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A common idiom in track and field is that you simply have to put one foot in front of the other and keep going. That’s what Americans are doing as we attempt to dig our way out of the depths of the COVID-19 crisis.

In an attempt to accelerate the recovery, President Biden recently unveiled his newest proposal – The American Families Plan (AFP), an ambitious $1.8 trillion package aimed at vaulting education, childcare, and paid family leave. The plan is the third member of Biden’s economic overhaul relay team, partnering with the American Rescue Plan Act (ARPA) and the American Jobs Plan (AJP). Called by The White House “an investment in our kids, our families, and our economic future,” the plan expands many of the refundable tax credits for lower-income taxpayers, hoping to help them clear the hurdle into the middle class.

The three most emphasized provisions in the plan are subsidized universal childcare, guaranteed paid family and medical leave, and expanded child tax credits. The American Families Plan takes the baton from the American Rescue Plan by extending the Child Tax Credit, the Child and Dependent Care Tax Credit, and the Earned Income Tax Credit through 2025 and making them all permanently refundable.

How exactly is President Biden planning on funding this nearly $2 trillion package? The Biden administration proposes a more progressive tax system, where the marginal tax rates on high earners and pass-through businesses increase. The plan includes the following proposals:

  • Starting in 2022, the highest marginal income tax rate would increase from 37% to 39.6%, hitting those currently in the middle or towards the top of the 35% bracket. The progressive threshold will make it easier for taxpayers to jump into a higher bracket.
  • Long-term capital gains for taxpayers with taxable income above $1 million flip from being taxed at preferential rates to being taxed as ordinary income – essentially raising the highest marginal rate to 43.4% with the additional 3.8% Net Investment Income Tax (NIIT).
  • Hidden in this plan is an important estate planning change. Unrealized gains would no longer receive the step-up in basis and would instead be taxed at death when it clears the bar for certain levels of value – $1 million for single filers and $2 million for joint filers (not including the exclusions for primary residences).
  • Where Biden really goes for the gold is in applying the 3.8% NIIT to pass-through business income (partnerships, S-Corporations, sole proprietorships, etc.) above $400,000. In addition, it would end the preferred treatment of carried interest to partners and make the 2017 limitation on excess losses applied to non-corporate income permanent.
  • The plan includes provisions to limit 1031 Like-Kind Exchanges above $500,000 in deferred capital gains and make permanent the Health Insurance Premium Tax Credits provided in the ARPA.

Also included in the plan is a proposal to beef up the IRS as it prepares to tackle the never-ending issue of tax evasion. The AFP proposes increasing IRS funding by $80 billion in an effort to improve tax enforcement on corporations and high-income taxpayers.

Now the ball is in Congress’s court as the parties wrestle over the provisions.

Author Michael T. Cyrs Senior Director of Wealth Transfer

Mike has nearly 30 years' experience as a private attorney and senior wealth transfer advisor concentrating in complex estate and business succession planning matters; estate, gift and generation skipping taxation; and advising clients regarding administration of highly taxable estates and trusts.

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