The Biden Administration recently released detailed tax proposals through the so-called Green Book. If approved, there would be big changes for high-income earners, on capital gains and for some business taxes.
While these proposals would all have to go through the legislative process and therefore may not pass or may be changed, it’s possible some of these may become law and therefore warrant tax planning considerations.
Even if Biden’s proposals don’t become law, there are some automatic taxes changes coming down the road as tax changes in President Trump’s Tax Cuts and Jobs Act only run through 2026. While five years feels like a long time, it’s not when it comes to tax planning.
Here’s what the Biden administration has proposed:
Corporate Tax Rate
Increase the tax rate for corporations from 21% to 28%, effective for taxable years beginning after December 31. Although for taxable years beginning after January 1, 2021 and before January 1, 2022 (i.e., taxable years that straddle 2021 and 2022), the tax rate would be 21%, plus an additional 7% rate times the portion of the taxable income earned in 2022.
Individual Tax Rates
Biden’s proposal would increase the top marginal individual income tax rate to 39.6%. The proposal would be effective for taxable years beginning after December 31, 2021.
In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals (other than surviving spouses), $481,000 for head of household filers, and $254,650 for married individuals filing a separate return.
After 2022, the thresholds would be indexed for inflation using the consumer price index, which is used for all current tax rate thresholds for the individual income tax.
Capital Gains Tax Rates
Under the proposal, long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income rates, with 37% generally being the highest rate (40.8% including the net investment income tax), but only to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022.
Biden’s tax plan also says: “A separate proposal would first increase the top ordinary individual income tax rate to 39.6% (43.4% including the net investment income tax).” The effective date is stated to be “after the date of announcement” (which presumably relates the announcement in connection with the American Families Plan of April 28, 2021). Although not entirely clear, the intention appears to be that capital gains would be taxed at the top ordinary income rate, which would be 37% from the date of announcement (April 28, 2021) until 12/31/21, and then 39.6% thereafter.
Capital Gains Tax Rates on Appreciated Property
The proposal treats transfers of appreciated property by gift or on death as realization events. The donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer.
- For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset.
- For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset.
- That gain would be taxable income to the decedent on the federal gift or estate tax return or on a separate capital gains return. The use of capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate (if any).
Capital Gains Taxes on Unrealized Appreciation
Gain on unrealized appreciation also would be recognized by a trust, partnership or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030.
With this and the other capital gains tax proposals, there are several exclusions.
Taxes on Carried Interests
The proposal will tax carried (profits) interests as ordinary income. Taxing all income allocable to an “investment services partnership interest” as ordinary (and subjecting such income to the self-employment tax) except to the extent allocable to a qualified capital interest.
The proposal would apply to taxpayers with taxable income in excess of $400,000 and would be effective for taxable years beginning after 12/31/21. (Section 1061 – capital gain holding period for partners with carried interests – would continue to apply to taxpayers earning $400,000 or less.)
The proposal would eliminate the self-employment tax exception for limited partners who provide services and materially participate. It also would subject all trade or business income to the 3.8% Net Investment Income Tax (NIIT) if not otherwise subject to the self-employment tax.
In particular, for taxpayers with adjusted gross income in excess of $400,000, the definition of net investment income tax would be amended to include gross income and gain from any trades or businesses that is not otherwise subject to employment taxes. S-Corporation, Partnerships and LLC owners who materially participate in the trade or business would be subject to self-employment tax on their distributive shares of the business’s income to the extent that this income exceeds certain threshold amounts.
The exemptions from self-employment tax provided under current law for certain types of S-Corp, partnership or LLC income (e.g., rents, dividends, and capital gains) would continue to apply to these types of income. This provision would eliminate the exception to the NIIT tax for real estate professionals. This proposal would be effective for taxable years beginning after 12/31/21.
The proposal would repeal section 1031 for gain in excess of $500,000 for each taxpayer (and $1 million for married couples filing jointly) each year for real property exchanges that are like kind. The proposal would be effective for exchanges completed in taxable years beginning after 12/31/21. Under this proposal, if a taxpayer begins an exchange in 2021 but does not complete the exchange until 2022, the exchange would be subject to the new rule.
Excess Business Losses
The section 461(l) limitation on excess business losses, which currently is set to expire for taxable years beginning after 12/31/26, would be permanently extended.
New Market Tax Credits
The proposal would permanently extend the New Market Tax Credit, with a new allocation for each year after 2025. These annual amounts would be $5 billion, indexed for inflation after 2026. The proposal would be effective after the date of enactment.
Other Tax Incentives
There are a number of provisions providing tax incentives for housing, energy, and infrastructure.
While these proposals are still up in the air and may not become law, it’s still a good idea to meet with your CPA to talk about your future plans. It’s likely there will be tax changes in the upcoming years – including some that may be significant – and you’ll get the most benefits if you start planning early.
Tony Deutsch, CPA, MT, CGMA is a shareholder at Concannon Miller, a CPA and business advisory firm in Hanover Township, Northampton County. He can be reached at [email protected]