The $6 trillion FY 2022 Budget Request released by President Joe Biden on May 28, 2021, calls for tax changes that impact individuals and corporations. Many of the changes were proposed earlier this year in various plans, including the Made in America Tax Plan, the American Families Plan and the American Jobs Plan.
It is important to note that a president’s budget request is exactly that – a request that Congress will evaluate as implementing legislation is considered. The president’s proposals will be considered by Congress along with other tax revenue proposals during the next several months. These specific tax proposals may be added, deleted or modified during the federal legislative and budgetary process.
The president’s Budget Request includes a discretionary spending plan for the fiscal year beginning October 1, 2021, and long-term infrastructure and social spending plans drawn from the American Families Plan and the American Jobs Plan. If passed by Congress as written, the administration’s long-term spending plans would be offset over a period of 15 years through various tax increases and other tax changes that were previously outlined in the Made in America Tax Plan.
Below are highlights of the FY 2022 individual, investment tax, corporate and international tax proposals contained in the Biden Administration’s American Families Plan and American Jobs Plan, as detailed in a report on the Budget Request known as the “Green Book,” issued by the Treasury Department.
American Families Plan
- Increases top marginal individual income tax rate to 39.6%. In tax 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.
- Taxes long-term capital gains and qualified dividends at ordinary income tax rates for taxpayers with adjusted gross income of more than $1 million (effective for gains required to be recognized after the date of announcement).
- Ends stepped-up basis. A donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. Proposed special rules include a $1 million per person exclusion (or $2 million per couple) and certain exclusions for transfers to a U.S. spouse, charity, or for the transfer of tangible personal property, subject to valuation limitations. Special rules also apply to gain deferral for transfers of family-owned and operated businesses, interests transferred into a trust, partnership or other non-corporate entity, capital losses and carryforwards, capital gains on primary residences and spousal portability.
- For taxpayers with adjusted gross income more than $400,000, the definition of net investment 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 shareholders, limited partners and LLC members who provide services and materially participate would be subject to self-employment tax on their distributive shares of partnership, LLC or S corporation income to the extent that this income exceeds certain threshold amounts.
- Makes permanent or extends certain changes made in the American Rescue Plan (ARP):
- Contribution percentages and expanded premium tax credit eligibility
- Earned Income Tax Credit (EITC) increased parameters for worker without children and expansion of age eligibility
- Child and dependent care tax credit
- ARP changes to the child tax credit
- Increases the existing employer-provided childcare tax credit to 50% of the first $1 million of qualified care expenses for a maximum total credit of $500,000 per year. The portion of the tax credit related to referral expenses would remain at 10% with a maximum amount of $150,000.
- Tax on carried (profits) interest. Taxes as ordinary income a partner’s share of income on an “investment services partnership interest” in an investment partnership, regardless of the character of the income at the partnership level, if the partner’s taxable income (from all sources) exceeds $400,000.
- Effective for like-kind exchanges completed after December 31, 2021, a deferral of gain would be allowed for up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) during a taxable year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.
- Makes permanent the section 461(l) excess business loss limitation on noncorporate taxpayers.
- Requires financial institutions to report data on financial accounts in an information return. The annual return will report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner. This requirement would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts. Similar reporting requirements would apply to crypto asset exchanges and custodians.
American Jobs Plan – Tax Proposals
- Increases income tax rate for C corporations from 21% to 28%.
- Several changes to the global minimum tax system including repeal of the tax exemption for the first 10% return of foreign assets (repeal of Qualified Business Asset Income [QBAI]), increasing the Global Intangible Low-Taxed Income (GILTI) minimum tax by reducing the Section 250 deduction and replacing a “global averaging” method for calculating a U.S. shareholder’s global minimum tax with a “jurisdiction-by-jurisdiction” calculation.
- Expands Section 265 to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction.
- Expands definition of an inversion transaction to limit the ability of a domestic corporation to expatriate.
- Repeals the deduction for Foreign-Derived Intangible Income (FDII).
- The proposal would repeal the Base Erosion and Anti-Abuse Tax (BEAT), replacing it with Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD). SHIELD would disallow deductions for payments to foreign-related parties by reference to the effective tax rate on the deductible payment in the local jurisdiction.
- Limitation on deduction for excessive interest by a financial reporting group based on data required to be reflected in the group’s consolidated financial statements. Under this proposal, a member’s proportionate share of the reporting group’s net interest expense is compared to its proportionate share of the group’s earnings.
- Imposes a 15% minimum tax on worldwide book income for corporations with income more than $2 billion.
- Creates a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade and a disallowance of deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business.
- Creates a new tax credit known as the Neighborhood Homes Investment Credit (NHIC) to support new construction for sale, substantial rehabilitation for sale, and substantial rehabilitation for existing homeowners.
- Makes permanent the New Markets Tax Credit (NMTC) and allocate $5 billion each year, indexed for inflation after 2026.
Notably absent from the FY 2022 Budget Request are proposals to repeal the section 199A deduction for pass-through entities, the 28% cap on itemized deductions, additional estate tax changes and modifications to income caps for payroll taxes. These items were mentioned during the 2020 presidential campaign, and it is unclear if they will be revisited either by the Biden Administration or Congress.
- Mark Baran, JD LL.M., Principal in the Tax Department, MARKS PANETH LLP
Compliments of Marks Paneth LLP – a member of the EACCNY.