Heirs and hedge fund managers could take a hit, but tens of millions of lower-paid families and young singles will come out with bigger tax credits.
President Biden will outline his $ 1.8 trillion plan for American families on Wednesday in his first address to a joint session of Congress on the eve of his 100th day in office. The plan is focused on expanding benefits for education, children and child care and the administration intends to fund it largely through tax hikes for the wealthiest taxpayers. It’s a follow-up to its US jobs plan, which focused primarily on physical infrastructure like roads and bridges and would be funded by corporate tax hikes.
Here’s who stands to lose from the individual tax changes proposed by Biden – and who might win.
Most of Biden’s tax proposals target the wealthiest Americans. He wants to raise the top personal income tax rate on ordinary income from 37% to 39.6% – the level it was before former President Trump’s tax cuts. This year, that top tax rate reaches $ 523,601 in taxable income for singles and $ 628,301 for married couples filing jointly.
Restoring the highest income tax rates and payroll taxes to pre-2017 levels would raise more than $ 111 billion over the course of Biden’s campaign tax proposals, according to an analysis of Biden’s campaign tax proposals by the Tax Policy Center. of the next decade.
Heirs of great estates
Biden has proposed removing the ‘mark-up’ from an estate’s asset base – this is the loophole that allows heirs to avoid capital gains tax on an unlimited amount of appreciation previously untaxed assets they inherit. The Biden plan would allow the first $ 1 million in earnings passed on by each deceased person to remain tax-free – and the administration points out that a couple could pass on $ 2.5 million in earnings to their untaxed heirs, a times the exclusion of $ 250,000 per person. on gains from the sale of a principal residence is taken into account.
For households earning more than $ 1 million, Biden offers to tax long-term capital gains and dividends at its highest regular tax rate of 39.6%, almost double the rate. current 20% tax on such income. Combined with a 3.8% surtax on investment gains implemented under the Affordable Care Act, Biden’s plan means the highest federal tax rate for highest incomes would drop from 23.8% to 43.4%.
The Biden administration has consistently stressed that its capital gains tax change proposals will impact only a tiny fraction of American households. “This change will only apply to three-tenths of one percent of taxpayers … roughly 500,000 households,” National Economic Council director Brian Deese told reporters earlier this week.
Hedge fund bigwigs
Biden wants to remove the deferred interest tax break – a loophole in the tax code that allows hedge fund partners to treat much of their compensation as long-term capital gains and therefore pay a tax rate much lower on what they earn than them. would if their remuneration was taxed as ordinary income.
“The president is also calling on Congress to close the interest-bearing loophole so that hedge fund partners pay ordinary rates of income on their earnings, like all other workers,” the White House said in a backgrounder on Biden’s plan.
High income real estate investors
Biden’s plan calls for ending a popular tax break tied to 1,031 similar swaps that allow real estate investors to defer federal capital gains taxes on one property by swapping it for another. But he would only end that breakup for winnings over half a million dollars.
Wealthy real estate investors would also be affected by Biden’s plan to close the basic loophole, which, combined with the 1031 foreign exchange tax break, can allow a family to permanently avoid income taxes. real estate capital gains passed on to heirs. .
Wealthy tax crooks
As part of the U.S. Plan for Families, the Biden administration wants to send an additional $ 80 billion to the IRS over the next ten years, on top of the 10.4 percent increase it has proposed for the financial year 2022. This money is intended to help the agency. step up enforcement efforts with more audits (not to mention qualified auditors) for high income, large corporations and large properties, and the addition of a new requirement that financial institutions report flows annually money entering and leaving accounts, which is designed to help the IRS better target its audits.
Biden wants to make it much harder for corporations and the ultra-rich to hide their wealth from the IRS – which they do at much higher rates than average earners. A recent study published by the National Bureau of Economic Research found that the richest 1% did not pay taxes on 20% of their income. Meanwhile, verification rates for top earners and businesses have dropped dramatically.
The White House estimates that additional support for the ailing agency will raise $ 700 billion for the federal government over the next decade.
Taxpayer earnings less than $ 400,000 per year
Biden has always promised that Americans earning less than $ 400,000 a year will not see their tax bills higher. And taxpayers at the lower end of the income scale are also likely to benefit from extensions of many of the expanded tax credits included in the US bailout from March, funded by the new tax hikes. rich. More information below.
Low- and middle-income families with children
Biden’s plan includes a 5-year extension of the expanded child tax credit allowed by the US $ 1.9 trillion bailout, which starting in July will provide eligible parents with a credit of $ 3,000 for each child ages 6 to 17 and $ 3,600 for each child under 17. 6, paid on a monthly basis until December, with the remainder to be claimed in 2021 tax returns next year. People earning up to $ 75,000 per year, heads of households earning up to $ 112,500 per year, and co-filers earning up to $ 150,000 per year can benefit from the fully extended credit.
The American Families Plan would also make the current $ 2,000 per child tax credit permanently refundable, meaning it would be more accessible to lower-income families who previously did not pay enough taxes. to qualify for maximum credit. Some Democrats have also pushed for extended credit to be permanent.
Low-income people without children
The plan also includes a permanent expansion of the earned income tax credit, which was also included in the US bailout. The changes to this credit were intended to increase benefits for low- and middle-income taxfilers without children. The ARP nearly tripled the maximum benefit amount for childless filers from $ 534 to $ 1,502. It also expanded the credit eligibility criteria to include people under 25 and people over 65.
The White House has estimated that the extended credit will benefit 17 million workers this year.
Biden also wants Congress to make permanent the temporary expansion of the American Rescue Plan of the Child and Dependent Tax Credit, which would give eligible families a tax credit of up to $ 4,000 for a child or up to $ 8,000 for more than one child to offset expenses for child care – including after-school programs and summer day camps – while they are working. The amount of this credit gradually disappears as income exceeds $ 125,000.
Those who receive their health insurance through the Affordable Care Act could also receive tax benefits, depending on how Democrats in Congress interpret the White House proposal. Biden’s plan includes extending the expanded tax credits for ACA bonuses that were included in the last stimulus bill, but he doesn’t provide many details.
As part of the American Rescue Plan, eligibility for health tax credits offsetting the cost of health insurance premiums has been extended to those with higher incomes.
Salaried workers and other law-abiding taxpayers
Most taxes owed on wages are paid largely because they are withheld automatically and workers’ earnings are fully reported to the IRS. “While about 99% of the taxes owed on wages are remitted to the Internal Revenue Service, compliance for other forms of income is significantly lower,” the Treasury Department said Wednesday.
People with more complicated financial lives, more wealth and more sources of income have more opportunities to engage in aggressive and questionable tax planning. Not surprisingly, their compliance with tax legislation is lower. The White House hopes to force wealthy tax evaders to pay more than they owe.