I hope you are enjoying your summer! With July 15th being the day that many families will receive their first advanced payment of the Child Tax Credit, I thought it was an important time to discuss both this credit, as well as some of the larger tax proposals currently being debated in government.
To start, I will first walk you through the American Rescue Plan’s Child Tax Credits, and then I will provide further details on some of the upcoming tax proposals which are part of the American Families Plan. As of July 2021, the American Rescue Plan has passed already, while the American Families Plan has not.
Enjoy! And as always, if you have any questions or if something strikes you that you’d like more information on, please let me know.
American Rescue Plan’s Child Tax Credits
As a part of the American Rescue Plan, the child tax credit, which families receive as a part of their tax return, was increased from a maximum of $2,000 per child to be a maximum of $3,000 per child between the ages of 6 and 17 and $3,600 per child under the age of 6 (within set income limits). More importantly, it changed the way this credit will be received by families. Previously, all credits were received as a part of the tax filing. For example, your 2021 tax credit would have been received when you filed your tax return in 2022. Now, eligible families will receive their payments in advance, monthly, starting today.
As a part of the advanced payments, the IRS has provided a portal for families to use https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021. You can use this site to confirm your eligibility, update your banking information, enter your information if you haven’t filed your taxes for the previous 2 years and even unenroll from the payments if you chose to receive all eligible payments when filing your taxes.
**Please note: If your 2020 tax return shows that you are eligible for the credits, but your income has increased in 2021 and you do not feel you are eligible anymore, please email me or give me a call. It is important to discuss if you should unenroll from the advanced payments and avoid having to pay back any credits you should not have received when filing your taxes in 2022.
5 of the American Families Plan’s Proposed Tax Changes
1. Child Tax Credits
The child tax credit, increased with the American Rescue Plan, is currently set to be a one-year increase, with the credit reverting to the 2020 credit limit in 2022. This proposal would extend the increased credit through 2025.
This credit, among other proposed credits (for example, additional dependent care credits and government spending towards both higher and pre-school education), will require additional funding to make it affordable. The funding would partially come from the additional tax proposals below.
2. Increased Marginal Income Tax Rate
There are currently 7 federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Based on your filing status, your total income lands you into one of these brackets and you are then taxed on a gradually increasing scale, with income taxed at each percentage up until your total income. For example: an individual or joint filers in the 22% tax bracket is taxed at 10% for their initial income earned, then 12% and finally 22%.
This new proposal plans to increase the top income tax rate to be 39.6% instead of being caped at 37%. The proposal also includes adjustments to the income levels which are included in each bracket. It is proposed that even some people who were previously in the 35% tax bracket could now also end up in the 39.6% tax bracket.
3. Long-term Capital Gains Rates
Currently, long-term capital gains (sale of assets, held greater than 1-year, for more than originally purchased) are taxed differently than the rest of your income. Depending on your income level and filing status for the year, your capital gains rate could be 0%, 15% or 20%.
As a part of the American Families Plan proposal, this would change. If your taxable income is above $1M for the year, instead of paying 20% tax on your capital gains, your capital gains would now be included as a part of your ordinary income. This means that these gains could be taxed as high as 39.6%, as indicated in the previously explained proposal.
4. Capital Gains upon Passing
When an individual passes away, any assets the individual had, which appreciated during their lifetime, are currently not taxed. When a beneficiary inherits assets, they get the benefit of a step-up in basis, which means the beneficiary does not have to worry about large gains if they sell the assets after receiving them. The assets are received at the current market value and then the beneficiary can either hold or sell their inherited assets.
Under the new proposal, the first $1M in capital gains passed to beneficiaries at death would remain tax free to the decedent and the beneficiaries; however, any unrealized gains above $1 million ($2 million for joint filers) would be subject to the capital gains tax when transferred to beneficiaries. As mentioned previously, this tax rate will potentially also be increased with the proposed tax laws.
5. Net Investment Income Tax Rates
In 2013, the Net Investment Income Tax went into effect. This is an additional 3.8% tax on certain investment income for individuals making above set income thresholds. This income includes items such as interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and some additional qualifying business income.
As a part of the American Families Plan, it is being proposed that this 3.8% be expanded to apply to all sources of income greater than $400K. This could even include any active pass-through income, which relates to self-employment and additional business income as well.
What does all of this mean for you? Plan! Although these tax proposals have not yet been passed, if you think you may be impacted by one of many of these new proposals it is important to be ready. As you can see from the proposals, not everything has been finalized yet. As an example, not all income levels have been labeled for individual filing statuses. Additionally, the date these proposals would become effective is not yet confirmed (which may mean they can be backdated for 2021).
Work with a CPA and / or a Financial Advisor, such as myself, to make sure you are aware of what these changes could mean, and if there are ways to plan ahead for the changes you are making this year to try and avoid a negative tax impact.
If you want more information or guidance on any or all of the proposals, please let me know! I am happy to schedule a complimentary consultation to discuss any questions or concerns you may have.
Thank you, as always, for your time.