Possible Tax Implications of President Biden’s American Families Proposal

At a glance:

• President Biden is proposing major investment and infrastructure spending programs, which, if passed, will be offset by significant tax increases targeted at high-income-earning and high-net-worth taxpayers.
• Legislators still need to draft details of the program, and the draft will almost certainly be revised from the President’s initial proposal. However, it is a relative certainty that taxes will not be reduced and will likely increase for at least some taxpayers.
• Additionally, the President is proposing a major boost to IRS funding, which will result in increased enforcement activity.
• The most notable elements of the President’s tax proposal include the following tax increase provisions:
  • Increases in top marginal tax rates for individuals to 39.6%.
  • Increase in the corporate tax rate to 28%.
  • A near-doubling of the long-term capital gains tax rates for high-income taxpayers.
  • Ending basis “step-up” on inherited assets for certain taxpayers.
  • Further restrictions on the tax deferral benefits of Section 1031 like-kind exchanges.

Aprio is committed to staying on top of all developments impacting your tax and business matters. While the President’s proposal likely will not pass Congress without major changes, our firm is building models to advise and enable our clients to respond prudently to any substantive tax changes. Contact us if you have any questions.

The full story:

On April 28, in his first address to a joint congressional session, President Biden proposed a major expansion in government spending programs. To accomplish this spending, and to fulfill his campaign promises, the President outlined his plan to propose significant tax increases, targeted at high-income and high-net-worth taxpayers. If enacted, the Biden tax plan will increase top marginal tax rates for individuals and corporate tax rates to their pre-2017 levels. The proposal would limit some key and widely used tax deferral opportunities currently available to high-net-worth taxpayers, and limit deductions for both businesses and higher-income-earning individuals.

1. Higher-income taxpayers would see rate increases and deduction decreases

In addition to a restoration of the pre-2017 top marginal rate to 39.6%, the Biden proposal will make permanent the cap on excess business losses used to offset other income. The plan also includes a repeal of the “carried-interest” preference, which will require fund managers and other taxpayers receiving carried-interest payments to pay tax on their income at ordinary income rates. The proposal also imposes even more restrictions on the use of Section 1031 exchanges to defer tax on like-kind swaps of real property assets, limiting the amount eligible for gain deferral to $500,000.

2. The proposal would eliminate the step-up in basis on inherited assets to $1 million of a deferred gain

While the proposal surprisingly left the estate tax rate structure and exemption thresholds intact, the plan would provide a cap on the amount of basis step-up a beneficiary would receive on inherited assets. The current exemption amounts for estate and gift tax purposes is $11.18 million for single taxpayers, and $22.36 million for married couples. These amounts are currently scheduled to revert to their pre-2017 levels of $5 million (single) and $10 million (married) on December 31, 2025. President Biden was widely expected to lower these amounts prior to this scheduled “sunset,” but he expressly declined to do so.

However, the removal of asset basis step-up treatment for most inherited assets will present both tax and administrative challenges. Beneficiaries would lose step-up and pay tax on any deferred step-up gain exceeding $1 million. The President’s advisors noted that the step-up would not apply to charitable bequests or to heirs inheriting family-owned businesses or farms.

3. The IRS would receive more funding for audits and more information for examinations, with a focus on higher-income taxpayers

The Biden plan calls for significant increases in funding to the IRS, along with a mandate for the IRS to perform more targeted audits of higher-income taxpayers and their transactions. Additionally, the proposal calls for increased regulation of CPAs and other tax-return preparers. The intent is to tighten tax compliance and close the “tax gap” between actual and expected revenues.

The bottom line

As is the case with most major legislative initiatives, the final result of the Biden plan will almost certainly look different than its initial proposal. Not all of the points proposed by the President will be included in any final bill, let alone be signed into law. However, it seems certain that we will be facing tax increases in 2022, which means the time to start planning for possible outcomes is now.

Our team is here to serve your needs and to ensure you are informed on the best-possible plans and outcomes in the event of any substantive tax increase legislation. Please contact us if you have any questions.

Disclosure

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.