By Zach Wimberger
On May 28th, 2021 President Joe Biden’s administration released its budget proposal for 2022. The $6 trillion budget included various provisions for items highlighted during the president’s campaign including infrastructure, social spending, climate, education and research and development. President Biden’s budget also included provisions for the highly discussed and speculated tax reform that has been expected since President Biden took office. The proposal includes various plans that aim to increase taxes on high income taxpayers, adjustments to certain areas in the tax code that are due to sunset in the coming years, and an increased tax rate to corporations. The proposal also includes tax incentives to support housing, infrastructure, and clean energy.
The American Families Plan
One plan outlined in Biden’s budget is the American Families Plan, which aims to provide education benefits in the form of universal preschool and two years of free community college. The plan includes several tax provisions aimed to fund these projects, including the following:
- An increase on the top marginal income tax rate from 37%, enacted in the Tax Cuts and Jobs Act of 2017, back to 39.6%, which was the top tax rate before the law was put in place. This tax rate would apply to taxpayers with taxable income of over $509,300 for married filing jointly, and $452,700 for single filers.
- An increase to the capital gains tax for individuals with an adjusted gross income of over $1 million from 20% to the new marginal tax rate of 39.6%. Also included with the tax hike on capital gains is retroactive status effective in late April of 2021, when the American Families Plan was initially introduced, to prevent high income earners from selling highly appreciated assets early to avoid the new tax hike.
- Applying the capital gains tax on property owned at death, eliminating the step up in basis and the allowance of inherited assets to be transferred tax free. The capital gains tax would also apply to gifted property.
- Imposing the 3.8% Net Investment Tax or the 15.3% self-employment tax on all passthrough business income over $400,000.
- Limiting the deferral of gains realized through like kind exchanges to $500,000 for single filers and $1 million for married filing joint.
- Making the excess business loss limitation permanent. The limitation of $250,000 ($500,000 for joint filers) is currently set to sunset on December 31, 2025.
- Making permanent the expansions to the earned income tax credit for workers with qualifying children, as well as the eligibility and refundable changes to the child and dependent care tax credit passed with the American Rescue Plan Act of 2021. Currently these provisions are limited to only the 2021 tax year. The plan also extends the increase in the child tax credit through the 2025 tax year.
The American Jobs Plan
The other plan included in Biden’s Budget Proposal is the American Jobs Plan, which looks to create jobs, focus on infrastructure, and incentivize domestic investment. As with the American Families Plan, the proposal includes a number of tax changes to corporate taxes including:
- An increase in the corporate tax rate from 21% to 28%.
- The imposition of a minimum tax of 15% on book earnings of large corporations with revenue over $100 million.
- Repealing the global intangible low-taxed income exemption for foreign oil and gas extraction income and raising the tax rate to 21%.
- Replacing the 10% base-erosion and anti-abuse tax with a new 21% “Stopping Harmful Inversions and Ending Low-Tax Developments” (SHIELD), which is aimed at deterring corporations from moving assets to countries designated as tax havens.
- The limitation of foreign tax credits on sales of hybrid entities.
- Repealing the Foreign Derived Intangible Income deduction, incentivizing companies to move their intellectual property to the U.S.
- Provide a 10% tax credit for certain onshoring activity and denying the deductibility of expenses incurred with moving jobs overseas.
- Expansion of the low-income housing tax credit.
- Providing or enhancing tax credits related to electricity transmission investments, qualified advanced energy manufacturing, heavy and medium duty zero emissions vehicles, and the electric vehicle charging and station credit.
While Biden’s proposed budget contains many provisions for changes to the tax code, these provisions are presently just proposals that will need to be debated and agreed upon by Congress before they are officially enacted. Certain changes to the capital gains tax rate and changes to capital gains at death have already been objected by congressional democrats that, with the current 50/50 split in the senate, might mean that adjustments to these areas would need to be made before these provisions have a chance at passing. As the 2022 budget process goes forward, we will be keeping an eye on any changes or additional proposals to the current tax system to better plan for the 2021 tax year.