On May 28th, the Biden administration released its 2022 budget and the Treasury “Green Book” which detailed the tax proposals that were included in the plans published by the White House earlier this year. The details confirm that tax policies will focus on targeting large corporations and high income individuals for increases that will support tax relief and programs for middle and low income tax payers. These publications also give us important details on proposed effective dates. Many of the proposed increases have an effective date of taxable years beginning after 12/31/2021 though the provision for the tax rate applied to long-term capital gains and qualified dividend could be sooner. The budget details also show that deficits are projected to remain elevated over the next 10 years.

Biden’s budget Blueprint gives more details on structure and timing some of the provisions that could have a meaningful impact on many of our clients if enacted. Some of the high impact proposals for our clients include:

  • Increase corporate tax rate to 28% from 21%
  • Increase top tax rate on individuals and trusts to 39.6%
  • Increase tax on long term cap gains, qualified dividends and carried interest at ordinary rates for upper incomes
  • Eliminate the step-up in basis of assets at death for certain inherited assets
  • Impose a tax on capital appreciation transferred by lifetime gift or at death with deferrals for family-owned and operated businesses

While these are proposals and an articulation of the budget impact, there is still a legislative process that needs to occur. With a thin margin in the Senate and House Democrats representing constituents in states with high local taxes, there will be vigorous debate on some of these provisions.

What is next?

The natural course would be to have discussions on Capitol Hill to test support for these plans. In the Senate, it seems that there is no consensus among Democrats. If the process is to proceed on a vote under the reconciliation rules then the Democrats will need all of their 50 votes and use Harris as the tie breaker vote. Senator Manchin has said that he wants a bipartisan path. Senators Manchin and Warner have stated that they believe that the corporate tax rate should be 25% or 26% but not as high as 28%. Senators Warner and Menendez agree that long term capital gains rates should rise but not as high as proposed by the White House. In the House of Representatives, there are many Democrats that represent states with high state and local income tax. Several Representatives have indicated that they would not support these tax increases without revision to limits on state and local tax (SALT) deduction. Relaxing these rules may be viewed as a benefit primarily for the wealthy so this could be a challenging position for all.

The White House Press Secretary says that President looks forward to making progress on determining legislative path before June 7th when Congress resumes.

Should clients be planning now?

While we cannot predict the actual substance or the timing of any legislation affecting tax policy, these recent publications increase the probability that an increase in the tax rate on long term capital gains and dividends will occur during 2021. The effective date proposed in last week’s release of information is “after the announcement” which, if some version of a tax increase on capital gains occurs, could mean April 28th though many familiar with legislative process believe that it could adjust to an important legislative milestone like the date of introduction or even further along in the legislative history.

We recommend a review of liquidity needs and capital gains transactions that are sources of liquidity. In addition, we recommend looking at portfolios that may need rebalancing after a period of strong equity performance. In other words, building liquidity reserves for known needs and rebalancing portfolios or other actions that bring clients in line with their risk parameters should be completed now.

In addition, anyone who wishes to utilize their augmented gift/estate tax exemption should move forward promptly so that transfers can occur in 2021.

Private Client highlights from May 28th release of 2022 Budget and Treasury Green Book

Here are some additional highlights from the information released on the 28th:

Corporate tax
  • Increase rate to 28%
    • Proposed effective in tax years beginning after 12/31/2021 (prorate for portion of the taxable year that occurs in 2022)
  • 15% minimum tax based on book income for corporations with more than $2 billion in such income
    • Proposed effective in tax years beginning after 12/31/2021
  • Increase top marginal tax rate to 39.6% for individuals and fiduciaries
    • This restores the rate to the top rate before the Tax Cuts and Jobs Act of 2017
    • Proposed effective in tax years beginning after 12/31/2021
  • Long term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary rates
    • Proposed effective date “required to be recognized after the date of announcement” (this could mean April 28, 2021 which was the date that The American Families Plan was released)
  • Carried interest or profits interest taxed at ordinary income rates for taxpayers with adjusted gross income of more than $400,000
    • Proposed effective in tax years beginning after 12/31/2021
  • NIIT (Net Investment Income Tax) & SECA (Self-Employed Contributions Act) for taxpayers with adjusted gross income in excess of $400,000, the definition of net investment income would be amended to include gross income and gain from any trades or businesses not otherwise subject to employment taxes.
    • Proposed effective in tax years beginning after 12/31/2021
  • Repeal of deferral of gain from like-kind exchange (Section 1031 exchange) for gains greater than $500,000 each year ($1 million for married couple).
    • Proposed effective in tax years beginning after 12/31/2021
  • Repeal of stepped-up basis
    • Gains taxed on transfers by gift or at death
    • Fair market valuation determined using methods available currently for transfers by gift and at death
  • Gain on unrealized appreciation would also be recognized by a trust, partnership or non-corporate entity that has not that has not been subject to a recognition event within the prior 90 years starting 1/1/1940. The first recognition event would be 12/31/2030.
    • Exemptions and exclusions:
      • Transfers to spouses and to charity still transfer with carryover basis.
      • Exclusion for tangible personal property like household furnishings (excluding collectibles).
      • $250,000 per individual exclusion on capital gain on sale of primary residence. This is portable to surviving spouse for total exclusion for married couple of $500,000.
      • Exclusion for capital gain on certain small business stock (under section 1202) would apply.
      • $1 million per person exclusion from recognition of “other unrealized capital gains on property transferred by gift or held at death”. This is also portable to the surviving spouse for a total of $2 million per married couple.
      • Payment on appreciation of certain family owned and operated businesses would not be due until business is sold.
      • Proposal also allows for 15 year fixed-rate payment plan for tax on appreciated assets other than liquid assets and other than businesses where deferral election is made.
    • Proposed effective date for transfers in tax years beginning after 12/31/2021
  • Repeal of credit and incentives for the oil and gas industry
    • Proposed effective in tax years beginning after 12/31/2021, unless specified
  • Clean electricity tax credits
      • Credit extended for five years with phase down over next five years
      • Credit expanded to include stand-alone energy storage
    • Proposed effective for construction beginning after 12/31/2021
What is not included but was in Biden’s comprehensive plan from the campaign trail?

There were certain provisions that were not detailed in the budget or in the Green Book. Those areas include:

  • Placing a cap on itemized deductions
  • Limiting the 20% deduction for certain pass through income (Qualified Business Income)
  • Imposing FICA on incomes over $400,000
  • Other changes to gift and estate tax rates and exemptions
  • No change to cap on State and Local tax deductions 






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