The White House today released details of the administration’s American Families Plan, the next phase in broad spending programs following the recent American Jobs Plan, which paired infrastructure spending with corporate tax increases.
This new proposal combines additional spending for education, childcare, healthcare, nutrition, and other family-related support with increases in taxes for higher-income households.
Here are some key items:
Additional spending, tax breaks for certain households
- Education: Universal pre-K for all children ages 3 and 4, two years of free community college, increase in Pell Grant awards
- Childcare: Direct support payments to low- and middle-income families to ensure no more than 7% of household income is directed towards childcare expenses
- Expanded tax credits: Extend tax credits that were recently, temporarily, expanded through the American Rescue Plan (ARP). They include the Child Tax Credit (recent changes extended through 2025), Earned Income Tax Credit (extended permanently), and the Child and Dependent Care Tax Credit (extended permanently)
- Healthcare: Permanent extension of Affordable Care Act premium tax credits, which were recently (temporarily) expanded through the ARP
- Paid family leave: Comprehensive paid family and medical leave program providing benefits up to $4,000 per month
Tax increases for higher-earning households
- Ordinary income: Increase the top tax rate from 37% to 39.6% (for 2021, the top tax rate applies to single taxpayers above $523,600 and couples above $628,300 in income)
- Investment income: Tax long-term capital gains and qualified dividends as ordinary income (43.4%, which includes the 3.8% surtax) for households with more than $1 million in income
- Step-up in cost basis at death: Repeal step-up for those with gains greater than $1 million ($2.5 million for couples, including existing $500,000 exemption for the sale of primary residence; though not specifically mentioned it would seem that individuals should be afforded their $250,000 exemption on a primary residence as well). There will also be exemptions for certain family farms and businesses passing to heirs who continue operations. For more information, read our recent post, “Three options to change stepped-up cost basis rules.”
- Carried interest: Hedge funds will no longer benefit from having carried interest receive preferential long-term capital gains (LTCG) treatment instead of being taxed as ordinary income. (Note that the provision to tax LTCG as ordinary income already includes those with over $1 million in income, which would apply to a great portion of carried interest currently. The measure may be designed to highlight the historical discrepancy with taxing carried interest at preferential LTCG rates)
- Expansion of 3.8% surtax: The proposal calls for applying the surtax more broadly on those earning more than $400,000 in income (including certain business income, which is not currently subject to the surtax)
- 1031 like-kind exchanges on real estate: Deferral of gains benefit eliminated if capital gain exceeds $500,000
Proposal is a first step
The spending and tax proposal is a first step in a long process that will likely carry into the fall. This plan represents a broad framework and there will be questions on how these provisions apply. The detailed work will be done at the committee level in Congress. Unlike the American Rescue Plan which, for the most part, passed as originally proposed, this plan could change dramatically as deliberations intensify among lawmakers.
Some major tax issues were not included. The proposal does not suggest any changes to the federal estate tax system and does not include an expansion of the SALT deduction. In particular, the absence of relief on SALT may be problematic for a coalition of lawmakers from high-tax states who recently called for expanding the SALT deduction.
When reviewing potential tax rate changes, it is important for investors to consult with a financial and/or tax advisor. Roth strategies may offer opportunities to hedge against higher taxes in the future. For more details on these strategies, read our recent post “10 ideas to use a Roth IRA to mitigate higher taxes.”
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