Dana R. Bull, CPA, MST •
The Department of the Treasury recently issued detailed information regarding the Biden Administration’s budget and tax proposals for fiscal year 2022. This annual publication is known as “the Green Book.” This publication gives a clear picture of tax policies being pursued by the current administration. Many of these proposals have been previously announced in the “Made in America Plan” and “American Jobs Plan.” Keep in mind that these are only proposals and not newly passed tax law. While there are too many proposals to address in this blog, here are some of the highlights that are likely to affect a number of taxpayers:
The Department of the Treasury recently issued detailed information regarding the Biden Administration’s budget and tax proposals for fiscal year 2022. This annual publication is known as “the Green Book.” This publication gives a clear picture of tax policies being pursued by the current administration. Many of these proposals have been previously announced in the “Made in America Plan” and “American Jobs Plan.” Keep in mind that these are only proposals and not newly passed tax law. While there are too many proposals to address in this blog, here are some of the highlights that are likely to affect a number of taxpayers:
Corporate taxation:
As outlined in the American Jobs Plan, the proposal would increase the income tax rate for C Corporations from a flat rate of 21% to a flat rate of 28%. This increase would be effective for tax years beginning after December 31, 2021. For corporations that begin after January 1, 2021 and before January 1, 2022, the tax rate would be equal to 21% plus 7% times the portion of the taxable year that occurs in 2022.
In addition, the Administration plans to do away with many tax preference items and credits that favor the oil, gas and coal industries while proposing several renewable and alternative energy incentives, including enhanced credits for renewable electricity, energy investments and energy-efficient homes.
Individual taxation:
The Administration has proposed an increase to the highest marginal tax rate from 37% to 39.6%. This would be effective for taxable years beginning after December 31, 2021. For married taxpayers filing a joint return, this top rate would apply to taxable income over $509,300 ($452,700 for single taxpayers, $481,000 for head of household, and $254,650 for married filing separately).
Perhaps the most significant change is regarding the taxation of capital gains and qualified dividends. This proposal would increase the current highest rate of 20% (23.8% including the net investment income tax) to the highest ordinary income tax rate, currently at 37%, (40.8% including the net investment income tax) for individuals with more than $1 million of adjusted gross income. It is presumed that the effective date for this proposal would be April 28, 2021, which was the “date of announcement” of the American Families Plan.
Along with increasing the tax rate on capital gains, the Administration is also looking to expand on what is a taxable event. Currently, you only trigger a taxable event when you sell a capital asset. Gifting of assets and inheriting assets do not cause the recognition of capital gains. Under new proposals, both gifting and death would become taxable events. The tax would only apply to any gains in excess of a $1 million per-person lifetime exclusion from the recognition provision. This exemption would be portable between spouses allowing for a total of $2 million exclusion for married couples. Additional exclusions are available for transfers between spouses, to charities, the existing exclusions for gain on a personal residence ($250,000 per taxpayer), as well as certain small business stock and tangible personal property such as household furnishings and personal effects.
The Administration also proposes to make permanent many aspects of the American Rescue Plan. Among these provisions are:
Self-employment taxes
This proposal would expand the scope of self-employment and net investment income taxes to require that income derived from pass-through trade or business be subject to one or the other tax regime. Currently, ‘passive’ owners of S Corporations and entities taxed as partnerships are subject to the net investment income tax - a 3.8% tax on their share of business income. Meanwhile, ‘active’ owners of partnership entities pay a similar 3.8% amount of self-employment tax. However, ‘active’ owners of S Corporations and certain active ‘limited partners’ (including certain LLC owners) are not subject to either tax. The Administration’s plan would expand the definition of net investment income tax to include all trade or business income not otherwise subject to employment taxes and subjecting active S Corporation owners, limited partner and LLC members to self-employment tax on their distributive shares of income.
Keep in mind that none of these proposals are law…yet. We will have to wait and see what parts remain after the Administration and Congress work to pass a budget and other new plans.
If you have questions on whether you could be impacted, contact your accountant, and remember to follow us on LinkedIn to stay up to date on all of our posts.
As outlined in the American Jobs Plan, the proposal would increase the income tax rate for C Corporations from a flat rate of 21% to a flat rate of 28%. This increase would be effective for tax years beginning after December 31, 2021. For corporations that begin after January 1, 2021 and before January 1, 2022, the tax rate would be equal to 21% plus 7% times the portion of the taxable year that occurs in 2022.
In addition, the Administration plans to do away with many tax preference items and credits that favor the oil, gas and coal industries while proposing several renewable and alternative energy incentives, including enhanced credits for renewable electricity, energy investments and energy-efficient homes.
Individual taxation:
The Administration has proposed an increase to the highest marginal tax rate from 37% to 39.6%. This would be effective for taxable years beginning after December 31, 2021. For married taxpayers filing a joint return, this top rate would apply to taxable income over $509,300 ($452,700 for single taxpayers, $481,000 for head of household, and $254,650 for married filing separately).
Perhaps the most significant change is regarding the taxation of capital gains and qualified dividends. This proposal would increase the current highest rate of 20% (23.8% including the net investment income tax) to the highest ordinary income tax rate, currently at 37%, (40.8% including the net investment income tax) for individuals with more than $1 million of adjusted gross income. It is presumed that the effective date for this proposal would be April 28, 2021, which was the “date of announcement” of the American Families Plan.
Along with increasing the tax rate on capital gains, the Administration is also looking to expand on what is a taxable event. Currently, you only trigger a taxable event when you sell a capital asset. Gifting of assets and inheriting assets do not cause the recognition of capital gains. Under new proposals, both gifting and death would become taxable events. The tax would only apply to any gains in excess of a $1 million per-person lifetime exclusion from the recognition provision. This exemption would be portable between spouses allowing for a total of $2 million exclusion for married couples. Additional exclusions are available for transfers between spouses, to charities, the existing exclusions for gain on a personal residence ($250,000 per taxpayer), as well as certain small business stock and tangible personal property such as household furnishings and personal effects.
The Administration also proposes to make permanent many aspects of the American Rescue Plan. Among these provisions are:
- Expansion of Premium Tax Credits for health insurance purchased on the Marketplace.
- Expansion of the Earned Income Tax Credit (EITC) for Workers without Qualifying Children.
- Expansion and refundability of the Child and Dependent Care Tax Credit coupled with increased reporting requirements.
Self-employment taxes
This proposal would expand the scope of self-employment and net investment income taxes to require that income derived from pass-through trade or business be subject to one or the other tax regime. Currently, ‘passive’ owners of S Corporations and entities taxed as partnerships are subject to the net investment income tax - a 3.8% tax on their share of business income. Meanwhile, ‘active’ owners of partnership entities pay a similar 3.8% amount of self-employment tax. However, ‘active’ owners of S Corporations and certain active ‘limited partners’ (including certain LLC owners) are not subject to either tax. The Administration’s plan would expand the definition of net investment income tax to include all trade or business income not otherwise subject to employment taxes and subjecting active S Corporation owners, limited partner and LLC members to self-employment tax on their distributive shares of income.
Keep in mind that none of these proposals are law…yet. We will have to wait and see what parts remain after the Administration and Congress work to pass a budget and other new plans.
If you have questions on whether you could be impacted, contact your accountant, and remember to follow us on LinkedIn to stay up to date on all of our posts.
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