The country’s highest earners could soon see the biggest tax hike in decades on their investments and wages, as President Joe Biden seeks to raise enough funds to cover his third near-$2 trillion policy proposal since taking office.
Biden in a congressional address late Wednesday revealed the American Families Plan, a package containing $1 trillion worth of investments and $800 billion of tax cuts for low- to moderate-income households that would help cover the cost of child care, education and absences from work, according to a White House fact sheet.
To pay for the plan, Biden primarily proposes raising taxes on corporations and funding Internal Revenue Service (IRS) investigations into tax evasion.
For individual taxpayers, however, Biden would also plan to:
- Raise tax rates on dividends and long-term capital gains for earners making more than $1 million annually.
- Scrap an estate tax loophole that currently allows individuals to transfer assets tax-free to their heirs when they die.
- Bump up the top-line income tax rate.
How the American Families Plan could change your taxes
If you make less than $400,000 a year, you won’t see any changes to your taxes. That’s at least the Biden administration’s promise as they seek to raise revenue and public support for what Biden said on Wednesday would be the largest infrastructure investment since World War II.
White House estimates suggest that the proposed tax increases in the American Families Plan would raise $1.5 trillion over the next 10 years and be fully paid for in 15 years.
“Sometimes I have arguments with my friends in the Democratic Party; you should be able to become a billionaire and a millionaire,” Biden said in his nationwide address. “But pay your fair share.”
Here’s what you need to know about the proposed tax changes, most of which Biden tossed around on the 2020 presidential campaign trail.
1. Increasing the top-line income tax rate
Biden’s American Jobs Plan calls for increasing the top-line income tax rate to 39.6 percent from 37 percent, taking this income bracket’s rate back to where it was before President Donald Trump signed the Tax Cuts and Jobs Act of 2017 into law.
That adjustment would only affect single filers making $518,401 a year or more, heads of household earning at least $518,401 and married couples generating $622,051 and above a year, according to tax brackets set for the 2020-2021 federal income tax year.
2. Raising taxes on dividends and long-term capital gains
If you’re an investor and make more than $1 million a year, the profits you generate by selling your assets would be taxed as income, regardless of how long you owned them.
Currently, capital gains are taxed as either a short-term or long-term investment. Profits from investments held for less than a year (short-term capital gains) are taxed the same as income. However, long-term capital gains (assets owned for more than a year) are hit with a levy that’s well below the current top-line income tax rate of 37 percent, with levies being either 0 percent, 15 percent or 20 percent, depending on the investor’s income.
The top 20 percent rate is currently charged on single filers who make at least $441,450 a year, heads of households earning $469,050 or more a year and married couples making $496,600.
Individuals earning at least $200,000 and married couples making $250,000 or more pay an additional net investment income tax (NIIT) worth 3.8 percent.
The Biden administration’s proposed changes would mean that individuals would pay a 43.4 percent tax on their investment profits, taking into account that 3.8 percent levy.
White House officials estimate that the changes would affect 0.3 percent of households, according to a fact sheet.
3. Scrapping estate tax on inheritances known as the ‘step-up in basis’
If you’ve ever inherited an asset from someone who’s died, that investment profit is currently taxed in a dramatically different way than if it had stayed in the hands of the original owner.
Instead of taking into account how much the asset appreciated from the owner’s original purchase price, heirs are only charged a tax on the gains that they’ve accumulated since the inheritance transferred over to them.
Biden wants to scrap that rule, known as the “step-up in basis,” though there would be a few exceptions. The first $1 million in profits, or $2.5 million for married couples after accounting for existing real estate exemptions worth $500,000, would be exempt. Meanwhile, those gains wouldn’t be taxed at all if they’re donated to charity. Family-owned businesses and farms “given to heirs who continue to run the business” would also be excluded, the White House said.
What this means for you
The Biden administration might be pressed to provide more clarity on some of these tax provisions, particularly about when the changes would take effect and whether his long-touted $400,000 tax hike threshold applies to both individual taxpayers and married filers.
Some forecasts suggest that capital gains tax rates could be even higher under Biden’s proposed changes, when taking into account state and local tax codes. An April 23 research note from the independent, bipartisan Tax Foundation found that the combined average rate would total 48 percent, compared to just 29 percent under the current law. That amount could be as high as 56.7 percent in California and 54.3 percent in New York.
The institution says raising capital gains tax rates to the proposed level would be the highest since the 1920s, potentially shaving off 0.1 percent from economic growth and reducing federal revenue by about $124 billion over the next decade.
Democrats have a slight edge in Congress, holding majorities in both the House and the Senate if passing the bill came down to a tie-breaking vote from Vice President Kamala Harris. Lawmakers could approve the legislation through budget reconciliation, a policy process that lets certain budget-impacting proposals pass through by a simple majority. All of that will be key to keeping the policy proposals alive that left-leaning legislators see as key to helping prop up families and workers after the worst economic crisis in generations.
“As the Federal Reserve signals again this week that interest rates will remain low for quite some time, there is an opportunity in the coming months for the recovery to lift the personal finances of many Americans,” says Mark Hamrick, Bankrate senior economic analyst and Washington bureau chief. “As of now, however, millions are still unemployed, under-employed or out of the workforce.”
What else to know about the American Families Plan
The proposal is a sister package to a $2.3 trillion infrastructure package from last month – the American Jobs Plan – which included new spending on everything from broadband and sustainable housing to roads, bridges and public transportation.
The two packages, however, face a steep uphill battle in Congress, with Republican lawmakers already uneasy about having spent $3 trillion so far this year on stimulus.
Biden in mid-March signed the $1.9 trillion American Rescue Plan into law, sending a third round of stimulus checks worth $1,400 to eligible U.S. adults and their dependents, while also ramping up unemployment benefits through September.
“With Republicans essentially countering his initial $2 trillion proposal on ‘infrastructure plus’ with a less expensive approach, there’s a chance that something agreeable to both parties might pass,” Hamrick says. “The question of how to pay for both the American Jobs Plan and the emerging American Families Plan remains divisive, but also critically important with respect to the outlook for the federal debt and deficits. These are issues which could impact Americans for years to come.”