At the end of April, President Joe Biden released a proposal for changes to the current U.S. tax code in the form of the American Families Plan.  This proposal is broad and touches on many areas beyond the scope of the current tax code.  However, for the purposes of this update, we will review three portions directly related to current tax law which may materially impact our clients and their families.

Increasing Top Marginal Rates

In the proposal, President Biden has suggested raising the top marginal tax rate from the current 37% to 39.6%.  The threshold for this new marginal rate is unclear at this time, however, if 2020 tax brackets are unchanged, this would apply to individuals with adjusted gross income (AGI) above $523,600 or, for married couples filing jointly, it would apply to those with AGI above $628,300.

Increasing Capital Gains Rates

Under the proposed plan, those making over $1,000,000 in taxable income would be subject to long-term capital gains rates of 39.6% (vs. the current top rate of 20%).  In addition, the current ACA surcharge of 3.8% would also apply to those individuals, thus making the top marginal capital gains rate 43.4% for Federal taxes.  At this time, it is unclear if this rate would apply to married couples with income above $1,000,000 or if the $1,000,000 threshold is on a per person basis.

Removing Step-up in Cost Basis

Currently, when someone passes away, their estate is typically entitled to a step-up in cost basis to the fair market value at the date of death, thus eliminating unrealized capital gains that were accumulated prior to their passing.  President Biden’s proposal would eliminate this step-up in basis for gains in excess of $1,000,000, thus removing some of the tax incentives for older Americans to hold assets with high unrealized capital gains through the end of their lifetimes.

What’s Next

While these proposals may have large and far-reaching impacts if implemented, as of today, they are still just proposals with miles to go before making their way into the tax code.  Also, it is unclear if these proposed changes would be retroactive to the beginning of this year or apply only on a go forward basis after passage.  Lastly, proposals such as this often go through multiple revisions and changes as they make their way from proposal to legislation and ultimately to incorporation into the U.S. tax code.  As such, it may not be prudent to make large adjustments to your portfolio or financial plan at this time.  That said, these are major proposed changes to the tax code and individuals who may be affected should keep a close eye on potential legislation as it works its way through Congress.

As always, we at Scharf Investments are happy to discuss this topic with you in more detail and identify any potential impacts to you, as well as strategies which may want to consider.  Before any action is taken by individuals in relation to their personal tax situation, we strongly suggest that you also discuss your plans with your CPA or tax professional.