Tax Increases on the Horizon

President Biden has been a proponent of raising taxes on those earning more than $400k per year. This is in addition to reverting the Estate and Gift Tax rates to pre-2009 levels, when tax rates were 45% and the exemption amount was $3.5mill per individual.  The President also supports eliminating the step-up in basis on inherited assets, as well as raising the capital gains tax rate on those earning $1 million dollars or more per year. Several bills have been introduced in the Senate with similar measures.

In March, President Biden introduced the American Jobs Plan.  The American Jobs Plan aims to create jobs by upgrading and repairing infrastructure in the United States.  The plan calls for $2.7 million in spending over a 10 year period and will be paid for by raising taxes on corporations.  Tax increases include setting the corporate tax rate at 28%, which is still below the Pre-TCJA levels of 35%. To discourage a shift of jobs overseas, U.S. multinational corporations would see an increase in the global minimum tax to 21%, up from the current rate of 10.5%.

This week, the President announced the American Families Plan (AFP). The AFP would provide funding for paid family and medical leave, two years of free community college, two years of universal preschool, and extend tax credits to lower and middle income families.

The AFP would cost $1.5 trillion over ten years, and unlike the AJP, would in part be funded by tax increases on individuals. Those tax increases include components of Biden’s Tax Plan, which calls for doubling long-term capital gains tax rate from 20% to 39.6% on those earning more than $1 million annually and eliminating tax loopholes, which suggests it will also look to eliminate the step-up basis on inherited assets at death.

Who will be affected?

While the plans suggest they will only raise taxes on top earners, it will have an impact on business owners and those with highly appreciated assets that have been held for a number of years. 

Realizing a large capital gain before taxes go up will lessen the overall income tax impact.   For example, a business owner considering selling their business this year for $5 million and has a zero dollar basis will pay 20% in capital gains taxes, or $1 million. If they sell their business after the tax increase, they will pay almost twice as much in taxes, $1.98 million. The business owner would need to sell their business for 32% more, $6.2 million, to get the same after tax profit.

With two new large spending plans on the table this year, we can only assume some or all of the components in the plans, including tax increases, will be included in this year’s reconciliation cycle.  

Typically, lawmakers can pass one reconciliation bill per budget resolution, however it was ruled that special budgetary rules can be used for additional budget resolutions for this fiscal year, which ends September 30, 2021.  If an additional budget resolution passes, changes to the taxes may come by October.