On March 31, the Biden administration began to unveil its priorities with the introduction of the American Jobs Plan, a proposed $2.3 trillion spending plan oriented toward infrastructure and jobs. At the same time, the Made in America Tax Plan was released by the Treasury Department providing further tax details. This tax plan calls for tax increases on businesses and corporations to raise $2 trillion in revenue over the next 15 years.
On April 28, the administration launched the second part of its two- part infrastructure plan, the American Families Plan, which includes an additional $1.8 trillion in new spending and tax credits over the next decade focused on investments in child care, education, paid leave, and other priorities. The revenue needed to cover the costs of this spending then shifted to changes in individual taxes targeting higher income earners.
Together, these plans set the tone for what President Biden would like to see in the legislation to be drafted by Congress and start to provide clarity of the proposals set forth during his campaign.
The American Jobs Plan includes the following spending proposals:
- $620 billion in transportation infrastructure
- $400 billion to expand domestic manufacturing and workforce development
- $213 billion toward affordable housing
- $180 billion towards research and development, including clean energy
- $174 billion for electric vehicles
- $137 billion for schools and childcare facilities
- $111 billion for clean drinking water
- $100 billion to expand broadband access
- $100 billion to modernize the electric grid
- $50 billion in infrastructure resiliency
- $18 billion to upgrade Veterans Affairs hospitals
The Made in America Tax Plan includes the following proposals:
- Raises the corporate tax rate from 21% to 28%
- Imposes a 15% minimum tax rate on the book income of large corporations
- Increases the Global Intangible Low-Taxed Income (GILTI) minimum tax on multinational corporations to 21%
- Eliminates subsidies, tax preferences, and special tax credits for the fossil fuel industry
- Reduces the expense deduction that U.S. companies can claim when offshoring jobs; and provides tax credits to U.S. companies to support onshoring jobs
Details of the American Families Plan, includes the following spending and revenue raising provisions
- $800 billion in extending tax credits recently passed in the American Rescue Plan, including:
- Affordable Care Act tax credits
- Child tax credits through 2025
- Child and dependent care tax credit
- Earned income tax credit
- $225 billion for child care
- $225 billion for a national paid family and medical leave program
- $200 billion for universal pre-K for 3- and 4- year-old children
- $109 billion for two years of free community college
- $85 billion increase to the Pell Grant financial aid program
Proposed tax changes
- Increase the top individual tax rate from 37% to 39.6%
- A new top capital gains tax rate of 39.6% over $1.25 million of income
- Eliminate the step-up in basis for gains in excess of $1 million for individuals and $2.5 million per couples with certain exceptions, such as family owned businesses and farms
- Eliminate the capital gains treatment of carried interest income
- Limit like-kind exchange treatment for real estate by capping the deferred capital gains at $500,000
- Expand the 3.8% net investment income tax for those with incomes over $400,000
- Increased investment in the IRS that is estimated to raise $700 billion in additional tax revenue over the next 10 years
Separate from President Biden’s most recent proposals, several Senate Democrats have released two tax plans. First, on March 25, Representative Gomez introduced the For the 99.5% Act, which proposes significant changes to the current estate and gift tax regime. If passed, the proposed changes to the estate and gift tax rates and exemptions would be effective as of January 1, 2022. However, many other provisions, including the restrictions on Grantor Retained Annuity Trusts (GRATs) and limitations on valuation discounts, would apply to transfers after the date of the bill’s enactment.
For the 99.5% Act inclues the following estate and gift tax proposals
- Reduces the estate tax and generation-skipping transfer tax exemptions to $3.5 million ($7 million for married couples)
- Reduces the gift tax exemption to $1 million
- Creates new estate tax rate brackets as follows:
- 45% for taxable estates between $3.5 million to $10 million
- 50% for taxable estates between $10 million to $50 million
- 55% for taxable estates between $50 million to $1 billion
- 65% for taxable estates above $1 billion
- Limits the gift tax annual exclusion to $10,000 per-donee and $20,000 per-donor for certain gifts, most notably gifts to trusts
- Modifies the Generation Skipping Transfer Tax rules by applying it with no exclusion to any trust set up to last more than 50 years. Existing exempt trusts would be subject to the GST tax 50 years after the bill is enacted
- Sets the minimum term for Grantor Retained Annuity Trusts (GRATs) at 10 years with a minimum 25% remainder interest
- Eliminates the use of Grantor Trusts by stating that a trust funded by a grantor after the date of the legislation is considered owned by the grantor for both income and estate tax purposes, and treating distributions from a Grantor Trust to a beneficiary as a gift
Eliminates or reduces valuable discounts for transfers of interests in entities such as family limited partnerships that are not conducting an active trade or business
Limits the use of valuation discounts on transfers of non-business assets for gift and estate tax purposes
The Sensible Taxation and Equity Promotion Act of 2021 (STEP Act)
Finally, Senators Booker, Van Hollen, Sanders, Whitehouse and Warren introduced the Sensible Taxation and Equity Promotion Act of 2021 (the STEP Act) on March 29. This focuses on the “step up in basis” at death presently afforded by the Tax Code.
The STEP Act includes the following proposals:
- As of January 1, 2021, eliminates the “step up in basis” at death and instead provides for the taxation of unrealized gains upon a noncharitable transfer by gift, in trust or at death (other than a transfer to a spouse who is a U.S. citizen or long-term resident; in which case the spouse takes over the transferor’s basis). Transfers already made this year would potentially be subject to the tax on unrealized gains or the carryover basis for spouses.
- Provides individuals with $1 million ($2 million per couple) exclusion from taxation for unrealized gains at death. That amount is limited to a cumulative $100,000 per taxpayer for lifetime transfers, to be deducted from the $1 million available at death.
- Provides that assets held in non-Grantor Trusts are taxed on unrealized gains every 21 years
- Maintain the $250,000 per taxpayer ($500,000 per couple) exemption for personal residence
- Maintain the current capital gains tax rates
- Allows taxpayers to pay the tax for illiquid assets, like business entities and farms, over a 15-year period
Please note that the proposals from the Biden administration were released in Fact Sheets from the White House and have not been officially introduced in congress. RBC Wealth Management continues to closely monitor any changes and timing that may impact our clients as well as provide planning opportunities.