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Overcoming the financial difficulties created by the COVID-19 pandemic has been quite challenging for Chicago families and businesses. Although widespread vaccine distribution has eased many of the government restrictions, corresponding economic improvements have been slow to improve. In fact, it was recently reported that April unemployment in Illinois remained at 7.1% and is a percentage point higher than the national average. In other words, the road to recovery may be longer than any of us hope.

To help rebuild and reposition the economy, the Biden Administration introduced its proposed tax agenda—the American Families Plan (AFP), which would provide $1.8T in investments and tax credits for families and children over the next 10 years. The comprehensive plan focuses on childcare, universal pre-kindergarten, free community college and makes higher education affordable for low- and middle-income students. It also includes enhanced tax incentives and tax cuts for American families. To help clients, prospects, and others, Selden Fox has provided a summary of the key details, including tax provisions, below.

Key AFP Provisions

  • ACA Premium Tax Credits – The American Rescue Plan provided two years of reduced premiums for those who purchase healthcare coverage independently. The AFP seeks to make this change permanent permitting over nine million people to save on healthcare costs and making coverage affordable for many of the uninsured.
  • Extension of the Child Tax Credit –The American Rescue Plan temporarily expanded the Child Tax Credit from $2,000 per child to $3,000 per child six years old and above and $3,600 for each child under six. It also made the credit refundable as well. The AFP calls for an extension of these changes through 2025 and makes the refund provision permanent.
  • Child and Dependent Care Credit – The AFP calls for Congress to make permanent the changes to the Child and Dependent Care Credit approved under the American Rescue Plan. Families will receive a credit for up to 50% of expenses on qualified childcare, up to $4,000 for one child, and $8,000 for two or more children. A 50% reimbursement will be allowed for those making less than $125,000 per year and partial credit for those making between $125,000 and $400,000 per year.
  • Earned Income Tax Credit Expansion – The AFP would also make permanent the Earned Income Tax Credit increases outlined in the American Rescue Plan, which tripled the benefit amount for qualifying families.
  • IRS Regulation Paid Tax Preparers – Finally, there is a provision that would allow the IRS to regulate paid tax preparers. Unfortunately, tax returns prepared by certain types of preparers have a very high error rate. Not only do they charge for the erroneous work, but they also subject taxpayers to costly audits. To remedy the issue and ensure consistency in training and quality, the AFP calls for the IRS to be empowered to regulate paid tax preparers.

Key Tax Reform Provisions

  • Increase in the Top Tax Bracket – There would be an increase in the top federal income tax bracket from 37% to 39.6% for taxpayers earning over $400,000. This modification would undo the top rate reduction made in the American Tax Cuts and Jobs Act of 2017.
  • Raise Capital Gains Taxes – There would also be an increase in the capital gains tax rate for taxpayers with a gain in excess of $1M. Under the AFP, the tax rate would be raised to 39.6% on investments, which represents an almost 100% increase in the capital gains tax rate.
  • Eliminate the Carried Interest Loophole – The AFP also calls for Congress to close the carried interest loophole, so hedge fund partners pay ordinary income tax rates on their income.
  • 1031 Exchange Limitations – These exchanges allow real estate investors to defer capital gains on the sale of property or assets. Under the AFP, exchanges would be limited to gains of up to $500,000, requiring taxes to be paid on other amounts.
  • Eliminate Medicare Tax Loopholes – While high-income earners and investors generally pay 3.8% Medicare tax on earnings, the application is inconsistent because of loopholes. The proposed changes would eliminate these loopholes and ensure those earning $400,000 would be taxed consistently. 

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The American Families Plan is an integral part of the Administration’s legislative agenda and has been called a once-in-a-generation investment in American families. While key elements will certainly be changed and compromises made as this goes through Congressional negotiation, the details provide important insight into the changes that the Administration is proposing. We will continue to provide updates if and when some of the provisions get closer to becoming reality. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Paul Rozek

Paul Rozek provides tax research, consulting and compliance services to closely held businesses, tax-exempt organizations, individuals and fiduciaries. His clients include family offices, private foundations, trade associations, charitable organizations, schools, credit unions and other nonprofit entities.