By Paul Staples, CPA, Tax Manager and Vince Nadder, CPA, Tax Partner
American Families Plan and American Jobs Plan: Summary of Selected Tax Provisions
On May 28, 2021, President Biden and the Treasury Department released the Fiscal Year 2022 Budget Plan (the Budget). The revenue proposals contained in the Budget are the American Jobs Plan and American Families Plan.
The following is a summary of selected revenue provisions contained in the Budget plan:
AMERICAN FAMILIES PLAN
The American Families Plan includes revenue proposals that increase the income taxes of high-income taxpayers, expand tax credits for low- and middle-income workers and provide funding for improved taxpayer compliance and service.
Increase in top marginal income tax rate
Effective for tax years, beginning in 2022, the top marginal income tax bracket would be increased from 37% to 39.6%. For 2022, the rate would apply to taxable income in excess $509,300 for married filing joint taxpayers and $452,700 for unmarried taxpayers.
Increase in tax rate for Long Term Capital Gains and Qualified Dividends
Under the Budget proposals, Long Term Capital Gains (LTCG) and Qualified Dividends for taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, 39.6 % under the budget proposal. From an example contained in the Treasury’s explanation of the budget proposal, a taxpayer with $900,000 of salary income and $200,000 of Long-Term Capital Gains would have $100,000 of the LTCG taxed at the favorable 20% rate and $100,000 of the LTCG taxed at 39.6%
The Treasury explanation does not go into what happens to the tax calculation if taxable income is less than $1 million due to the taxpayer’s itemized deductions
This proposal would be effective for LTCG and Qualified Dividends recognized AFTER April 28, 2021, the date of announcement.
Capital Gains Taxes on Property Transfers
Under the Budget proposal, a donor or deceased owner of appreciated property would have to realize and pay a capital gains tax on the excess of the Fair Market Value of the property over the taxpayer’s adjusted tax basis.
This provision would effectively do away with the step up in basis at date of death provisions contained in current IRC section 1014.
The capital gains tax would be due on the Federal estate or gift tax return, or with a new capital gains tax return.
Gain on unrealized appreciation would also be recognized by a trust, partnership, or other non-corporate entity if the property has not been subject to a recognition event within the 90-year period beginning on January 1, 1940.
A transfer would be defined under the current gift and estate tax provisions in the tax law. However, under the proposal, a transfer of a partial interest would be subject to this tax based on its proportional share of the Fair Market Value of the entire property; traditional gift and estate tax discounts would not apply for purposes of computing this tax.
Transfers of property or in-kind distributions from a trust, partnership, or other non-corporate entity, other than from a grantor trust would be subject to this tax. The deemed owner of a grantor trust or other revocable trust would recognize the gain and pay the tax upon the distribution of any appreciated asset to a person other than the grantor of the grantors spouse.
Transfers by a decedent to a U.S. spouse or a charity would not be subject to the tax as well as gifts to a U.S. spouse.
The proposal allows a $1 million per person exclusion from recognition for unrealized capital gains transferred by gift or death. The exclusion is portable for married taxpayers.
The current exclusion from taxation for the gain on the sale of a principal residence it preserved as is the exclusion for capital gain on the sale of certain small business stock.
Payment of tax on appreciation on certain family-owned and -operated businesses would not be due until the interest is sold or the business ceases to be family-owned and -operated. The proposal would also allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, excluding liquid assets.
The proposal would be effective for gifts or transfers of property by decedents occurring after December 31, 2021.
Self-Employment Tax and the Net Investment Income Tax
The Budget proposal contains provisions that would effectively impose either a 3.8% Self-Employment Tax or the 3.8 % Net Investment Income (NII) Tax on all business income passed through to high income taxpayers for Partnerships, LLCs and S corporations. The taxes would be imposed on adjusted gross income in excess of $400,000.
This provision would be effective for tax years beginning after December 31, 2021.
Other Proposed Changes in the American Families Tax Plan
- The income from Carried Interests on “investment services partnership interests” would be taxed at ordinary income tax rates for partners with taxable income in excess of $400,000;
- The deferral of gain from like-kind exchanges would be limited to $500,000 per taxpayer per year, $1 million for married taxpayers filing jointly;
- The excess business loss provisions of IRC section 461(l) would be made permanent;
- Several tax credits included in the American Rescue Plan Act (ARPA) would be expanded and extended. These include the premium assistance tax credits, ARPA’S changes to the child and dependent care tax credit, and the child tax credit increase.
- The expansion of the Earned Income Tax Credit (EITC) for workers without qualifying children would be made permanent;
- The employer-provided childcare tax credit would be increased to 50% of the first $1 million of qualified expenses.
Most of these provisions would have effective dates beginning in 2022.
AMERICAN JOBS PLAN
C Corporation Tax Rate Increase
The budget proposals would increase the C corporation tax rate to 28% from 21% effective for tax years beginning after December 31, 2021. For tax years beginning after January 1, 2021 and before January 1, 2022, the corporate income tax would be equal to 21% plus 7% times the portion of taxable income that occurs in 2022.
Large Corporations Tax Changes
The proposals contain a number of provisions that would modify the global minimum tax regime. A 15% minimum tax would be imposed on the book income of large corporations effective for tax years beginning after December 31, 2021. A large corporation would be defined as a corporation with book income in excess of $2 billion.
Housing and Infrastructure
The budget contains a number of proposals to support housing and infrastructure.
Low Income Housing Tax Credit
The Low Income Housing Tax Credit would be expanded for years beginning in 2022.
Neighborhood Homes Investment Tax Credit
The proposal also creates a new Neighborhood Homes Investment Tax Credit. This credit would support investment in houses in neighborhoods where homes are in poor condition or have low property values. Each year, the Treasury Department would allocate a specified amount of these credits to the 50 states, Washington, D.C., and U.S. possessions.
Section 45D New Markets Tax Credit
The Section 45D New Markets Tax Credit would be made permanent.
Clean Energy Tax Credits
Finally, the budget contains a number of proposals to support and prioritize clean energy. The proposal includes a number of new tax credits, for example, tax credits for Electricity Transmission Investments, and Tax Credits for Heavy and Medium-Duty Zero Emission Vehicles.
Section 199A Qualified Business Income (QBI) Deduction
During the latest election, one of the President’s tax proposals was to modify or reduce the benefit of the QBI deduction for high income taxpayers. The budget proposal contains no changes to the QBI deduction.
The Keiter team will continue to monitor the Budget proposal as it is considered by Congress and provide timely updates to our clients and friends. Contact your Opportunity Advisor if you have any questions or Email | Call: 804.747.0000
Additional Tax Planning Resources
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.