The White House – Fact Sheet: The American Families Plan
President Biden’s April 28 “Fact Sheet: The American Families Plan” contains numerous tax breaks for low and middle earner taxpayers and numerous tax increases on taxpayers “making over $400,000 per year.”
Tax breaks. Here is a summary of the tax breaks in the Fact Sheet:
Extend expanded ACA premiums tax credits in the American Rescue Plan. The American Rescue Plan Act of 2021 (PL 117-2; the American Rescue Plan) expanded the Code Sec. 36B premium credit that is available to many persons who are enrolled in an Exchange-purchased qualified health plan, thus, in effect, lowering health plan premiums for those persons. This expansion applies to 2021 and 2022. The American Families Plan would make those premium reductions permanent.
Extend the Child Tax Credit increases in the American Rescue Plan through 2025 and make the Child Tax Credit permanently fully refundable. The American Rescue Plan made several changes to the Child Tax Credit for 2021. For example, it expanded the Child Tax Credit from $2,000 per child to $3,000 per child for children six years old and above, and $3,600 per child for children under six. It also made 17-year-olds eligible to be qualifying children for the first time and made the credit fully refundable. And, it provided for advance periodic payment of the credits.
The American Families Plan would make permanent the full refundability of the Child Tax Credit, while extending the other expansions to the Child Tax Credit through 2025. “The credit would also be delivered regularly.”
The Fact Sheet says that the President is committed to working with Congress to achieve his ultimate goal of making permanent the Child Tax Credit as well as all of the expansions he signed into law in the American Rescue Plan.
Permanently increase the Child and Dependent Care Credit. The American Rescue Plan made the following changes to the Child and Dependent Care Credit for 2021: it increased the amount of the credit for many taxpayers and made the credit refundable. The American Families Plan would make these changes permanent.
Make the Earned Income Tax Credit expansion for childless workers permanent. The American Rescue Plan made changes that roughly tripled the Earned Income Tax Credit (EITC) for childless workers for 2021. The American Families Plan would make these changes permanent.
Tax increases. Here is a summary of the tax increases in the Fact Sheet:
Increase the top tax rate to 39.6%. The President’s plan would restore the top tax bracket to what it was before the 2017 Tax Cuts and Jobs Act (PL 115-97), returning the rate to 39.6%, applying only to those within the top 1%.
Increase the tax on capital gains for high earners. The Fact Sheet says, “Households making over $1 million-the top 0.3% of all households-will pay the same 39.6% rate on all their income, equalizing the rate paid on investment returns and wages.”
Reducing the step-up in basis at death for some taxpayers. The President’s plan would end the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) at death and would tax the gains if the property is not donated to charity. The reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.
Change taxation of carried interest. 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.
Cut into the rule for like-kind exchanges. The President would eliminate the like-kind exchange rule with respect to gains greater than $500,000 on real estate exchanges.
Make the excess business loss rules permanent. Under Code Sec. 461(l), for non-corporate taxpayers in tax years beginning after Dec. 31, 2020, and before Jan. 1, 2026, the “excess business loss” of the taxpayer for the tax year, if any, is disallowed. With some modifications, an excess business loss is (1) the excess of the taxpayer’s aggregate deductions for the tax year that are attributable to trades or business of the taxpayer over (2) (A) the taxpayer’s aggregate gross income or gain attributable to those trades or businesses plus (B) a threshold amount. Any disallowed excess business loss is taken into account in determining whether there is an NOL carryover to the following tax year under Code Sec. 172. The American Families Plan would make this rule permanent.
Close loopholes in the 3.8% net investment income tax. Certain unearned income of high-earner individuals, estates, and trusts is subject to a surtax of 3.8%. (Code Sec. 1411)
The Fact Sheet says that the application of this provision is “inconsistent across taxpayers due to holes in the law” and says that the President’s proposal “would apply the taxes consistently to those making over $400,000.”
IRS Notices Possibly Sent in Error: Earlier this month, the IRS issued notices to approximately 260,000 taxpayers stating they haven’t filed their 2019 federal tax return. These notices, referred to as CP59 notices , are issued yearly to identified taxpayers who have failed to file tax returns due the prior calendar year. Due to pandemic-related shutdowns, the IRS has not completed processing all 2019 returns at this time. Therefore, the CP59 notices should not have been sent because some portion of the recipients may have filed a return that is still being processed. Taxpayers who filed their 2019 returns, but nevertheless received the CP59 notice, can disregard the letter and do not need to take any action. There is no need to call or respond to the CP59 notice because the IRS continues to process 2019 tax returns as quickly as possible. See www.irs.gov/individuals/understanding-your-cp59-notice for more information on CP59 notices.
Notice 2020-65, 2020-38 IRB, IR 2020-195 (8/28/2020)
In a Notice, the IRS has provided guidance to employers regarding the recent presidential directive to allow employers to defer the withholding, deposit, and payment of certain payroll tax obligations.
Background. On August 8, 2020, the President, via a Presidential Memorandum, directed the Secretary of the Treasury (Secretary) to use his authority pursuant to Code Sec. 7508A, in light of the COVID-19 emergency, to defer the withholding, deposit, and payment of certain payroll tax obligations.
Deferral guidance. The Secretary has determined that employers that are required to withhold and pay the employee share of social security tax under Code Sec. 3102(a) or the railroad retirement tax equivalent under Code Sec. 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memorandum and this Notice (Affected Taxpayers). (Notice 2020-65, 2020-38 IRB 1)
For Affected Taxpayers, the due date for the withholding and payment of the social security tax, and so much of the railroad retirement tax equivalent tax as is attributable to the rate in effect under Code Sec. 3101(a), on Applicable Wages, defined below, (collectively Applicable Taxes) is postponed until the period discussed below.
Observation. If an employer decides to follow this Notice, there is no indication whether individual employees can ask to opt out, i.e., have their Applicable Taxes withheld and paid over when their Applicable Wages are actually paid.
For purposes of the Notice, Applicable Wages means wages as defined in Code Sec. 3121(a) or compensation as defined in Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. The determination of Applicable Wages is made on a pay-period-by-pay-period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period, and the relief provided in the Notice applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under the Notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes. If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.
Observation. The Notice does not define what is “necessary” nor does it provide any more information as to what “arrangements” the Affected Taxpayer may make. Presumably, the “if necessary” rule covers a situation where the Affected Taxpayer deferred paying over Affected Taxes of an employee and then the employee leaves the Affected Taxpayer’s employment anytime before April 30, 2021.
Please contact your payroll provider should you have questions or concerns regarding deferrals and repayment calculations.
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