American Families Plan tax proposals face an unpredictable path

Changes to taxes on individuals would greatly affect middle market

Apr 30, 2021

There’s a challenging political journey ahead for the Biden administration’s proposed changes to taxes on individuals, part of its American Families Plan that provides for expansive programs in education, child care and family support. As was true with the Made in America Tax Plan announced just 29 days earlier, this proposal amounts to a starting point for negotiations with a highly partisan and narrowly split Congress.

Jim Alex, RSM’s national tax go-to-market leader, and Mathew Talcoff, national tax industry leader, react to the proposals and assess the legislative cycle ahead in a discussion with Dan Ginsburg, RSM’s public affairs leader, on “Tax Policy Now.” Below is a transcript of their conversation, edited for clarity:


Dan Ginsburg: President Biden talked bluntly about increasing taxes on millionaires and billionaires as part of the American Families Plan:

  • Raises taxes on individual rates of high earners
  • Increases capital gains
  • Eliminates estate step-ups
  • Closes the carried interest loophole
  • Extends business loss limits
  • Includes a significant increase in funding for the IRS

Now, it’s important to reiterate that at this stage, these are just proposals. And, frankly, given the razor-thin majorities in Congress, we need to preface everything we’re saying with a bit of a reality check that these proposals are just really starting points for congressional negotiations. And at this stage, the political road to enacting these plans is neither paved nor clear.

With that said, Jim, what stands out to you about what the president had to say about the tax elements of the American Families Plan?

Jim Alex: Thanks, Dan. From a tax policy perspective, my first thought is concern. There are enormous adverse effects that affect the middle market and taxpayers overall, and so it’s a curious the path the president plans to take.

I think it was Winston Churchill who had the old adage that basically said: You do great things by taking the hard path. And maybe that’s the thinking here because it looks like a hard path ahead.

Choices were made with regard to things that are in the plan as compared to what was said on the campaign trail, versus stuff that was left out that was also said on the campaign trail. So these choices create what looks like a very hard path for a lot of taxpayers as we look at this plan.

Let me give you an example. There’s an enormous change, potentially, with regard to estate planning, specifically with regard to the elimination of the step-up in basis—and I won’t get into all the weeds about it. Folks reading this understand what that change means. But why take that approach when instead they could have chosen to raise the estate tax rate and lower the estate and gift tax exemption? Instead, they’re going to unsettle a cornerstone of estate planning by proposing to eliminate the step-up in basis. That’s one example, Dan.

Dan: Interesting. Any other similar speedbumps you see?

Jim: I’ll call out two other matters. First, there is no proposed change to the state and local tax deduction. As you know, it’s a very controversial matter. There’s nothing here with regard to that. They could have provided that at the same time (they) capped the number of deductions you could take. It’s not found in this plan.

The second one, it’s a head scratcher. No relief with regard to R&D deductions is found in the plan. As you know, the ability to immediately deduct R&D expenses expires at the end of this year. That could have been an easy fix and helped businesses, business owners and taxpayers, in general. It’s not found in the plan, and it’s puzzling why we don’t see that when we’re encouraging a lot of development here onshore in the United States.

Dan: Yeah. I guess the next big question is—when? What’s your sense for when this gets done and, equally important, when it all becomes effective?

Jim: There are three scenarios. It could be Jan. 1 next year. It could be when it’s passed this year. Or the worst scenario is retroactive to Jan. 1 of this year. The best conjecture is still that it’s prospective to next year. Why? Because the tough political divide that faces the president as he wants to get this passed makes us, from looking at history, believe that it’s probably Jan. 1 next year, though we have to watch very carefully what the signals would be with regard to a potential effective date

Dan: That’s helpful. So, Matt, let’s turn to you. What are you hearing from clients about the administration’s tax proposals?

Matt Talcoff: Sure, Dan. The things we’re hearing depend on the profile of the client. You mentioned things like carried interest; that really relates to the financial services sector. Or like-kind exchanges in the real estate sector.

But I think if we take one common ground, it’s the long-term capital gains rate. The general population out there is concerned about the fact that if long-term capital gains rates go up, it could have impacts on the markets. It certainly will have impacts on their net after-tax cash that they have when they sell an asset.

So if you think about a business owner, they’re worried about the possibility that if they hold on to an asset too long, and all of a sudden you have a doubling of the long-term capital gains rate, what does that mean to their future plans? If they have planned to retire and use that after-tax money for all their dreams, well, it’s going to change now.

So they’re asking questions around how I plan for that. How do I model it out? And how do I consider it when we think about the fact that there could be a change in the tax upon death? All of those things are things that we’re hearing from our clients, and we need to be prepared and flexible in our planning.

Dan: One of the other eye-opening components of the tax plan is the administration’s stated intent to “revitalize enforcement” at the IRS, which the administration says would raise about $700 billion over 10 years. What is your take on this? More importantly, how should our audience prepare?

Matt: This has been talked about a lot, especially over the last week or two. Eighty billion dollars toward the IRS is a big number, especially when you look at their funding today. So there will be a lot of investment, we would expect, in technology, in hiring more agents. And then, if you read the headlines, you’re seeing that there is discussion about more reporting from banks. So they would want banks to report not just the dividends, interest and capital gains income, but also the aggregate inflows and outflows into a bank account. That could be concerning to a lot of taxpayers out there because they know that a lot of things that go in and out of their bank accounts really are not income or expenses. It could be a loan; it could be all sorts of things.

So our advice to our clients has been stay calm. If you’re reporting everything already, don’t worry about it. Just make sure you’re constantly in contact with your tax advisor. I would say make sure that your documentation is really good. When you face an audit—if you haven’t faced an audit—there is a whole host of questions that you’ll be asked. And when you have the documentation, those questions are easily answered. And when you can tie that documentation back to your tax return, again, no need to worry. So stay calm, be prepared, speak with your advisor, and make sure you have good documentation. That would be our advice.

Dan: That makes a lot of sense. Now, bigger picture, we talked about the long road between what has been proposed and what will actually get implemented. Lots of complications between now and then, for sure. But given this uncertainty, what can businesses and owners do now?

Matt: We like to narrow it down to a few things. I’ve said it before: plan, be prepared and be flexible. There are a lot of things you can do in the tax world—whether you’re in the tax year or even after the tax year—before you file your tax return. So, model things out. We are doing tons of modeling with our clients right now. We are looking at scenarios to accelerate or decelerate expenses or income. We are doing modeling around if you sell an asset and you make an assumption based on your capital gains rate, what will that mean after tax? So the message is: be prepared, communicate and be flexible. Those are our three words.

Dan: Thanks, Matt, and thank you, Jim, for your terrific insights. They really help to clarify what these proposals mean for the middle market.

RSM contributors