OSAE Executive News Summer 2021

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AN EXAMINATION OF THE BIDEN ADMINISTRATION’SFAR-REACHING TAX OVERHAULWHAT IT COULD MEAN FOR YOUR ORGANIZATION AND MEMBERSRecently, President Joe Bidenannounced his $1.8 trillionAmerican Families Plan (AFP),the third step in his Build BackBetter policy initiative. Theannouncement followed theprevious releases of the proposed$2.3 trillion American Jobs Planand the Made in America TaxPlan. These plans propose majorinvestments in various domesticinitiatives, such as expandedtax credits for families, offsetwith tax increases on highincomeindividual taxpayers andcorporations.Proposed tax changes for the wealthyThe AFP would reverse many of theprovisions in 2017’s Tax Cuts and Jobs Actand other parts of the tax code that benefithigher-income taxpayers. These taxpayerscould be hit by changes to the following: Individual tax rates.The plan proposes to return the taxrate for the top income bracket to Obamaadministration levels, going from thecurrent 37 percent to 39.6 percent. It’s notclear whether the income tax brackets willbe adjusted. For 2021, the top tax ratebegins at $523,601 for single taxpayersand $628,301 for married taxpayersfiling jointly. Capital gains and qualified dividend income.For those with income of more than$1 million in a tax year, the AFP wouldtax long-term capital gains and qualifieddividend income as ordinary income —in other words, at 39.6 percent. Longtermcapital gains currently are taxed ata maximum rate of 20 percent (effectively23.8 percent, when combined with thenet investment income tax), depending ontaxable income and filing status. Net investment income tax (NIIT).This tax applies to net investmentincome to the extent that a taxpayer’smodified adjusted gross income (MAGI)exceeds $200,000 for single tax filers,$250,000 for joint filers and $125,000for married taxpayers filing separately. Ifa taxpayer meets the applicable MAGIthreshold and has net investment income,the amount of NIIT liability is 3.8 percentof the lesser of 1) the amount by which theMAGI exceeds the threshold or 2) the netinvestment income.The AFP proposes to broaden theNIIT by applying it to all types of incomegreater than $400,000, rather than onlyinvestment income. On top of the hike incapital gains, these taxpayers would facea tax of 43.4 percent at the federal level.With state and local capital gains taxes,high-income individuals could face anoverall capital gains tax rate that tops50 percent.Stepped-up basis.Under existing law, the income tax basisof an inherited asset is the asset’s fair marketvalue at the time of the deceased’s death,not the deceased’s original cost for it. This isreferred to as “stepped-up basis.” As a resultof this rule, the gain on appreciated assetsisn’t subject to taxation if the heir disposes ofthe assets at death. To reduce the incentive tohold appreciated assets until after death —rather than subjecting them to capital gainstaxes — the AFP imposes limits on stepped-upbasis. Specifically, it ends the practice forgains that exceed $1 million, or $2.5 millionper couple when combined with existing realestate exemptions. The Biden administrationhas indicated that it would carve outexceptions for property donated to charitiesand family-owned businesses and farms.Carried interest.A “carried interest” is a hedge fundmanager’s contractual right to a share of apartnership’s profits. Currently, it’s taxable atthe capital gains rate if certain conditions aresatisfied. The Biden administration would taxcarried interests at ordinary tax rates.16 OSAE.ORG
Like-kind exchanges.Also known as Section 1031 exchanges,like-kind exchanges allow a taxpayer to deferthe recognition of a gain on the exchange ofreal property held for use in a business or forinvestment if the property is exchanged solelyfor similar property. The AFP would end suchdeferrals for gains of more than $500,000.Tax relief for individuals and familiesWhile the AFP would increase the taxliability of high-net-worth individuals, it’s alsodesigned to help those less well off. It woulddo so through a variety of tools, includingthe following: Child Tax Credit (CTC).The American Rescue Plan Act (ARPA),passed in March 2021, temporarilyincreased the CTC from $2,000 to $3,000for eligible taxpayers for each child agesix through 17, with credits of $3,600 foreach child under age six. It also makesthe credit fully refundable in most cases.The current $2,000 credit is subject to aphaseout when income exceeds $400,000for joint filers and $200,000 for otherfilers, and it’s generally refundable up to$1,400 per qualifying child. The ARPAcontinues the typical phaseout treatmentfor the first $2,000 of the credit in 2021but applies a separate phaseout for theincreased amount — $75,000 for singlefilers, $112,500 for heads of householdand $150,000 for joint filers. Under theARPA, the U.S. Treasury Department willmake monthly advance payments for theCTC beginning in July and running throughDecember 2021, based on taxpayers’ mostrecently filed tax returns.The AFP would extend these CTCincreases through 2025 and make thecredit fully refundable on a permanentbasis. The proposed extension wouldinclude the regular advance payments fromthe U.S. Treasury Department.PLEASE VISITHTTPS://WWW.CSHCO.COM/TO LEARN MORE ABOUT POSSIBLE CHANGESTO THE TAX LAWS AND MUCH MOREFROM OSAE STRATEGIC PARTNERCLARK SCHAEFER HACKETT (CSH). Child and dependent care tax credit.The ARPA expands this credit for 2021.Taxpayers can claim a refundable 50percent credit for up to $8,000 in careexpenses for one child or dependentand up to $16,000 in expenses fortwo or more children or dependents —making the credit ultimately worth up to$4,000 or $8,000. It begins phasing outwhen household income levels exceed$125,000; for households with incomeover $400,000, the credit can be reducedbelow 20 percent. The AFP would leavethis increase in place permanently. Familieswith an income between $125,000 and$400,000 would receive a partial credit. Health insurance tax credit.The ARPA also increases the availabilityand the amount of premium tax credits(PTCs) under the Affordable Care Act(sometimes referred to as ACA subsidiesor cost-sharing), retroactive to January1, 2021. It extends PTCs to anyone whoreceives, or was approved to receive,unemployment benefits in 2021. It alsolimits the amount that anyone who obtainsinsurance through the federal or statemarketplaces must pay for premiums to8.5% of their MAGI — regardless oftheir income. The AFP would make thisexpansion permanent.Corporate tax proposalsIn addition to the individual tax proposals,the Biden administration has proposeda swath of changes in the taxation ofbusinesses. For example, the AFP would makepermanent the limit on excess business lossdeductions. The Made in America Tax Plancontains many more provisions relevant tobusinesses. Among other things, it proposesto raise the corporate tax rate to 28 percent,the midpoint between the 21 percent rateenacted during the Trump administration andthe Obama administration level of 35 percent.The plan also proposes several changes tointernational taxation rules, including raisingthe tax rate on global intangible low-taxedincome to 21 percent. The Made in AmericaTax Plan would also impose a 15 percentminimum tax on book income (as opposed tothe income reported on corporate tax returns)on large companies that report high profitswith little or no taxable income. Note, too,that Treasury Secretary Janet Yellen has statedthat the United States is working with othercountries to set a global minimum tax rate.The American Jobs Plan, on the otherhand, provides several tax incentives andother support for businesses. For example,it would provide $52 billion to promotedomestic manufacturing and $31 billion forsmall business programs to expand accessto credit, venture capital, and research anddevelopment funding. It proposes targetedcredits related to clean energy generationand storage and expanding the Section45Q carbon credit. And it would provide anexpanded credit for employers that provideworkplace childcare facilities.IRS-related proposalsIn a recent study, the IRS found that thetop 1 percent of individual taxpayers failedto report 20 percent of their income andfailed to pay nearly $175 billion in taxesowed annually. The Biden administrationproposes providing the IRS with the resourcesand information it needs to address the “taxgap” (that is, the difference between the taxowed by taxpayers and the amount that’sactually paid on time). The AFP calls for asignificant boost in the funding of IRS taxenforcement — $80 billion over 10 years,which, on an annual basis, nearly doubles theagency’s 2021 enforcement budget. The closerscrutiny would focus on large corporations,partnerships and wealthy individuals. It alsowould require financial institutions to reportinformation on balances and account flowsto better track earnings from investment andbusiness activities. The Biden administrationhas stated that the enforcement efforts won’ttarget households with less than $400,000 inannual income.THE PATH FORWARDThe Biden administration and the slim Democraticmajority in Congress have already demonstrated with theARPA their willingness to use the budget reconciliationprocess to pass fiscal policy legislation on a majority basisin the U.S. Senate. That approach, however, requiresunanimous Democratic support. Moderate Democrats inCongress could demand the trimming of certain proposalsregarding tax increases or reject them altogether (forexample, the higher taxes on investment income andchanges to the step-up in basis). We’ll keep you up to dateon the provisions that survive and any that might be addedduring negotiations, such as an elimination of the limit onthe state and local tax deduction.EXECUTIVE NEWS Summer 202117
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OSAE Executive News Summer 2021

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