On March 31st, President Biden unveiled the American Jobs Plan—a $2 trillion infrastructure proposal aimed to bolster the post-pandemic economy. The scale of this bill is so expansive that it will take roughly fifteen years of increased taxes to pay for the eight years of proposed spending.
But who will pay for this historic bill?
The exact proponents of the plan are still a bit unclear, but corporations will bear the brunt of the burden. Under this new plan, the corporate tax rate could increase from 21% to 28%. There could also be an additional increase in taxation of corporate income earned by US based companies, and these changes could take effect as early as January 2022.
If you aren’t a multinational corporation, though, how could these changes trickle down into your lap? Well, according to Forbes, Goldman Sachs has predicted that Biden’s entire tax plan would reduce 2022 earnings-per-share on the S&P 500 by 9%. The hope is that Congress will end up passing a smaller rate increase of 25%, which would only depress earnings by 3%.
Individual Tax Hikes to Follow
But just because corporations are on the front burner, doesn’t mean the American taxpayer is in the clear. As for individual taxes, Biden would seek to reverse some of the 2017 Tax Cuts & Jobs Act (TCJA) changes and also return the estate tax to 2009 levels, thus increasing the number of estates that are subject to taxes.
Below are the ten major changes and planning tips that could be coming down the pipeline in terms of our individual tax liabilities.
1. Increase the top ordinary income tax rate for income over $400,000 to 39.6%.
It is yet to be confirmed whether this will apply to individuals or families, but this would increase the tax rate 2.6% up from the current 37%.
For individuals or families on the cusp of this threshold, the best plan of action could be to find viable strategies to reduce income including funding retirement plans, opening defined benefit or profit-sharing plans, charitable giving, or even bunching deductions into fewer years. You may even consider (1) decreasing dividend or other income-producing investments or (2) diverting them to retirement accounts.
2. Eliminate step-up in basis at death and potentially create a taxable event at that time.
The key to handling this potential (yet perhaps very difficult to pass) provision is in considering “basis management” as an ongoing strategy to reduce portfolio gains. Annual re-balancing will be of utmost importance with special attention paid to options such as placing stocks that are anticipated to appreciate into retirement accounts, gifting, charitable giving, and transferring low-basis stocks to lower-income family members.
3. Replace deductions for contributions to IRAs, 401(k)s, and similar retirement accounts with a flat 26% credit.
Theoretically, this provision incentivizes lower income Americans to contribute to their retirement accounts. But, high-net worth clients stand to lose their full deduction. In this case, these high-earning individuals may want to more heavily consider the benefits of Roth conversions.
4. Increase long-term capital gains rates on income $1,000,000 and over from 20% to 39.6%.
One planning strategy is to reduce the size of the capital gains budget, limiting it to 23.8% versus the potential 43.4% top rate. This can be accomplished by accelerating gains into this year, tax-loss harvesting, or gifting highly appreciated assets to charity. Other options include increasing business expenses, and increasing retirement contributions. In other words, find ways to level income so as to (1) not fall into the highest tax bracket the following year and (2) avoid exceeding the $1 million capital gains threshold.
5. Unified gift and estate tax exemption amounts would decrease from $11.58M to $3.5M for individuals and $23.16M to $7M for married couples.
Other provisions here would most certainly affect the high-net worth individual including:
- Doing away with GRATS (or requiring a 10-year minimum term and a 25% minimum gift of the market value of the property)
- Eliminating Family Limited Partnership discounts
- Limiting dynasty trusts and defective trusts
Heavy gifting techniques, death bed planning, gifting up to parents, and looking for large appreciated assets to engage in tax basis management could be very effective in preparing for this change.
6. The Child and Dependent Care Tax Credit would increase from $3,000 to $8,000 for one child and from $6,000 to $16,000 for two or more children.
As it stands now, these changes only apply to the 2021 tax year, but could be potentially extended.
Taxpayers may consider consulting with their CPA to discuss if married filing separately would be most advantageous in this tax environment.
7. Tax-deferred exchanges for real estate performed under IRC 1031 would no longer be available.
Investors may consider performing like kind exchanges this year in order to defer gains. This is similar to exchanging one annuity for another without recognition of gain via an IRC 1035 exchange. The IRC 1031 exchange allows for this same type of exchange when one property is exchanged for another held for a business or investment.
8. The maximum amount of itemized deductions would be no more than 28% for those earning over $400,000 (again unclear whether that is individual or joint).
9. The earned income tax credit would be expanded to include workers age 65 and older, without children living at home, who are considered “childless” for tax purposes.
10. The first-time home buyer credit would be restored with a maximum of $15,000.
This provision is new as there is currently no first-time home buyer credit
Hindsight is 20/20
As we mentioned, some or all of these tenets may never pass, but it is best to be prepared now to avoid any unwanted surprises. Hindsight is 20/20. You don’t want to look back and wish you had erred on the side of caution to have avoided losing a significant amount of income.
We hope that these explanations are informative and helpful, but we are always here to help point you in the right direction. Should you have any questions or concerns, do not hesitate to contact our office. With the right planning, we can do our best to prepare for the unexpected.
1 https://www.nytimes.com/2021/03/30/business/economy/biden-infrastructure-taxes.html 3 May 2021
2 https://www.cnbc.com/2021/03/31/biden-infrastructure-plan-includes-corporate-tax-hike-transportation-spending.html 3 May 2021
4 Ibid.
5 https://www.investopedia.com/explaining-biden-s-tax-plan-5080766 3 May 2021
6 https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/ 3 May 2021
7 Ibid.
8 https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/ 3 May 2021
9 Ibid.
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