President Biden will lay out his $1.8 trillion American Families Plan on Wednesday in his first address to a joint session of Congress on the eve of his 100th day in office. The plan is focused on expanding benefits for education, children and childcare and the administration intends to finance it in large part with tax hikes on the wealthiest individual taxpayers. It’s the follow-up to his American Jobs Plan, which focused primarily on physical infrastructure like roads and bridges and would be financed with corporate tax hikes.
Here’s who stands to lose out from the individual tax changes Biden is proposing—and who might come out ahead.
The bulk of Biden’s tax proposals are targeted at the wealthiest Americans. He wants to increase the top individual income tax rate on ordinary income from 37% to 39.6%—the level it was prior to former President Trump’s tax cuts. This year, that top tax rate kicks in at $523,601 in taxable income for singles and $628,301 for married couples filing jointly.
According to an analysis of Biden’s campaign tax proposals by the Tax Policy Center, restoring top income and payroll tax rates to pre-2017 levels would raise more than $111 billion over the next decade.
Heirs of larger estates
Biden has proposed eliminating the “step-up” in basis on assets in an estate—this is the loophole that allows heirs to avoid capital gains tax on an unlimited amount of previous untaxed appreciation in assets they inherit. The Biden plan would allow the first $1 million in passed-on gains from each person who dies to remain tax free—and the administration points out that a couple could pass on $2.5 million in gains to their heirs untaxed, once the $250,000 per person exclusion on gains from the sale of a primary residence is factored in.
For households earning more than $1 million, Biden is proposing taxing long term capital gains and dividends at his higher top ordinary income tax rate of 39.6%—nearly double the current top 20% tax rate on such income. When combined with a 3.8% surtax on investment gains implemented as part of the Affordable Care Act, Biden’s plan means that the top federal tax rate for the highest earners would rise from 23.8% to 43.4%.
The Biden Administration has consistently emphasized that its proposed capital gains tax changes will only impact a tiny fraction of American households. “This change will only apply to three-tenths of one percent of taxpayers...about 500,000 households,” National Economic Council director Brian Deese told reporters earlier this week.
Hedge fund bigwigs
Biden wants to do away with the carried interest tax break—a loophole in the tax code that allows hedge fund partners to treat a large portion of their compensation as long term capital gains and therefore pay a much lower tax rate on what they earn than they would if their compensation were taxed as ordinary income.
“The President is also calling on Congress to close the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income just like every other worker,” the White House said in a fact sheet about Biden’s plan.
High-earning real estate investors
Biden’s plan calls for ending a popular tax break connected with 1031 like-kind exchanges that lets real estate investors defer federal capital gains taxes on a property by exchanging it for a different one. But it would end this break only for gains greater than half a million dollars.
Wealthy real estate investors would also get hit by Biden’s plan to end the “step-up” in basis loophole, which, when combined with the 1031 exchange tax break, can allow a family to permanently avoid capital gains taxes on property passed down to heirs.