What to make of plan for families

The American Families Plan is a combination of $1 trillion of spending over 10 years and $800 billion worth of tax credits, which are currently temporary and would be made permanent. The proposal is mostly focused on education, child care, and paid family and medical leave. To fund the plan, the proposal would impose higher taxes on the nation’s wealthiest families.

Here are the specific aspects of the tax increases:

• Raise the top marginal tax rate from 37% to 39.6%. The number 39.6% might seem familiar, because it was the top level before the 2017 Tax Cuts and Jobs Act was enacted. In the Biden proposal, that amount would apply to taxable income earned for married couples above $509,300, and for individuals above $452,700 — that was according to a White House official who had to clarify the initial numbers after there was confusion around the muchcited $400,000 level.

The current top income bracket for 2021 kicks in for income earned above $628,300 for those who are married filing jointly and above $523,600 for individuals. What’s important is not only that the top rate would rise, but that higher rate would be applied to income at a lower level. The White House points out that this change intends to reverse the 2017 tax cut for the top bracket and notably, the change would apply to less than 1% of American earners.

• Change long term capital gains and qualified dividend rates for households making more than $1 million. Currently, assets held for more than a year are considered long-term and are subject to a separate tax structure than the money earned by working. Currently, there are three long term capital gains tax brackets, of which the top rate is 20%. That top rate is assessed on asset sales of more than $501,600 for couples and $441,850 for individuals.

Under The American Families Plan, if you make more than $1 million, the top capital gains rate would be subject to the top ordinary income tax of 39.6% (as noted above) plus the existing (and additional) 3.8% Medicare surcharge for a total of 43.4%. This would be a whopper of an increase from the current 23.8% top rate.

• Change the way taxes are assessed on inherited assets. The current estate tax system allows for a “stepup” in cost basis at death. So that means that if I purchased a portfolio of stocks 50 years ago for $1,000 and it was worth $1,000,000 at my death, my descendants would inherit the portfolio as if they paid $1,000,000 for it. When they sell it, $1,000,000 would be the cost basis of the assets, which effectively means they would pay no tax on all of that accumulation.

Under the Biden plan, a stepped up cost basis would be eliminated-for everyone, but there would also be a provision which would exclude up to $1,000,000 of gains from taxation. This is similar to the current rule on primary residence gains, which exclude the first $250,000 for individuals and $500,000 for couples.

• Beef up IRS audits of high-income earners. The plan would provide the IRS with $80 billion to ramp up audits in an effort to collect

an additional $700 billion over 10 years. While those claims may not bear out, it is clear the IRS has been underfunded-its budget has fallen by 20% in real terms over the past decade.

The plan is likely to go through the grinder of Congressional negotiations, so be careful not to make any moves in your portfolio or estate plan until the details are concrete and become law.