President Biden released his FY 2022 Budget proposal and the Treasury Green Book (which summarizes the revenue proposals) on May 28, 2021. The proposals contain several changes to the current tax structure. In this article, we will attempt to summarize some of the more significant items.
American Jobs Plan
The proposals under the American Jobs Plan portion of the proposed budget include the following items (these proposals are generally effective for years beginning after December 31, 2021)
Raising the corporate income tax rate from 21% to 28%.
Expand the low-income housing tax credit with the creation of an “Opportunity Housing Credit Dollar Amount” to incentivize additional housing in designated census tracts of opportunity.
Create a new Neighborhood Home Investment Credit to support new construction for sale, substantial rehabilitation for sale, and substantial rehabilitation for existing homeowners.
There are also a significant number of proposals related to incentives for clean energy.
American Families Plan
The American Families Plan portion of the budget proposal contains many of the more impactful items. We will provide a high-level view of those items as follows –
Strengthen Taxation of High-Income Taxpayers
Increase the top marginal individual income tax rate to 39.6%. The top marginal rate would begin applying at the dollar thresholds of the 2017 top tax bracket, which is significantly less than the amounts in 2021. This provision is effective for years beginning after December 31, 2021.
The tax rate for long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates. This proposal would become effective for gains recognized after the date of announcement. (This means that if this provision is passed, it is already effective, potentially as early as April 28, 2021)
Transfers of appreciated property by gift or on death would be treated as a realization event. The gain would be taxable income reported on a federal gift or estate tax return or on a separate capital gains return. There would be a $1 million exclusion per person, indexed for inflation. In addition, gain on unrealized appreciation on property held be a trust, partnership, or other non-corporate entity would be subject to this tax if the property has not been subject of a recognition event within the prior 90 years. The proposal for the gains on transferred property would apply to transfers and deaths after December 31, 2021. The first recognition event for any taxpayer under the second provision would be December 31, 2030.
For taxpayers with adjusted gross income greater than $400,000, all pass-through income of high-income taxpayers would be subject to either the net investment income tax or the additional 3.8% Medicare tax. This would also apply to pass-through income from S corporations. This provision is effective for years beginning after December 31, 2021.
Support Workers, Families, and Economic Security
Make permanent the expansion of the premium tax credit that was part of the American Rescue Plan. This proposal is effective for years beginning after December 31, 2022.
Make permanent the expansion of the of the earned income tax credit for workers without qualifying children that were enacted as part of the American Rescue Plan. This proposal would be effective for years beginning after December 31, 2021.
Make permanent the changes to the child and dependent care credit enacted in the American Rescue Plan. This proposal would be effective for years beginning after December 31, 2021.
Extend the child tax credit increase adopted as part of the American Rescue Plan through 2020 and make permanent full refundability of the credit. Some the key provisions that were changed include the following.
Increase the age of a qualifying child to include children who are 17 years old.
Increase the credit to $3,600 for qualifying children under age 6 and $3,000 for all other qualifying children.
Allow 50 percent of the otherwise allowable credit to be paid in advance based on information on the previous year’s income tax return.
The proposal would be effective for years beginning after December 31, 2021.
Increase the employer-provided childcare tax credit for businesses. This proposal would be effective for years beginning after December 31, 2021.
Deferral of gain from like-kind exchanges would be limited to $500,000 for each taxpayer ($1 million in the case of a married couple filing a joint return) each year for real property exchanges. This proposal would be effective for exchanges completed in years beginning after December 31, 2021.