With President Joe Biden’s Build Back Better program, there have been big changes in US tax law. However, such changes need to be enacted by Congress to become law and therefore any provisions discussed could be revised or eliminated.
The Three-Part Program/ tax plan:
The American Rescue Plan (enacted)
The American Rescue Plan Act was signed into law by Biden on March 11, 2021. This provided individual cash payments and created tax law changes to benefit lower-income individuals and families. These changes were only implemented as temporary and time-limited solutions, enacted to remedy problems worsened by the pandemic. The Rescue Plan is projected to lift over five million children from poverty this year and help businesses reopening.
The American Families Plan (proposed)
The American Families Plan was proposed to help families cover basic expenses, including health insurance premiums. It further proposes to increase taxes for wealthy individuals, with a substantially higher capital gains rate. The programs within the plan would provide children in the US with an additional four years of free education, with two years of free prekindergarten and two years of free community college. The plan would especially assist colleges and universities that serve minority groups.
Through the American Families Plan, the Biden Administration hopes to reverse damage caused by years of underfunding the IRS. This underfunding has reduced auditing and enforcement efforts, costing the US government substantial tax revenue. Through increased funding to the IRS, enforcement of tax law compliance would be significantly strengthened.
The American Jobs Plan (proposed)
The American Jobs Plan was proposed to increase tax revenue on corporate profits, which would help to fund the plan’s infrastructure improvements.
Aiming to incentivise job creation and US inward investment, prevent profit-shifting to tax havens by corporations, and ensure that large corporations pay their fair share of taxes to the IRS. Tax proposals accompanying this plan would raise the corporate tax rate, alongside imposing new minimum taxes in order to prevent US businesses escaping taxes through tax planning. The Biden Administration further aims to reduce preferences for the fossil fuel industry and the offshoring of jobs.
Biden’s corporate tax changes
President Biden has proposed increasing the corporate income tax rate from the 21% level to 28%. Although this rate is considerably lower than the highest corporate rate of 35% effective from 1994 to 2017, this proposal has drawn a lot of opposition.
The Biden Administration has further proposed a new corporate minimum tax of 15% on book income, in order to prevent wealthy companies from avoiding US taxes. This is clearly a problem that needed addressing; with an independent study finding that 91 of the Fortune 500 companies paid no US corporate income tax in 2018. The US would levy a minimum tax of 21% on MNC’s income, applied on a country by country basis to eliminate tax havens. Tax credits would be granted for ‘onshoring’ expenses while deductions for offshoring expenses would be eliminated. The Biden Administration is determined to discourage US corporations from moving intangible assets and profits abroad to controlled subsidiaries in countries with lower tax rates, and the plan’s 21% tax is especially focused on global intangible low-taxed income (GILTI). Further to this, the Biden Administration is aiming to establish, with other countries through multilateral negotiations, a global minimum tax. This would help to prevent the rent-seeking behaviour of corporations or countries pursuing competitive advantage by cutting corporate tax rates.
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Will the Biden tax plan increase my taxes?
The proposed increase in top income tax rate – 37% to 39.6%, in addition to the current net investment income surtax of 3.8% on high-income taxpayers continuing to apply. Therefore, the top federal tax rate on capital gains would total to 43.4% – almost double the current top combined rate of 23.8%.
The White House estimates that the increase in capital gains tax would only affect 3% of taxpayers. The Biden Administration states that only those whose income exceeds $1 million would be subjected to these higher taxes on capital gains. Whether this threshold applies per individual taxpayer or per return is unclear. The effects of this would also vary from state to state, as some states have no income tax while others exclude capital gains.
To no surprise, this proposal has drawn a lot of opposition. Opponents warn of the adverse effects on the stock market, while others believe that the majority of US shareholders will not be affected because around 75% of US stock owners bought their shares through non-taxable accounts. Distributions from these accounts are essentially taxed at ordinary income rates.
Additional Proposals within the American Families Plan:
The plan also contains tax proposals aimed at countering loopholes that have benefited higher-income individuals. These proposals include the following:
- Repealing the ‘step-up in basis’ rule that enables families to inherent/pass down property without paying taxes on the increase in the property’s value. However, this will not include family-owned farms that will be operated by the family members receiving the property. Gains will also not be taxed when appreciated property contributed to a charity.
- Close the ‘carried interest’ loophole that allows partners to receive partnership interests tax-free, paying only capital gains tax when disposing their interests.
- Limit the current real estate tax break for ‘like-kind exchanges’ which allow real estate investors to defer taxation. Biden proposes to end the deferral for capital gains in excess of $500,000.
- Revise the 3.8% Medicare tax on earnings to make it consistent for taxpayers making over $400,000 annually. Currently, this does not consistently apply to all high-income workers and investors.
The American Families Plan Individual Income Tax Changes
The American Families Plan aims to create significant changes in the taxation of high-income individual taxpayers. The proposals avoid increasing taxes on individuals with an annual income below $400,000.
This is to fund extensive programs including education, paid family and medical leave, child nutrition, and expanded childcare. Biden has requested that Congress extend the expiring individual tax credits enacted in the American Rescue Plan.
Will the individual tax benefits within the American Rescue Plan Act be extended?
Several tax law changes implemented through the American Rescue Plan Act are set to expire at the end of 2021. For example, the child tax credit for 2021 is $3,600 per child under the age of 6, and $3,000 per child aged 6 to 17, and is fully refundable and payable in advance. This is set to revert in 2022 to $2,000 per child aged under 17. Within the American Families Plan, Biden has proposed extending the increased child tax credit through to 2025.
Likewise, the child and dependent care tax credit was increased in 2021, with a maximum credit of $4,000 for one qualifying individual, and $8,000 for two or more qualifying individuals. This credit is refundable for some taxpayers. However, in 2022 this credit is set to become non-refundable and the maximum would decrease to $1,050 for one qualifying individual and $2,100 for two or more.
The earned income tax credit that was increased for childless workers in 2021 would also be permanently expanded under the American Families Plan. This is especially meaningful where these credits have been estimated to reduce childhood poverty in the US by 50%.