President Joseph Biden is proposing two major spending initiatives which would be funded by increases in taxes in several areas. While political and social commentators analyze the policy strengths and weaknesses of the American Families Plan and the American Jobs Plan, RINA’s CPA’s are focusing on potential tax implications for clients. Our initial take is discussed below.
First, it is extremely important to recognize that all aspects of these plans are tentative. They have not gone through any review or modification by Congress, much less been adopted as initially proposed. Therefore, RINA cannot definitively say what the impact of the plans will on your taxes or suggest with absolute confidence actions a client should take.
Our general advice is DON’T PANIC! RINA’s professionals will watch how the potential changes in tax law move through the legislative process.
The biggest changes in tax law for individuals are suggested in the American Families Plan. The package proposes:
- Restoring the pre-2017 top tax rate of 39.6%, replacing the current top rate of 37%. According to The Wall Street Journal, individuals with taxable income above $523,600 and married couples with taxable income over $628,300 would be affected.
- Eliminating special treatment of capital gains for households making over $1 million. The President says that this change will touch only the top 0.3% of households, and those taxpayers will pay the same 39.6 percent rate on all their income.
- Ending the 1031 Exchange tax break for gains greater than $500,000.
- Ending “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity. The reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.
- Closing the “carried interest loophole” so that hedge fund partners will pay ordinary income rates on their income.
- Requiring taxpayers making over $400,000 to uniformly pay a 3.8% Medicare tax on earnings.
- Mandating that financial institutions report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are.
- Increasing investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, defined as taxpayers with income less than $400,000. These additional IRS resources would focus on large corporations, businesses, and estates, and higher-income individuals.
- Extending key tax cuts adopted in the American Rescue Plan that benefit lower- and middle-income workers and families, including the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Tax Credit.
- Extending the expanded health insurance tax credits in the American Rescue Plan. These credits are providing premium relief that is lowering health insurance costs by an average of $50 per person per month for nine million people.
The separate American Jobs Plan proposes:
- Extending the 48C manufacturing tax credit program.
- Setting the corporate tax rate at 28%.
- Increasing the minimum tax on U.S. corporations’ foreign profits to 21% and calculate it on a country-by-country basis so it includes profits reportedly earned in tax havens. This Global Intangible Low-Taxed Income (GILTI) tax is currently 10.5%- 13.125%, according to Investopedia.
- Eliminating the rule that U.S. companies pay zero taxes on the first 10% of return when they locate investments in foreign countries.
- Eliminating deductions for foreign corporations on payments that could allow them to move profits out of the United States if they are based in a country that does not adopt a strong minimum tax.
- Making it harder for U.S. corporations to claim to be a foreign company by “inverting”, that is acquiring, or merging with a foreign company to avoid U.S. taxes.
- Denying companies expense deductions for offshoring jobs while also providing tax credit for bring jobs to the United States.
- Eliminating the tax incentives for “Foreign Derived Intangible Income” (FDII).
- Enacting a 15% minimum tax on the income corporations use to report their profits to investors—known as “book income”.
- Eliminating all special tax preferences for corporations in the fossil fuel industry.
Again, RINA believes that it is unlikely that all of the 20+ changes in tax law will survive legislative review and be signed into law. Our professionals will continue to monitor the plans’ progress in Washington, and we will report any significant development in future alerts.
Moreover, the tax increases are targeted to fund programs designed to grow the economy in specific areas. So, before changing any financial or investment strategy clients are encouraged to talk to their RINA accountant and wealth management teams to devise an appropriate response.
Please reach out to your RINA professional if you have additional questions or concerns.