A Breakdown of The American Families Plan Tax Compliance Agenda

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On May 20, 2021, the U.S. Treasury Department released a report outlining new tax compliance measures as part of the American Families Plan. The Biden administration hopes that these new proposed procedures will increase tax fairness in the United States. Here’s what you need to know.

What The Biden Administration Hopes to Accomplish

According to the Treasury Department’s official report, the tax gap is constantly growing, and it will continue to do so if unaddressed. These new proposed measures seek to fight the tax gap by fighting tax evasion. This new plan aims to help create the necessary resources for the IRS to monitor and enforce fairness in the tax system.

The Changes

Provide the IRS the resources it needs to address sophisticated tax evasion

This includes $80 billion in additional resources to rebuild the infrastructure that has declined by nearly 20% over the last decade (U.S. Treasury Report)

Provide the IRS with more complete information.

This consists of stricter cashflow reporting requirements for banks and other third-party organizations without causing the taxpayers any additional responsibilities. The most talked about point in this category is the new cryptocurrencies and crypto-assets regulation from the U.S. Department of Treasury. (For more information and the U.S. Department of Treasury’s cryptocurrency announcement, read our article.)

Update technology used by the IRS to identify tax evasion and serve customers

The IRS’s current technology dates back to the 1960s and is the oldest in the federal government. These updates would allow the IRS to identify errors quicker and better protect the tax system from security threats.

Regulating paid tax preparers and increasing penalties for those who commit or abet evasion

Many people use tax preparers to file their taxes. Frequently, these preparers are unregulated and lack enough training to provide proper assistance. These new regulations will ensure that all preparers meet the necessary requirements to minimize errors in filing.

Will They Affect You & How

The plan covers a wide range of tax areas. If you do any of the following, the proposed changes may affect you.

If you earn more than $400,000 (at a household level)

The highest tax bracket would be restored to 39.6% for those with a household income above $400,000.

If you itemize deductions on your federal income tax return

For those in the 28% tax bracket, you may see an increased ability to deduct state and local taxes, as the $10,000 limit is being called to be eliminated. However, for those in higher tax brackets, the itemized deductions could be more limited.

If you have IRAs or workplace retirement plans

The date you must begin taking required minimum distributions (RMDs) from employer-sponsored plans and/or traditional IRAs would be delayed over a number of years up to age 75 depending on your current age.

If you make annual gifts to one or more individuals

The amount you may be able to gift before reporting on a gift tax return is lowered to $10,000 per year.

If you are a recipient of annual gifts

While an individual can gift up to $10,000 each, the proposed changes would make it so that a recipient cannot receive more than $10,000 in gifts before having to pay a gift tax.

If you have an estate that is valued at greater than $3.5 million

One of the proposed estate tax changes would be a progressive taxation system that would start at 40% for estates valued at over 3.5 million at the time of death.

If you are in a position to inherit assets in the future

Of the changes on the table, one of them would remove the step-up cost basis. Meaning that if the stock costs the decedent $10,000 and it is then inherited at $100,000, then you, the receiver, would inherit a potential capital gain of $90,000.

Questions?

Have questions about how these changes affect your specific tax situation? Our tax experts are here to help. Contact us to set up a meeting.