What Is President Biden’s Tax Plan?

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What Is President Biden’s Tax Plan?

President Joe Biden has made substantial progress on the three essential aspects of his Build Back Better agenda, all of which are supported by significant changes in tax law, less than two months after his inauguration. This page summarizes the essential components of Biden’s tax plan and specifies which sections have been implemented and which are still in the proposal stage.

All of the modifications, with the exception of those previously authorized as part of the American Rescue Plan, would need to be adopted by Congress in order to become law. Any of the provisions mentioned here might be changed or repealed. With Democratic victory in the Georgia Senate runoff elections, Democrats now control both of the congressional tax-writing committees. Rep. Richard Neal of Massachusetts is the new chairman of the House Ways and Means Committee, and Sen. Ron Wyden of Oregon is the new head of the Senate Finance Committee.

Biden’s Three-Part Program and Tax Policy Changes

Here’s a brief summary of the tax provisions in the three plans, followed by a more detailed discussion of the tax changes, both enacted and proposed.

The American Rescue Plan (enacted)

Biden signed the American Rescue Plan Act into law on March 11, 2021, which gave cash transfers to people and featured a variety of individual tax code modifications helping lower-income persons and families that were part of his election campaign tax policy. These adjustments are time-limited, intended to be temporary fixes for issues exacerbated by the epidemic.

  • Individual tax credit adjustments will normally expire at the end of 2021. The 2021 child tax credit of $3,600 for children under the age of six and $3,000 for children from six to seventeen is completely refundable and due in advance. Unless extended by law, it will return to $2,000 per kid under the age of 17 in 2022.
  • Similarly, the child and dependent care tax credit is larger in 2021 than in previous years. For 2021, the maximum credit for one person is $4,000, and the maximum credit for two or more qualified people is $8,000, which is refundable for certain taxpayers.
  • The earned income credit (EIC) was extended to employees under the age of 25; beginning in 2021, people as young as 19 are eligible and may apply the credit to greater earned income and benefit from a higher phaseout level. The limit age for eligibility was permanently removed by the statute.
  • The premium reductions for Affordable Care Act (ACA) health insurance coverage that were established under the American Rescue Plan via the use of premium tax credits are effective for two years.

The American Jobs Plan (proposed)

On March 31, 2021, Biden introduced the American Jobs Plan, which would raise corporate income taxes. The higher taxes were intended to help pay the plan’s infrastructure enhancement ambitions, which are anticipated to cost $2.3 trillion. The specifics of the corporate tax adjustments are outlined below, and they include a higher corporate tax as well as new minimum taxes on multinational businesses’ book revenue and profits.

The American Families Plan (proposed)

Biden introduced the American Families Plan on April 28, 2021, with an estimated cost of $1.8 trillion. To help pay for the plan’s services, the plan contains measures to raise taxes on rich persons, including a much higher capital gains rate. These programs would provide four additional years of free education to American children—two years of free prekindergarten for three and four-year-olds and two years of free community college; assist colleges and universities serving minority groups; and support paid family and medical leave, nutrition programs, expanded child care, and the extension of currently enhanced ACA subsidies and individual tax credits enacted in the American Rescue Plan, which are set to expire after 2018.

The Biden administration also intends to reverse years of underfunding of the Internal Revenue Service (IRS), which has resulted in diminished auditing and enforcement activities and staff, as well as significant tax revenue losses for the government. The Biden ideas would raise IRS funds to guarantee corporate and high-income people comply with tax laws. Increased audits and enforcement are expected to allow the IRS to collect hundreds of millions of dollars in tax bills that are now underpaid owing to under-enforcement caused by insufficient funds. Furthermore, increased government monitoring of paid tax return preparers is advocated.

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Now, let’s look at these proposed tax changes in detail.

Key Takeaways

  • The top individual federal income tax rate would rise from 37% to the pre-Trump rate of 39.6%.
  • The corporate rate would rise from 21% to 28%; a 15% minimum tax would apply to corporate book income.
  • American corporations’ foreign income generally would be subject to a tax of 21%.
  • The top individual income tax rate would increase to 39.6%.
  • Taxpayers with incomes over $1 million would pay a tax of 43.4% on capital gains.
  • An extension through 2025 is proposed for the 2021 increase in the fully refundable child tax credit from $2,000 per child to $3,600 for children under age 6 and $3,000 for children ages 6 through 17.
  • Extensions beyond 2021 also are proposed for the increase in the maximum Child and Dependent Tax Credit from $3,000 to $8,000 ($16,000 for more than one dependent); the expansion of, and increase in, the earned income tax credit for younger workers; and the premium tax credits that reduce ACA health insurance premiums.
  • The base on death step-up and carried interest loopholes will be closed.
  • Tax deferral for real estate trades and deductions for excess business losses would be limited by limits.

Tax Increases to Fund Infrastructure Program

Corporate tax measures contained in the administration’s infrastructure program, the American Jobs Plan, advance tax principles espoused during Biden’s presidential campaign. Corporate tax policy aims of the proposal include encouraging job creation and investment in the United States, preventing corporate profit shifting to tax havens, and ensuring that major firms pay their fair amount of taxes.

The Biden administration’s tax proposals would raise the corporate tax rate, impose new minimum taxes to prevent profitable U.S. businesses from avoiding taxes through aggressive tax planning, repeal incentives for offshoring jobs, eliminate preferential treatment for the fossil-fuel industry, and strengthen IRS corporate tax law enforcement.

The American Jobs Plan’s corporate tax adjustments would increase tax revenue to help pay for the plan’s programs and infrastructure improvements, which range from transportation and roads to broadband, water resources, healthcare facilities, education, and more. The anticipated $2.3 trillion cost of the American Jobs Plan, the extent of the planned 10-year investments, and the tax hikes intended to finance it have sparked significant policy and political discussion.

Corporate Tax Changes

Biden has advocated raising the corporate income tax rate from 21% to 28%, which has been in place since 2018. A 28% tax rate would be much lower than the highest corporate effective rate of 35% that was in existence from 1994 to 2017; yet, the hike has sparked controversy and inspired proposals for a compromise rate.

In response to an independent research that showed 91 of the Fortune 500 corporations paid no US corporate income tax in 2018, the Biden administration has proposed a new corporate minimum tax of 15% on book profits to discourage successful businesses from dodging US taxes. The present exemption for the first 10% return on international investment would be repealed, as would the preferential tax rate of half the domestic rate of 21% on the balance of foreign earnings. As a result, the United States would pay a minimum tax of 21% on the revenue of multinational firms. This minimal tax would be applied nation by country to guarantee that earnings made in tax havens are taxed. Deductions for “offshoring” charges would be removed, while tax credits for “onshoring” expenses would be awarded.

One specific purpose of the Biden proposal is to discourage US firms from relocating intangible assets and associated income to controlled subsidiaries in countries with lower tax rates than the US. The plan’s 21% tax is primarily targeted at GILTI, or global intangible low-taxed income, which is generated by moving earnings from readily moved assets, such as intellectual property rights, to low-tax nations. Furthermore, the Biden administration is attempting to persuade other nations to participate in creating a global minimum tax in order to prevent countries from gaining a competitive edge by lowering corporation tax rates via multilateral talks.

Individual Income Tax Proposals

The American Families Plan, in addition to the corporate tax reforms in the American Jobs Act, would make major changes in the taxation of high-income people. The tax adjustments would contribute to the funding of numerous initiatives to support individual Americans. It would provide free education from prekindergarten to two years of community college for three and four-year-olds; assist Historically Black Colleges and Universities (HBCUs), Tribal Colleges and Universities (TCUs), and institutions such as Hispanic-serving institutions, Asian American-, Native American-, and Pacific Islander-serving institutions, and other minority-serving institutions (MSIs); and support paid family and medical leave, child nutrition, and expanded child care. Biden has also requested Congress to extend the American Rescue Plan’s expiring individual tax credits.

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The Biden proposals on individual taxation are intended to avoid raising taxes on individuals with annual incomes less than $400,000; to create benefits for the poor and those with low and moderate incomes, primarily through refundable tax credits such as the already enacted earned income and child tax credits; and to target any tax increases for the wealthy.

Tax Increases for the Wealthy

The projected highest income tax rate by the Biden administration would raise the current law’s 37% rate to 39.6%. According to the White House, only the wealthiest 1% of taxpayers would be affected by this rise. The highest long-term capital gains tax rate would almost quadruple, climbing from 20% to 39.6%. Furthermore, the present 3.8% net investment income surtax on high-income taxpayers would very certainly be retained. Thus, the new maximum federal tax rate on capital gains would be 43.4%, over twice the current top combined rate of 23.8%.

According to Biden administration officials, only taxpayers with earnings over $1 million would be subject to the increased capital gains tax. However, it is unclear whether the $1 million requirement applies per person taxpayer or per return; the threshold for a combined return would be $2 million on a per-individual basis. When state tax regulations are implemented, the effect of this move varies since some states have no income tax, others omit capital gains or tax them at lower rates than normal income tax rates, and some tax capital gains at their regular, ordinary-income tax rate. With a highest state capital gains rate of 5.2%, the total average federal and state capital gains tax rate for high-income people would be 48.6%.

The Biden capital gains plan would almost quadruple the present federal tax on long-term capital gains. The White House, on the other hand, believes that the hike in the capital gains tax rate would impact just 0.3% of taxpayers, or around 500,000 people.

Opponents of the capital gains tax rise say that it will have a negative impact on the stock market. This critique is dismissed by other observers. They believe that the majority of US shareholders will be unaffected by this change because roughly 75% of US stock owners purchased their shares through 401(k) plans, individual retirement accounts (IRAs), and other types of nontaxable accounts, the distributions of which are ultimately taxed at ordinary income rates.

Extension of Individual Tax Benefits

Several of the American Rescue Plan Act’s tax reforms, including the increase in certain individual tax credits, will expire at the end of 2021. The 2021 child tax credit of $3,600 for children under the age of six and $3,000 for children from six to seventeen is completely refundable and due in advance. Unless extended by law, it will return to $2,000 per kid under the age of 17 in 2022. Biden recommends extending the increase in the child tax credit through 2025 and making its full refundability and advance payment features permanent in the American Families Plan.

Similarly, the child and dependent care tax credit is larger in 2021 than in previous years. For 2021, the maximum credit is $4,000 for one qualified people and $8,000 for two or more suitable individuals, with some taxpayers receiving a refund. Unless changed before then, the credit would become nonrefundable in 2022, with maximums falling to $1,050 for one qualified person and $2,100 for two or more. Similarly, the American Rescue Plan Act raised and enlarged the earned income tax credit for childless employees until 2021. The American Families Plan will permanently expand and enhance the allocations for these tax credits. These credits are expected to cut childhood poverty by half.

The Biden administration also recommends making permanent the premium reductions for ACA health insurance coverage implemented under the American Rescue Plan and rendered temporary via premium tax credits.

The elimination of the step-up in basis rule might be very expensive to heirs of valued property at all income levels, not just the wealthy.

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Additional Proposals: Step-Up in Basis, Carried Interest and Real Estate Exchanges

The American Families Plan offers further tax recommendations to close “loopholes” that mostly favor higher-income persons and were condemned by Vice President Biden throughout his presidential campaign. The idea would eliminate the “step-up in basis” law, which allows families to pass property down from generation to generation without ever paying taxes on the land’s value rises over time. However, the Biden administration has said that family-owned farms that have been handed down to family members who will run the land would be exempt from this change. Furthermore, profits on valued property donated to charity are not taxed.

The Biden plan would also close the “carried interest” loophole, which partners in private equity and hedge funds, as well as other investment partnerships, claim allows them to receive their partnership interests tax-free and pay only capital gains tax when they sell their interests, avoiding paying ordinary income tax rates. Furthermore, the proposal would restrict the current statutory real estate tax credit for “like-kind swaps,” which permits real estate investors to delay taxes while exchanging real estate. The deferral would be phased off for capital gains in excess of $500,000.

Furthermore, the 3.8% Medicare tax on profits, which does not now apply uniformly to all high-income employees and investors, would be amended to apply more consistently to taxpayers earning more than $400,000 per year. The Biden tax proposal would also maintain permanent the 2021 rule that allows people to deduct only their gross income and company earnings up to $250,000 ($500,000 for joint returns).

The Bottom Line

The Biden administration has proposed major changes to the Internal Revenue Code, with many specifics yet to come. Many of the concepts were first floated during Biden’s presidential campaign. His administration estimates that tax law changes and the return on investments approved under the American Jobs Plan and the American Families Plan will pay the cost of both programs over a 15-year period.

Officials in the Biden administration believe that their tax ideas would increase fairness in the tax system by placing a lower tax burden on low-income Americans while asking the affluent to pay a proportionally higher percentage. The White House stresses that the tax hikes would only impact the wealthiest 1% to 2% of individual taxpayers.

Frequently Asked Questions

Will the Biden tax plan increase my taxes?

It depends. Individual income tax rates of $400,000 or less would not be raised under the Biden proposal. New and increased tax advantages, such as the child tax and earned income credits, as well as provisions for child and dependent care and health insurance premiums, would almost certainly lower taxes for typical households.

However, the Biden tax proposal would raise taxes on firms and most people earning more over $400,000. It would restore the previous year’s highest marginal individual tax rate of 39.6%. Ordinary income rates on “carried interests” would apply to equity and hedge fund managers. Furthermore, the step-up in basis for appreciated assets upon death would be eliminated.

What is a tax credit?

A tax credit is a direct offset to a taxpayer’s tax liability. It is a monetary decrease in tax duty. Tax credits, unlike deductions, offer the same amount of benefit to all taxpayers regardless of tax rate. Some tax credits are “refundable,” benefiting taxpayers who owe less in taxes than the credit amount. The remainder is refunded to such taxpayers.

A 20% tax credit for a $100 qualified expenditure reduces taxes by $20 for all taxpayers, regardless of income level or tax category. An exclusion, exemption, or deduction, on the other hand, decreases income and so gives a greater benefit to taxpayers in higher tax rates. Here are several examples:

  • A $100 deduction saves $37 for a person in the 37% marginal tax bracket—that is, 37% of the $100.
  • The savings from a deduction will be smaller for a person in the 24% marginal tax bracket: $24—i.e., 24% of $100.

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