Those of you who have worked hard and accumulated wealth have probably been fretting the day when a tax and spend administration would come back into office. Well, that administration is here. To be sure, let’s pin the blame on Biden, but one must not forget that his predecessors going back to George W. Bush also spent like drunken sailors. One of the priority items on the table is a major alteration to the current tax code. These potential changes come in the wake of other spending packages that have been passed, including the American Rescue Plan, providing COVID-19 relief funds for Americans, and the recently passed infrastructure package. With that said, let’s take a look at some of the legislation that is in effect and proposals that may impact your wealth management in the upcoming fiscal year.
The cornerstone of legislation is the Build Back Better Act and the provisions of its $1.75 trillion reconciliation bill. Less than two months after his inauguration, Biden had moved significantly forward on the three key elements of his Build Back Better program, all of which are funded by notable changes in tax law. Three of the pieces of legislation that concern taxation are The American Rescue Plan (enacted), The American Jobs Plan (proposed), and The American Families Plan (proposed).
The American Rescue Plan was signed into law on March 11, 2021, and provided, among other things, cash payments to individuals worsened by the pandemic, as well as several tax changes. Among them are the child tax credit, which is temporarily increased to $3,600 per child under 6 and $3,000 per child under 17. This will revert to $2,000 per child in 2022. In addition, the child and dependent care tax credit and the earned income credit have each been expanded and extended.
The American Families Plan was announced on April 28, 2021 that will target tax increases to higher wage earners, including a substantially higher capital gains rate to help pay for the $1.8 trillion in entitlements given away by Biden. This draconian plan will also increase the funding and power of the Internal Revenue Service, which is something that no tax paying American wants to see. This will increase auditing and taxation to the average American if passed and increase the size of the IRS exponentially. Let’s take a look at some of the details of how the average American will be far worse off under the Biden proposed plan.
- 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 progressive tax rate increase reduces the incentive for those in the top tax brackets to produce additional income. While most of you work for corporations, the proposal assumes that they are deleterious to society and should be taxed at significantly higher rates. Corporate CEO’s aren’t naive. These higher tax rates are generally passed on to you and your family in the form of higher priced goods and services, and perhaps more impactful, they result in less economic growth and thus put jobs of employees in more jeopardy. Higher corporate taxes are also at the crux of The American Jobs Plan, which was proposed in March of 2021.
Those of you who might be concerned with estate tax planning, it will be the expansion of the Net Investment Income Tax that you will want to pay attention to. High earners who use S corporations and partnership entities to shield themselves from this 3.8% tax, will now have a 5% surtax on those individuals who have income exceeding $10,000,000 and an additional 3% surtax on income exceeding $25,000,000 a year.
According to the Tax Foundation, a non-profit independent tax agency, it estimates that the tax provisions, IRS enforcement, and drug pricing provisions in the proposed legislation would increase federal revenues by about $1.5 trillion over the next decade, before accounting for $500 billion in expanded tax credits for individuals and businesses, resulting in a net revenue increase of about $1 trillion. Excluding the anticipated revenue from increased tax compliance and the drug pricing provisions, the bill would raise about $637 billion from net tax increases over 10 years. The Tax Foundation also estimates that the proposed legislation would reduce long-run economic output by nearly 0.4 percent and eliminate about 107,000 full-time equivalent jobs in the United States. It would also reduce average after-tax incomes for the top 80 percent of taxpayers over the long run. These don’t sound like American family plans to me.
For tax advisors, the advantage of this legislation is that there will be fewer changes than would otherwise have been the case, and therefore only hundreds as opposed to thousands of pages of legislation to become familiar with. It remains to be seen what will be included in a final bill, or if the bill will pass at all. Nevertheless, taxpayers should be aware of the proposed changes and plan accordingly.