Biden Administration Releases Green Book on FY 2022 Tax Proposals

On May 28, 2021, the Treasury Department issued the so-called “Green Book,” which describes in detail the tax proposals contained in the American Jobs Plan and the American Families Plan. Below is a summary of some of the more significant tax changes and their proposed effective dates.

Increase Corporate Tax Rate

The Administration has proposed an increased corporate tax rate that would replace the 21% flat rate instated by the Tax Cuts & Jobs Act of 2017 with a new 28% flat rate. This change would be effective for tax January 1, 2021, but end before January 1, 2022, a straddle rate of 21% plus 7%, times the portion of the tax year occurring in 2022, has been proposed.)

Increase Top Marginal Income Tax Rate for Individuals

The Administration would increase the top ordinary income tax rate for individuals from 37% to 39.6%, effective for tax years beginning after 2021. This change would accelerate the return of the top income tax rate of 39.6%, which, under current law, would have occurred automatically for tax years after 2025. The following chart shows the changes compared to the rates in place now.

Income tax rates for 2021 would not increase with this proposal.

Increase in Capital Gains and Qualified Dividend Rates for High Earners

A number of changes are proposed for the taxation of capital gains. Taxpayers with adjusted gross income of $1 million or more will see an increase in the highest rates for long-term capital gains and qualified dividends. These high net worth taxpayers would be taxed at ordinary income tax rates but only to the extent that their income exceeds $1 million (the threshold for married filing separate would be $500,000).

Gifts and Death Transfers of Appreciated Property

Transfers of appreciated property as gifts and upon death would be treated as sales. The donor or decedent transferring the asset will now be considered to have sold it, and the gain would be treated as income on the federal gift, estate or separate capital gains tax return of the donor or decedent. Capital losses and carryforwards from a transfer at death are allowed to be taken on the final income tax return of the decedent. Any tax imposed on a sale at death is deductible on the decedent’s estate return.

Recognition of Gains on Unrealized Appreciation by Non-Corporate Entities

Gains on unrealized appreciation would be recognized by a trust, partnership or other non-corporate owner of property, if it has not been the subject of a recognition event within the prior 90 years. The testing period would begin on January 1, 1940, and the first possible date a gain would be recognized would be December 31, 2030.

Changes in Net Investment Income Tax and Self-Employment Contributions

• Pass-through business income of high earners would be subject to Net Investment Income Tax (NIIT) or the Self-Employment Contributions Act Tax (SECA). The definition of NIIT is expanding, and all trade or business income of high-income taxpayers (AGI in excess of $400,000) would be subject to a 3.8% Medicare tax through either NIIT or SECA. This would apply to gross income and gains from any trade or business that is not otherwise subject to employment taxes.
• LLC members, limited partners, and S-corporation shareholders who provide services and materially participate in their businesses would be subject to SECA on their distributive share of income, once certain threshold amounts are exceeded. Current SECA exemptions (rents, dividends, capital gains, certain retired partner income) will continue to apply.

This would apply to tax years beginning after December 31, 2021.

Treatment of Carried Interest

Carried interest will be treated as ordinary income and would be subject to self-employment tax. The proposal notes that that while profit interests are structured as partnership interests, the income is received in connection with the performance of services.

A partner’s share of income from an investment partnership would be taxed as ordinary income as well (regardless of the character of the partnership income) if the partner’s taxable income from all sources exceeds $400,000.

Like-Kind Exchange Limitations

The deferral of gains in Section 1031 exchanges will be allowed up to $500,000 per taxpayer ($1 million for married taxpayers filing a joint return) per each year. In the year of transfer, any gains in excess of the limits would be taxable. This change would be effective for exchanges completed after December 31, 2021.

For more information on changes to tax law, please contact your Marcum tax advisor.