President Biden's Recent Tax Proposals

A couple of months ago, I wrote a blog discussing potential tax changes that might occur under our new President given his election and Democratic control of the Senate and House of Representatives for at least the next two years. That blog reviewed some of the changes President Biden proposed during his campaign. Since that blog was written, President Biden has proposed two new pieces of legislation that, if passed, would increase both individual and corporate income taxes.

On March 31, President Biden announced a $2.3 trillion spending package called the American Jobs Plan (“AJP”) as a spending program designed to create millions of jobs, rebuild our country’s fragile infrastructure and position us to out-compete China. Along with the AJP, President Biden released a Made in America Tax Plan (“MATP”) to make sure corporations pay their fair share of taxes and encourage job creation at home. The MATP proposes to pay for the spending proposed under the AJP by raising the corporate income tax rate from 21% to 28% – the middle ground between President Trump’s 21% corporate income tax rate and President Obama’s 35% corporate income tax rate.

On April 28, President Biden introduced a $1.8 trillion spending package named the American Families Plan (“AFP”). This plan calls for numerous spending initiatives for education, healthcare, and childcare. He intends to pay for these programs by increasing taxes on the wealthy. According to the Tax Foundation, the funding choices under the AFP come at the cost of reduced economic output, fewer jobs, and lower wages. AFP provides for several proposed tax increases including:  (i) boosting the top individual tax rate to 39.6% from 37% for individuals with income in excess of $452,700 and married couples with income in excess of $509,300; (ii) increasing the capital gains tax rate from 20% to 39.6% for those making more than $1,000,000; and (iii) eliminating the step-up in basis for assets received by a beneficiary at death.

The step-up in basis rule works as follows: If I purchase stock for $5,000 and five years later pass away when the stock is worth $12,000, the person inheriting that stock from me receives a step-up in basis to $12,000 – the value of the stock at the time of my death. This affords the beneficiary the ability to sell that stock at my death or shortly thereafter and pay little or no capital gains tax on the sale. There are no income tax consequences to me or my estate.

Under President Biden’s proposal, the beneficiary in my example above still would receive a basis of $12,000 in the stock he or she inherited from me. However, what is new under President Biden’s plan is my death would be treated as a taxable sale of my stock, and I would have to report on my final income tax return and pay capital gains tax on $7,000 ($12,000 fair market value of stock at my death minus $5,000 cost basis). The proposal exempts the first $1,000,000 in gain from taxation as well as family-owned businesses and farms and contributions to charities.

It will be interesting to see what happens with these proposals moving forward. The narrow Democratic control in the Senate and House of Representatives provide plenty of political obstacles for President Biden in trying to pass these proposals in their current form. Stay tuned!!