Biden's American Families Plan Comes With a Big Tax Hike. Here's Who Could Pay More
Ahead of his first speech to a joint session of Congress on Wednesday, President Joe Biden unveiled the American Families Plan, a wide-ranging proposal with a hefty price tag aimed at expanding the social safety net. Expanding the Child Tax Credit and establishing programs for universal pre-school, free community college, paid family leave and more would cost an estimated $1.8 trillion.
Biden wants to pay for his package by raising taxes — specifically, by enacting "a set of measures to make sure that the wealthiest Americans pay their share," according to a White House fact sheet. But the very thought of higher taxes, especially in the middle of a pandemic, is still enough to make the average person worry.
Will Biden's plan affect your income taxes? Which tax hikes is he suggesting? And why do people keep talking about capital gains? Here's what you need to know.
Are taxes going up?
If Biden's proposal passes, yes. Some people will see higher taxes.
The American Families Plan suggests increasing the top individual tax rate from 37% to 39.6%, the level it was before former President Donald Trump signed the Tax Cuts and Jobs Act in 2017. (FYI: The lower rate would have expired anyway in 2026 unless Congress stepped in.) The idea is to "reform the tax code so that the wealthy have to play by the same rules as everyone else," according to the fact sheet.
Biden's push to increase the capital gains tax rate is a bigger, buzzier change, says Mike Savage, CEO of 1-800Accountant. Biden wants to make it so that households earning more than $1 million pay the same rate on profits from selling their investments, aka capital gains, as they do on wages.
Currently, the highest-earning taxpayers owe a 20% capital gains tax on assets held for over a year. Biden would increase this to 39.6% for top earners, meaning "if you're making more than $1 million, your capital gains tax is pretty much doubling," Savage says.
The White House also wants to close the carried interest loophole, end a special real estate tax break, change some Medicare taxes and raise corporate taxes.
Whose taxes will rise under Biden?
Biden said in a March interview that "anybody making more than $400,000 will see a small to a significant tax increase." White House economic adviser Brian Deese described the federal income tax rate adjustment in more concrete terms at a press briefing earlier this week.
"This change will only apply to three-tenths of a percent of taxpayers, which is not the top 1%; it’s not even the top one half of 1%," Deese said. "We’re talking about three-tenths of a percent; that’s about 500,000 households in the country."
Ryan D. Brown, partner and attorney at financial planning firm CR Myers & Associates near Detroit, says the tweaks would likely affect a small group of affluent Americans — not so much your middle-class Joes.
The example that always comes up here is billionaire Warren Buffett, who has repeatedly said he pays a lower tax rate than his secretary due to the way the system works.
"From the Democrats' point of view, this is an attempt to level the playing field by taxing the quote-unquote wealthy and those that don't work typical 8-5 jobs like most Americans do but are getting rich off of investing," Brown says. "That's why they're doing it."
Whose taxes won't go up?
On the campaign trail and in a November tweet, Biden said that "no one making under $400,000 will see their taxes go up." Deese elaborated during the briefing, explaining that for some "150 million households in the country, this is not a change that will be relevant."
However, Senate Minority Leader Mitch McConnell, R-Ky., has expressed skepticism about who will end up paying higher taxes. NBC News reported McConnell said Biden's previously pitched infrastructure package was a Trojan horse and that Democrats wanted to raise "taxes across the board." Sen. Ted Cruz, R-Texas, has cast Biden's tax increases as part of a "radical agenda."
There has also been some confusion around what Biden means when he says "no one" and "anybody" — in other words, whether that $400,00 threshold applies to both individual taxpayers and households, just one, or some other configuration.
All we know for certain is that "the tax code is going to be long, it's going to be big, it's going to have a lot of things in it," says Aaron Leak, wealth manager at ECL Private Wealth Management in Chicago.
Could Biden's tax hikes affect me in other ways?
There might be a domino effect on the stock market.
Savage says that if the capital gains tax goes up, investors may hold onto their assets instead of selling as a way to avoid dealing with it. If corporations have to pay more in taxes, their earnings could fall, and their stock prices might dip.
The market could also see a big selloff as investors try to lock in lower rates before the policy goes into effect. As a result, Brown says, it's possible people's 401(k)s and individual retirement accounts may falter.
Are these tax hikes definitely happening?
No. Brown says Biden's proposal faces an "uphill battle" in Congress, where Democrats just barely have an edge. The party had to use the complex budget reconciliation process to get the American Rescue Plan passed in March and has already seen pushback on the cost of Biden's $2.25 trillion infrastructure package.
Some sort of compromise may be the most likely outcome. Biden might support a top 39.6% capital gains tax rate, but Brown says negotiations could lead to a "middle ground" around 30%.
I think my taxes might increase if this passes. What should I do?
First, don't forget that this is all speculation. We're only talking about proposals and consequences that could possibly happen and raise taxes.
Second, consider calling an expert. Leak says his team is ready to dive into the tax code to "make sure we're putting clients in the best situation" if there are legislative changes.
What else is going on?
Honestly, a lot. Another part of the American Families Plan is a push to "revitalize enforcement to make the wealthy pay what they owe," which includes giving the seriously understaffed IRS more resources to crack down on high earners who misreport their taxes. (Yes, this likely means more audits for rich people.) And we haven't even touched on the proposals around unemployment insurance, school meal and medical leave programs.
For now, though, remember it's early days.
"There's a lot more horse trading and negotiating to go on and scenarios to play out before anything's set in stone," Savage says.
Best just to focus on getting your 2020 taxes done by May 17.
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