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Breaking down the Green Book of President Biden's administration tax proposals

On May 28, 2021, the Department of the Treasury released “General Explanation of the Administration’s Fiscal Year 2022 Revenue Proposals.” This document, commonly referred to as the “Green Book,” summarizes the Biden administration’s tax proposals which are included in the fiscal year 2022 budget proposal.

While the items contained in the Green Book are simply proposals of potential future tax law changes and do not represent actual changes in tax law which have already occurred, it is still important to consider the potential impact of these proposed changes when considering certain transactions in 2021. Some of the proposals in the Green Book include:

- Increase the federal tax rate for C corporations from 21 percent to 28 percent while also creating a 15 percent minimum tax applied to the book earnings of certain large corporations.

- Increase the highest individual marginal tax rate from 37 percent to 39.6 percent.

- Increase the long-term capital gain rate and qualified dividend rate to 39.6 percent for the portion of taxable income exceeding $1 million. Please note that this change would be effective retroactively to the date of announcement in 2021.

- Limit the annual gain deferral on the aggregate amount of IRC §1031 like kind exchanges to $500,000 per person ($1 million in the case of married individuals filing a joint return). Please note that this would be effective for exchanges completed in taxable years beginning after Dec. 31, 2021, and could cause an exchange which begins in the second half of 2021 to have less than 180 days to close on the replacement property.

- Treat transfers of appreciated property by gift or on death as realization events requiring recognition of capital gain at the time of the transfer. The proposal would allow a $1 million per person lifetime exclusion and would be effective for gains on property transferred by gift, and on property owned at death by decedents dying after Dec. 31, 2021. The per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent’s surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion effectively $2 million per married couple). Payment of tax on the appreciation of certain family owned and operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.

- All passthrough business income of high-income taxpayers would be subjected to either the 3.8 percent net investment income tax or the 3.8 percent Medicare tax under the Self-Employed Contributions Act.

- Carried interests would be taxable as ordinary income and subject to self-employment tax.

- The limitation of excess business losses [i.e., losses from business activities over the sum of (a) gains from business activities and (b) a specified threshold amount)] would be made permanent.

Please consult your tax adviser to determine how the Green Book may impact your specific situation.

Joel A. Bock, CPA, MST, is a partner in Daniells Phillips Vaughan & Bock, a Bakersfield accounting firm.

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