In late May, the Biden Administration released its proposed budget for fiscal year 2022. Proposals in the budget, which are described in the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (also known as the “Greenbook”), include (1) increasing taxes on high-income taxpayers and corporations; (2) ending the carried interest tax break; (3) repealing the carryover and step-up basis rules for transfers by gift or at death; (4) expanding tax credits aimed at supporting workers, families, and low-income housing; (5) repealing the gain deferral on certain like-kind exchanges; (6) incentivizing U.S. employers to bring offshore jobs and investments into the United States; (7) disincentivizing the reduction or elimination of a trade or business currently being conducted in the United States from starting up, expanding, or otherwise moving to a location outside the United States; (8) providing additional expenditures for clean energy; (9) increasing funding for IRS enforcement; (10) increasing oversight of paid tax return preparers by providing the Secretary of the Treasury with explicit authority to regulate all paid preparers of federal tax returns and establish minimum competency standards, and (11) creating a comprehensive financial account information reporting regime.
Each year, the President kicks off the federal government’s annual budget process by sending Congress a detailed budget request for the coming year. The budget request lays out the President’s recommendations for overall federal fiscal policy, communicates the Administration’s priorities for federal programs, and provides recommendations for spending and tax policy changes. Last month, the Department of Treasury issued the Biden Administration’s fiscal year 2022 budget request. Included with the request was the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (i.e., the “Green Book”) which provides an explanation of the Administration’s revenue proposals for 2022.
On the heels of the passage of the American Rescue Plan in March, the Biden Administration announced two more initiatives – the American Jobs Plan and the American Families Plan. Unlike the American Rescue Plan, which was not paid for with additional taxes, the Administration proposes to pay for these two new initiatives through major changes to the Internal Revenue Code, as described in the Green Book. According to the Treasury Department, the tax-related proposals will raise $2.4 trillion in revenue over a 10-year period. The cost of 2022 budget, along with mandatory spending programs, is $6 trillion.
If passed, the changes contained in the Green Book would result in a major overhaul of the Internal Revenue Code. A summary the proposed changes follows.
Budget Proposals Relating to High-Income Taxpayers
Individual Income Tax Rates. The budget proposes to increase the top marginal individual income tax rate for the highest income taxpayers, which was reduced to 37 percent under the Tax Cuts and Jobs Act, back to 39.6 percent. This rate would be applied to taxable income in excess of the 2017 top bracket threshold, adjusted for inflation. In 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. After 2022, the thresholds would be indexed for inflation. The proposal would be effective for tax years beginning after December 31, 2021.
Long-term Capital Gains and Qualified Dividends. The budget proposes that taxpayers with adjusted gross income (AGI) of more than $1 million would be taxed at ordinary income tax rates under the budget proposal, with 37 percent generally being the highest rate (or 40.8 percent if the taxpayer is subject to the 3.8 percent net investment income tax (NIIT)), but only to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. For example, a taxpayer with $900,000 in labor income and $200,000 in preferential capital income would have $100,000 of capital income taxed at the current preferential tax rate and $100,000 taxed at ordinary income tax rates.
Repeal of Carryover and Step-Up Basis Rules. The budget proposes would repeal the carryover and step-up basis rules for transfers by gift or at death and instead treat such transfers as realization events. For a donor, the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. In addition, gain on unrealized appreciation would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. Certain exclusions would apply, including allowing carryover basis for transfers by a decedent to a U.S. spouse or to charity. The proposal would also allow a $1 million per-person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death.
Expansion of the 3.8 Percent Medicare Tax to Additional Taxpayers. The budget proposes that all trade or business income of high-income taxpayers would be subject to a 3.8 percent Medicare tax (i.e., the 2.9 percent Medicare tax on all employment earnings, plus the 0.9 percent Medicare tax imposed on self-employment earnings and wages of high-income taxpayers), either through the NIIT or Self-Employment Contributions Act (SECA) tax. In particular, for taxpayers with AGI in excess of $400,000, the term “net investment income” as used in Code Sec. 1411 would include trade or business gross income and gain not otherwise subject to employment taxes. In addition, limited partners and LLC members who provide services to, and materially participate in, their partnerships and LLCs, as well as S corporation owners who materially participate in their trade or business, would be subject to SECA tax on their distributive shares of the business’s income to the extent that the income exceeds certain threshold amounts.
Budget Proposals to Close Loopholes
Repeal of Certain Like-Kind Exchange Deferrals. The budget proposes to repeal the deferral of gain from some like-kind exchanges under Code Sec. 1031. Instead, any gains from like-kind exchanges in excess of $500,000 ($1 million in the case of married individuals filing jointly) during the tax year would have to be recognized in the year the taxpayer transfers the real property subject to the exchange.
Excess Business Loss Limitation Made Permanent. The budget proposes to make permanent the excess business loss limitation of noncorporate taxpayers under Code Sec. 461(l), which currently applies for tax years beginning after December 31, 2020, and before January 1, 2027.
Budget Proposals to Expand Tax Credits for Workers and Families
Decrease in Premium Tax Credit Contribution Percentages Made Permanent. With respect to the premium tax credit (PTC) under Code Sec. 36B for individuals who purchase health insurance through an insurance exchange, the budget proposes to make permanent the temporary decrease enacted by the American Rescue Plan (ARP) Act of 2021 in the applicable contribution percentages of household income used for determining the amount of the credit. The proposal would also make permanent the ARP expansion of PTC eligibility to taxpayers with household income above 400 percent of the federal poverty line.
ARP EITC Changes Made Permanent. The budget proposes to make permanent the increase enacted by the ARP in the earned income tax credit (EITC) phase-in and phase-out rates, and the income range over which the credit phases in, for workers without children. In addition, the end of the phase-in and the end of the plateau income ranges would be indexed for inflation in the same manner as other EITC parameters. The proposal would also make permanent the ARP expansion of age-eligibility for the EITC that currently applies only for 2021.
ARP Child and Dependent Care Tax Credit Changes Made Permanent. The budget proposes to make permanent the changes to the child and dependent care tax credit (CDCTC) under Code Sec. 21 enacted in the ARP for tax year 2021, which includes making the CDCTC refundable and increasing the amount of expenses, the maximum rate, and the applicable percentage of expenses that are eligible for the CDCTC. In addition, the proposal would establish reporting requirements such as adding the CDCTC to the list of credits subject to paid preparer due diligence requirements under Code Sec. 6695(g).
Extension of ARP Child Tax Credit Changes. The budget proposes to extend, to tax years beginning before January 1, 2026, most of the ARP changes to the child tax credit (CTC) under Code Sec. 24, including: (i) allowing children age 17 to qualify for the CTC, (ii) increasing the maximum tax credit per child to $3,600 for children under age 6 and to $3,000 for all other qualifying children, and (iii) allowing 50 percent of the otherwise allowable credit to be paid in advance based on information on the previous year’s income tax return. In addition, the CTC would be made fully refundable, regardless of earned income, for all tax years.
Budget Proposals Relating to Corporate Taxation
Increase in Corporate Tax Rate. The budget proposes to increase the income tax rate for C corporations from the current 21 percent rate enacted by the TCJA to 28 percent.
Imposition of a 15 Percent Corporate Minimum Tax. The budget proposes that a 15-percent minimum tax would be imposed on the worldwide book income of corporations with book income in excess of $2 billion.
Budget Proposals to Improve IRS Enforcement and Administration
Increase in Funding for IRS Enforcement. The budget proposes to increase funding for the IRS Enforcement and Operations Support programs in order to fund improvements and expansions in the IRS’s enforcement and compliance activities. The proposal would direct those additional resources go toward enforcement against taxpayers with the highest incomes, rather than those with income of less than $400,000.
Creation of Comprehensive Financial Account Information Reporting Regime. The budget proposes to create a comprehensive financial account information reporting regime. Financial institutions would report data on financial accounts in an information return. The annual return would 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, with the exception of accounts below a threshold of $600 or fair market value of $600. Similar reporting requirements would apply to crypto asset exchanges and custodians.
Increased Oversight of Tax Return Preparers. The budget proposes to increase oversight of paid tax return preparers by providing the Secretary of the Treasury with explicit authority to regulate all paid preparers of federal tax returns, including by establishing minimum competency standards. In addition, penalties would be increased to the greater of $500 per return or 100 percent of the income derived per return by ghost preparers (i.e., paid preparers who fail to identify themselves on tax returns) and increase the limitations period during which the penalty may be assessed from three years to six years.
Expansion of Cypto Asset Reporting. The budget proposes to expand the scope of information reporting by brokers who report on crypto assets to include reporting on certain beneficial owners of entities holding accounts with the broker. Brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, would be required to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker.