Tax Impacts of the American Families Plan

President Joe Biden recently announced the American Families Plan (“the Plan”), which is summarized in the Fact Sheet provided by the President. The Plan is a proposal that has not passed Congress. If adopted, it would make several changes to the current tax regime. Some key tax aspects of the Plan are summarized below:

Increase Highest Income Tax Rate

The Plan would increase of highest marginal income tax rate from 37% to 39.6%.

Elimination of Basis Step-Up

The Plan would eliminate the basis step-up at death for capital gains in excess of $1 million. This means death may be treated as a realization event (similar to a sale). Under current law, beneficiaries are not taxed on unrealized appreciation at the time property is inherited, and such appreciation is generally forgiven for income tax purposes.

If adopted, both capital gains and estate tax could apply at death, which will negatively impact people who die owning appreciated stock, appreciated real property, or appreciated business interests.

Note, under the Plan, taxpayers would be granted an exemption of $2.5 million per couple when combined with the existing $500K principal residence exclusion before the capital gains tax applies. In addition, there appears to be two exceptions when a transfer at death will not be treated as a realization event: (1) when property is contributed to charity, and (2) when family-owned businesses and farms are gifted to heirs who continue to run the business.

Capital Gains

The Plan would increase the long-term capital gains rate for households with income over $1 million.  A household with more than $1 million in annual income (which appears to be income of any kind), will be subject to a capital gains rate of 39.6%.  When the net investment income tax of 3.8% is also applied, the total tax rate will be 43.4%, as opposed to the current highest capital gains rate, which is 23.8%.

The Plan does not include a change to the gift and estate tax rates or the gift and estate tax exemption (currently $11.7 million per taxpayer).  Also, the discussion of eliminating the basis step-up appears to be limited to transfers at death rather than lifetime transfers.

For more information regarding the Plan and its potential impact on your personal estate planning, please contact an attorney in our estate planning practice group, including Ryan Montgomery or Kaitlyn K. Perez.

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