The Covid Economy

How Biden's American Families Plan will affect taxes for the wealthiest Americans

Share
President Joe Biden speaks during a joint session of Congress at the U.S. Capitol in Washington on Wednesday, April 28, 2021.
Bloomberg | Bloomberg | Getty Images

President Joe Biden introduced a $1.8 trillion plan to expand access to child care and education Wednesday night during his first joint address to Congress. To pay for the American Families Plan (AFP), as the White House is calling it, the president has proposed a number of tax changes that would affect the wealthiest American households.

Biden's proposal includes instituting free community college, universal preschool and national paid parental leave, among other priorities. It also calls for a four-year extension of the new $3,000 child tax credit.

To pay for the plan, Biden has proposed reinvesting in the IRS to help the agency run more effectively, as well as taxing the wealthiest Americans more. Here's how the tax changes would work.

Reinstating a 39.6% top tax rate

In 2017, the top marginal income tax rate was decreased from 39.6% to 37% as part of former President Donald Trump's tax plan. Biden wants to raise it back to its pre-2017 level for "those within the top 1%" of earners.

Biden has said repeatedly that no one earning less than $400,000 per year would have their taxes increase. But a White House official confirmed Thursday that the change would apply to individuals earning more than $452,700 and married couples earning more than $509,300 — meaning each partner could earn less than $400,000 and see their tax bill rise.

That said, this change would affect less than 1% of taxpayers, according to the most recent filing data from the IRS. And an estimated 65% of Americans support a tax hike on those earning more than $400,000, according to a recent Manmouth poll.

Changes to capital gains taxes

Currently, long-term capital gains — the increase in value of an asset owned for longer than one year over its original purchase price — are taxed less than ordinary income, maxing out at 20% (plus an additional 3.8% Medicare surtax on net investment income).

But the White House has said this lower tax rate is "one of the most unfair aspects of our tax system," and Biden is proposing increasing the capital gains tax rate to 39.6% for Americans earning more than $1 million a year.

Additionally, Biden wants to limit a tax loophole on inherited wealth. Currently, an asset like a stock is transferred to an heir at its current market value when the original owner dies. So when the asset is sold, any gains from the time the original owner purchased it to the time it was transferred at his or her death to the heir essentially go untaxed.

Biden wants to change this so that taxes are collected on any unrealized gains over $1 million at death, regardless of the taxpayer's other income, according to the Tax Foundation.

Republicans oppose the plan

The president says this plan will help keep the country on the road to recovery from the coronavirus pandemic and is part of a larger package he is proposing to boost the economy that also includes the $2 trillion infrastructure plan released last month.

Biden has stressed that low- and middle-income Americans will not see their taxes increase under this plan.

"I'm not looking to punish anybody," Biden said during his address. "But I will not add to additional tax burden of the middle class of this country. They're already paying enough."

However, Republicans called the plan divisive and it is unlikely any GOP lawmakers will support it. Sen. Tim Scott, R-S.C., delivered the GOP response to Biden and called the proposal a "partisan wish list," saying it would amount to "throwing money at certain issues because Democrats think they know best."

Editor's note: This post was updated with new information on the income thresholds for the proposed 39.6% marginal tax rate.

Don't miss:

Check out: Meet the middle-aged millennial: Homeowner, debt-burdened and turning 40

VIDEO8:4108:41
How a 25-year-old making $62,000 in NYC spends her money