The Biden administration recently released a proposed budget for the fiscal year 2022, referred to as the “Green Book”. The budget includes a number of proposals for tax increases along with a series of increased or extended tax credit and incentive programs. Here is a list of some of the proposed changes:
- Elimination of the reduced long-term capital gain and qualified dividend rates for high-income individuals with over $1 million of income.
- Increase the top marginal tax rate for individuals from 37% back to 39.6%.
- Increase C-corporation income tax rates from 21% to 28% (this was 35% prior to the Tax Cuts and Jobs Act)
- Impose a capital gain tax on gifted and inherited assets
- Expand the self-employment (“SE”) tax and net investment income (“NII”) tax for certain passthrough entity owners. All passthrough entity income would be subject to either SE or NII tax.
- Establish a new corporation minimum tax based on financial statement or “book” income, applicable to a small group of the largest corporations in the nation.
- Extend or make permanent a variety of 2021 tax credits created under American Rescue Plan Act, including:
- Premium Assistance Tax Credit
- Earned Income Tax Credit for workers without qualifying children
- Child and dependent care tax credit
- Child tax credit
- Establish a $500,000 per taxpayer cap on gain deferral from 1031 like-kind exchanges
- Create new credits for onshoring business operations (moving an existing business activity into the US), and disallow deductions related to offshoring (moving US activities away from the US)
We believe the effective date for many of these provisions, if passed, would likely be January 1, 2022. However, some provisions may be retroactive or may be deferred to future years.
The operative word in all of this is “proposed”. As of today, it is at best uncertain what, if any, of these proposals may become law. We expect changes or compromises will be necessary to gather support for the package. For example, a campaign issue was the elimination of the limitation on the deduction of state and local taxes (SALT). That change was not included in the Treasury Department’s Green Book report.
We will continue to monitor the proposals as bills are drafted and negotiated by the President and Congress. Regardless of what happens, we offer this advice: make good economic decisions first. If you and your investment advisors believe now is the time to sell an asset, then sell it. If you believe now is the time to hold or buy, then hold or buy. You could save 5%, 10%, or possibly even 20% in taxes by selling at the lowest tax time but could lose much more than that by selling at the wrong time.
If you are contemplating a significant transaction, we want to discuss it including how the proposed changes might affect you. We also believe now is a good time to re-evaluate estate planning. If estate tax law changes are made effective on January 1, 2022, you may want to have trust or gift documents in place and ready to finalize before then.
As always, if you have any questions please contact your Dent Moses advisor.