By Joseph A. Mastriani, CPA/PFS, CFP | Shareholder| Buckno Lisicky & Company CPAs
The Biden administration released its “Green Book” of revenues and policy proposals on May 28, 2021. The focus of the plan is to extend the tax breaks enacted as part of the American Rescue Plan Act for lower- and middle-income taxpayers. These tax breaks would be paid for with tax increases and perceived loophole closers on those making more than $400,000 per year.
Some Democrats in Congress are likely to try to add their own provisions to the plan. if enacted, Biden’s proposals will probably have to be passed under budget reconciliation rules in the Senate and even then will require adjustments to keep every Democratic senator on board, as the tax increase provisions are not likely to attract Republican support. Most commentators do not expect passage of any tax legislation until close to the August recess.
Main proposals are:
- Increase the top individual rate
One provision would increase the top individual tax rate to 39.6%, returning the top rate to that which existed before the Tax Cuts and Jobs Act of 2017. President Biden had previously said that he would not raise taxes for anyone earning under $400,000.
Single filers earning over $452,700 and Married filing Joint filers earning over $509,300 would be subject to the new top rate. The effective date of the new provisions is not clear, but Congress has generally been hesitant to impose tax increases retroactively.
- Increase capital gains rate
Another provision would increase the capital gains rate to 39.6% for earners making $1 million or more. This would represent a significant increase in the current top tax rate of 20% for those subject to this change, and result in both ordinary income and capital gains being taxed at the same top rate.
- Ending stepped-up cost basis at death for some
The administration proposes eliminating the basis step-up and imposing the income taxation of capital gains at death, subject to a $1 million-per-person exclusion. For certain family-owned businesses, including farms, the tax would not be due until the family-owned business is sold or otherwise ceases to be family-owned.
- Close the S Corporation loophole
One provision would expand the 3.8% Medicare tax to owners of S Corporation pass-through entities earning over $400,000. One of the advantages of the S corporation structure is the ability to limit payroll taxes by having separate pots of money for status as an employee and as an owner. This proposal would potentially limit that advantage based on the structure of the entity.
- Tax breaks for lower- and middle-income taxpayers
The American Rescue Plan Act enacted enhancements to the Child Tax Credit, the Child and Dependent Care Credit, the Earned Income Tax Credit, health insurance tax credits, and the premium tax credits under the Affordable Care Act. The enhancements included increasing dollar limits, income limits, and increasing refundability. Those enhancements under the American Rescue Plan were effective only for 2021. President Biden’s proposal would extend the Child Tax Credit through 2025 and make the other enhancements permanent.