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American Families Plan proposes major changes, including tax reform

Apr 30, 2021

On Wednesday, April 28, President Biden revealed the American Families Plan to Congress. The plan touches on a broad range of topics but at its root aims to address poverty issues and prioritize working and middleclass American families.

The American Families Plan, which carries a price tag of $1.8 trillion dollars, is broken up into three major areas: add at least four years of free education, provide direct support to children and families, and extend tax cuts for families with children and American workers.

In order to pay for these various programs, President Biden has proposed significant tax reform. Whether all the wide-reaching provisions included in the American Families Plan become law is unclear; however, this article will address the areas that Wipfli is tracking.

Tax reform

In order to generate revenue to help cover the costs of the programs of the plan, President Biden is proposing tax reform aimed at impacting high-income taxpayers.

Revitalize enforcement: The plan would require financial institutions to report information on cash flows within accounts so that earnings from investments and business activities will be reported, similar to how wages are reported. In addition, the plan would increase investment in the IRS with the goal of enforcement against Americans with income over $400,000. The plan states that these tactics will raise a purported $700 billion over the next 10 years.

Increase the top tax rate on the wealthiest Americans to 39.6%: The Tax Cuts and Jobs Act of 2017 lowered the top individual tax rate from 39.6% to 37%. The plan would restore the top tax rate to 39.6%.

End capital gains tax rates and other tax breaks: First, President Biden is proposing that the top capital gains rate reflect the ordinary income rate — meaning, the top capital gains rate would go from 20% to 39.6% (including the net investment income tax, the top capital gains rate would actually be 43.4%). 

Second, the plan would end the practice of “stepping up” basis for property at death for gains in excess of $1 million. The plan states that it would be designed in such a way that it protects family-owned business and farms that will continue to be run by the heirs.

Third, the President is proposing to eliminate the practice of carried interest, eliminate like-kind exchanges of real estate for gains greater than $500,000 and permanently extend the excess business loss rules. 

Finally, the plan would enforce the net investment income tax of 3.8% consistently on taxpayers with more than $400,000 of income.

Tax cuts for America’s families and workers

Extend expanded ACA premiums tax credits in the American Rescue Plan Act of 2021: Through a direct investment of $200 billion, the plan would make the American Rescue Plan Act’s (ARPA) temporary reductions in insurance premiums permanent.

Extend the child tax credit increases in the ARPA through 2025 and make the child tax credit permanently fully refundable: The plan would extend the expansion of the child tax credit, as enacted by the ARPA, through 2025. The expansion increased the child tax credit from $2,000 per child to $3,000 per child for six years old through 15, and $3,600 per child for children under six. At the option of the recipients, they could choose to begin receiving the credit in monthly payments starting in July.

Permanently increase tax credits to support families with childcare needs: The plan would also make permanent the temporary child and dependent care tax credit expansion as enacted by the ARPA. Families will receive a tax credit up to 50% of their spending on qualified childcare expenses, up to a total of $4,000 for one child or $8,000 for two or more children. A 50% reimbursement will be available to families making less than $125,000 a year. Families making over $125,000 and up to $400,000 will receive a partial credit.

Make the earned income tax credit expansion for childless workers permanent: ARPA made the earned income tax credit available for childless workers below the poverty line. The American Families Plan would make this expansion of the earned income tax credit permanent.

Provide direct support to children and families

Create a national comprehensive paid family and medical leave program: The plan would guarantee 12 weeks of paid leave. The areas that would be covered include parental leave, family/personal illness and issues involving personal safety and wellbeing. In addition, the program would provide workers a minimum of three days of bereavement leave per year. Workers would be entitled to two-thirds of average weekly wages, up to $4,000 per month. The lowest compensated workers would have their wages replaced at 80% of their average weekly wages.

Nutrition: The plan hopes to address a number of nutritional insecurity issues that importunately impacts low-income families and families of color. To do this, the plan would expand summer EBT to all eligible children, expand school meal programs, incentive consumption of healthy foods and facilitate re-entry for former inmates through SNAP eligibility.

Add at least four years of free education

The plan aims to expand the number of years available for free public education. The plan would offer universal pre-school for all three- and four-year-olds. In addition, the plan would provide for free community college and other postsecondary education. Part of the education sections of President Biden’s plan would attempt to address teacher shortages, improve teacher preparation and strengthen pipelines for teachers of color. In addition, the plan would help current teachers earn in-demand credentials and invest in educator leadership.

Questions on the American Families Plan impact to you?

Because the American Families Plan has just been proposed, it’s likely changes will be made to it. We will continue to track these changes and note their impact. If you have questions about how any of the above proposed changes might impact you, contact Wipfli.

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Author(s)

Andrew Seifert
Senior Manager
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