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American Rescue Plan

Overview of the American Rescue Plan Act from IRS (May 13, 2021)

IRS provides overview of key tax provisions in American Rescue Plan Act, including retroactive tax benefits for 2020


Understanding Biden’s American Families Plan and What it Could Mean to Taxpayers (April30, 2021)

On April 28, President Joe Biden released details about the second half of his $4.1 trillion Build Back Better plan for the country. Previously, the President introduced the American Jobs Plan designed to tackle infrastructure and climate change. We now know more about the American Families Plan, a $1.8 trillion package of spending and tax credits that will help fight child poverty, help paid leave programs, and invest in education. This second half of the plan will be funded through individual and estate tax increases. 

 

We have outlined below the highlights to the plan and what we think will affect most of our clients. It is important to remember that these are only “proposed” changes and will likely have to go through the budget reconciliation process. 

 

To review more details about the plan, the White House released a fact sheet (select link to view 29-page document).

1. Individual Tax Rates

Current 

Biden’s American  Families Plan 

7 Tax Rates on Ordinary Income:

10%, 12%, 22%, 24%, 32%, 35%, 37%

 

Long-term capital gains: top rate 23.8%

 

 

 

 

Qualified Dividends: top rate 23.8%

Increase top rate from 37% to 39.6% for taxpayers making more than $400,000.

 

The new top rate on long-term gains would reach 43.4% (nearly doubling current rate) for households with taxable income in excess of $1 million.

 

Increase tax rate to 43.4% for households making over $1 million; Impact on C corps will be dramatic when coupled with proposed increase in corporate income tax rate.

 

 


 

 

 

2. Child Tax Credit

 Current 

Biden’s American  Families Plan

$2,000 credit for each qualifying child; $500 for nonqualifying child; Phased out at higher income levels.

 

A credit up to 35% of spending on childcare to work allows up to $1,500 for one child, and $3,000 for two or more children under age 13.

 

Extend and make permanent most of key tax cuts in American Rescue Plan including the Child Tax Credit, The Earned Income Tax Credit, and the Child and Dependent Care Tax Credit. These provisions include increasing and make fully refundable the child tax credit from $2,000 to $3,000 for each qualifying child ($3,600 for children under 6) and make the Child and Dependent Care Tax Credit fully refundable at a maximum credit of $8,000. 

 

 

3. Employment/Social Security (Medicare) Taxes

Current  Biden’s American Families Plan

Payroll tax applied on worker’s wages up to $142,800 for 2021. FICA tax of 12.4% split between employer and employee.

 

 

Apply an additional 3.8% Medicare tax consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes. 

 

4. Estate Taxes

Current

Biden’s American Families Plan

Exemption amount $11.7 million for 2021 ($11.58 mil for 2020). Assets passed through at death get a basis step-up to fair market value for the recipient. Exemption amount reverts to $5 million after 2025. Top tax rate is 40%.

 

End the practice of “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 property is not donated to charity. Protect family-owned businesses and farms to avoid paying taxes when given to heirs who continue to run business.

 

 

 

5. Corporate Tax Rates

 Current

Biden’s American Families Plan

21%

 

Increase to 28%

 

This rate increase along with 43.4% on capital gains could create huge incentive to change corporate status to S corp.

 

 

6. Eliminate Real Estate Tax Breaks

 Current

Biden’s American Families Plan

Taxes on gains of real property are deferred if the property is exchanged for that of “like-kind.” Owners of certain residential rental property occupied by low-income tenants may claim a tax credit of a percentage of the qualified basis of the property over 10-yr period.

 

Eliminate the special real estate tax break that allows real estate investors to defer taxation when they exchange property (like-kind exchanges) for gains greater than $500,000.

 

7. Tax Enforcement and Compliance

 Current

Biden’s American Families Plan

Tax compliance runs on a voluntary system requiring taxpayers to file yearly tax returns. A tax gap, the difference between what is estimated to be owed and what the IRS collects, stand at approx. $440 billion annually.

 

Gives IRS the authority to regulate paid tax preparers. Require financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages are already. Add IRS resources to focus on corporations, businesses, estates, and higher-income individuals.

 

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