What are the changes?

At the end of April, President Biden announced the American Families Plan as “an investment in our kids, our families and our economic future”.

The 10-year plan to increase support for American families is estimated to cost $1.8 trillion. Predominantly targeting education, childcare, healthcare, the aim is to “build back better”. Amongst the changes are:

  • Providing direct support to children and families
  • Making college more affordable
  • Increasing education for teachers to combat the growing teacher shortage
  • Paid leave, the pandemic has pushed back progress in the women’s labour force due the lack of family friendly policies.
  • Childcare being limited to 7% of income
  • Universal preschool

How will this be funded?

The $1.8 trillion will need to be found to fund these plans and it is estimated that approximately $1.5 trillion of this will come from tax hikes for the wealthiest families.

So, this will come from:

  • Income tax – Increase the top rate of tax to 39.6%. Those earning less than $400k per annum should not see any increase in their income tax rates.
  • Capital Gains tax – For those earning $1m or more, the capital gains tax rate will no longer remain at 20% but increase to a lofty 39.6% – matching the highest income tax rate. Add in the NIIT (Medicare/Obamacare) of 3.8% and this means you could be faced with a gain taxed at 43.4%.
  • Inheritance – ‘Step up in basis’ has always been a comforting benefit of the US system for heirs. It allows the market value to be set as at the date of inheritance. This can then be used as the cost basis for capital gains tax when the holdings are sold, rather than the original purchase price of the assets. There will now be an end to ‘step up in basis’ for gains of over $1m.

It is understood there will be increased IRS audits for high earners and an expectation that banks will be required to provide even more information on account flows to ensure investment earnings are reported to the IRS, just like your salary would be. Transparency and sharing of information are here to stay.

Speak to your advisor

Before rushing into anything, speak to your advisor because sometimes the obvious quick fix of realising gains now may not make sense in the long run:

  • Realised gains and ultimately capital gains tax may be a very small percentage of you overall portfolio. An increase in the tax rate is not fun but doesn’t change for managed portfolios, the tax liability is still very small.
  • Rebasing can result in a large crystallisation event and ultimately a large tax bill.
  • If a new administration comes in, then the capital gains rate could well change again.

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Jenny Judd Director London and Capital
By Jenny Judd, Director

 

 

 

 

Disclaimer:
London & Capital are not tax advisors and this is our understanding of the rules. The above should not be treated as tax advice and you should consult a tax consultant to address your specific needs to determine if the structures above are appropriate for your circumstances.
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