On May 28, 2021, the Biden administration released its fiscal year 2022 budget proposal, and on the same day the Treasury Department released its highly anticipated “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals” (“Green Book”), which provides additional details around the administration’s tax proposals as well as new provisions. The proposals include corporate and individual tax increases; potentially retroactive capital gains tax increases; and effectively ending stepped-up basis at death for high earners. However, negotiations in Congress will determine the final tax changes and these proposals may not necessarily be reflected in final legislation.
The Green Book provides additional details around the tax provisions included in the administration’s American Jobs Plan and American Families Plan legislative proposals, including the following:
- Impose tax increases on corporations and high-income individuals;
- Make permanent and/or expand certain existing tax credits for lower-income and other taxpayers, including child and dependent care tax credits and earned income tax credits;
- Change the existing international tax regime;
- Impose a 15% minimum tax on the worldwide book income of domestic corporations exceeding $2 billion;
- Encourage onshoring of U.S. jobs by creating a new general business credit and disallowing deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business;
- Support clean energy through new incentives for production and use of alternative fuels and eliminating fossil fuel tax preferences;
- Provide support for housing and infrastructure by creating, extending and/or expanding tax credits and providing federally subsidized state and local bonds to encourage investment in housing and infrastructure; and
- Increase in IRS’s ability to enforce tax laws, particularly for business entities and high net worth individuals, including increasing IRS funding; requiring financial institutions to annually report account inflows and outflows; and requiring specific reporting directed at crypto assets and transactions involving crypto assets.
The U.S. tax proposals most relevant to our clients include the following:
- Increase tax rates on domestic corporations from 21% to 28%;
- Raise the top marginal individual ordinary income tax rate from 37% to 39.6%;
- Tax long-term capital gains and qualified dividends as ordinary income for individuals with Adjusted Gross Income (AGI) of more than $1 million;
- Treat transfers of appreciated property by gift or on death as realization events;
- Expand the 3.8% Medicare tax by subjecting all trade or business income of individuals earning over $400,00 to either self-employment tax or net investment tax;
- Tax carried interest as ordinary income;
- Limit gain deferral on like-kind exchanges of real property to an aggregate amount of $500,000 per year per taxpayer ($1 million for married individuals filing jointly); and
- Make permanent the section 461(l) excess business loss limitation on noncorporate taxpayers that is set to expire after 2026.
Most of the proposals would be effective for taxable years beginning after December 31, 2021. However, the capital gains tax rate increase is proposed to apply to “gains required to be recognized after the date of announcement,” which may mean the April 28, 2021 announcement of the American Families Plan or the May 28, 2021 release of the budget and Green Book. While the effective date may ultimately slip to the date of enactment of the legislation, this potentially retroactive tax rate increase for capital gains is something taxpayers who are contemplating transactions in 2021 should consider.
Click here for further details on the significant U.S. tax proposals included in the Green Book.
While some of the proposals could modify key aspects of the U.S. tax system, the release of the Green Book is only the first step in the FY 2022 budget and appropriations process. The proposals must still be vetted by Congress, and there may be significant changes made as the legislative process plays out over the coming months. As the administration and congressional committees continue to work on tax and budget proposals, clarifications and details regarding the various proposals will emerge. Some of these initial proposals may be abandoned or revised, and additional proposals may emerge.
While the Green Book proposals could have a significant, although by no means certain, likelihood of moving forward as part of the appropriations process or in separate pieces of legislation such as an infrastructure bill, depending on a taxpayer’s specific facts and circumstances, significant tax savings may be achieved by taxpayers who anticipate expected tax changes and may be able to take steps now to take advantage of existing tax provisions and rates.
We will continue to monitor the progress of these proposals as the legislative process plays out over the coming months. For further questions regarding how the proposals in the Treasury Department’s Green Book may potentially impact your personal or business taxes, please contact your Bennett Thrasher tax advisor by calling 770.396.2200.