By: Juliya Ismailov
On May 28, 2021, the U.S. Department of Treasury released the “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” also known as the “Green Book.”
The following list summarizes these most recent tax proposals, comparing them to prior announcements mostly recently detailed here. Unless otherwise noted below, the effective date of these proposals is December 31, 2021.
Unchanged Proposals:
Increase income tax rate from 21% to 28%.
Increase top income tax rate from 37% to 39.6% on individuals with adjusted gross income (AGI) over $509,300/married or $452,700/single (up from $400,000).
Eliminate capital gains preferential tax rate of 20%, taxing such gains at the ordinary income tax rate, plus 3.8% Net Investment Income Tax (NIIT) (also known as “Obamacare tax”), for individuals or married taxpayers earning more than $1 million. The effective date is newly stated in the Green Book as the date of announcement (by President Biden in his April 28, 2021 Joint Address to Congress), which potentially means retroactive application.
Carried interest, or share of income on an “investment services partnership interest” (ISPI), is proposed to be taxed as ordinary income for taxpayers with AGI over $400,000 and be subject to employment taxes.
Repeal of Section 1031 tax-free like-kind exchanges of real property for gains over $500,000/person.
Permanently extend the current Section 461(l) limitation on excess business losses for non-corporate taxpayers.
New Proposals:
Impose NIIT on gross income and gain from any trade or business not otherwise subject to employment taxes (i.e., SECA, FICA, Medicare tax), for taxpayers with AGI over $400,000.
The Administration also newly proposes to eliminate exceptions from employment taxes for limited partners, LLC members and S corporation owners who materially participate in the business on distributions exceeding $400,000 (not to be indexed for inflation).
On the gift and estate tax front, in addition to basis step-up at death that was previously proposed, which combined with an income tax rate of up to 39.6% plus 3.8% NIIT, can result in total federal death taxes of almost 75%, the Green Book now indicates a mark-to-market regime in which a gift would also be treated as a recognition event triggering income tax on the built-in gain.
In addition, the Administration also newly proposes to impose income tax on transfers into and out of irrevocable trusts, partnerships and other non-corporate entities.
There is a $1 million exemption on such mark-to-market taxes, and continued exemptions of transfers to a U.S. spouse or charity, transfers of certain small business stock, and $250,000/person on transfer of a principal residence.
Finally, the Administration proposes a recognition event to be triggered automatically every 90 years, [1] with the first such trigger event to occur on December 31, 2030, if an asset in a trust or another non-corporate entity had not otherwise been marked-to-market in the past 90 years.
Proposals No Longer Mentioned:
Capping itemized deductions at 28% of AGI.
Eliminating 20% deduction for pass-through income.
Eliminating $10,000 limit on the state and local taxes (SALT) deduction.
Lowering the estate/gift lifetime exemption from $11.7 million to $3.5 million. (Note that the higher exemption is scheduled to “sunset” in any event in 2026, resulting in automatic decrease to the 2017 level of $5.5 million.)
Increasing top estate tax rate from 40% to 45%.
[1] The Sensible Taxation and Equity Promotion (STEP) Act legislation introduced in March 2021 proposes this period to be 21 years.
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