What’s in President Joe Biden’s Tax Plan?
Throughout the 2020 presidential debates, and subsequent election, we have been inundated with information regarding Joe Biden’s tax reform. On May 28, 2021, President Biden’s administration unveiled its proposed budget for fiscal year 2022. The budget includes many of the proposed tax modifications that were included in the American Jobs Plan and the American Families Plan. Let’s take a look at some of the individual and business tax provisions that were introduced in the proposed budget.
Individual Tax Aspects of the Budget
A. Increase the top marginal income tax rate from 37% to 39.6% for taxpayers with taxable income over $509,300 for married taxpayers filing jointly and over $452,700 for single filers. For comparison, the top marginal income tax rate under the current law of 37% applies to taxable income over $628,300 for married taxpayers filing jointly and over $523,600 for singles filers.
B. Tax long-term capital gains and qualified dividends as ordinary income for high-income taxpayers with adjusted gross income (“AGI”) of more than $1 million at a top marginal rate of 43.4%. This rate includes the new top marginal income tax rate of 39.6% along with the 3.8% Net Investment Income Tax (“NIIT”) and is an increase from the current top marginal rate for gains of 23.8%. Only gains in excess of the $1 million AGI threshold would be taxed at the top 43.4% rate.
C. NIIT or Self-Employment Contributions Act (‘SECA”) taxes equal to 3.8% would apply to all active business income for individual taxpayers with AGI’s that exceed $400,000, including materially participating Limited Partners, LLC Members and S Corporation Shareholders. Under current law, NIIT applies to passive pass-through income for Partners, Members and S Corporation Shareholders, but not active pass-through income.
D. Treat transfers of appreciated assets upon death or by gift as a realization event subject to income tax as if the property were sold. Tax would apply on unrealized gains in excess of $2 million for joint filers and $1 million for single filers, plus the current law capital gains exclusion for primary residences of $500,000 for joint filers and $250,000 for single filers. However, gains on gifts to a spouse or charitable organization would not currently be recognized. Under current law, transfers by death or gift are not subject to income tax, and upon death, the decedent’s heirs receive a “stepped-up basis” equal to the fair market value at the time of death.
E. Limit the deferral of gain from like-kind exchanges under Internal Revenue Code (“IRC”) Section 1031 to $1 million for joint filers and $500,000 for single filers. Any gain realized on exchanges that exceed the limitation would be recognized in the tax year in which the property was transferred.
F. Make the excess business loss limitation under IRC Section 461(l) permanent. The limitation expires December 31, 2025. IRC Section 461(l) generally disallows non-corporate taxpayers from deducting business losses in excess of $500,000 for joint filers or $250,000 for single filers. Any excess losses are carried over to subsequent years as net operating losses.
G. Extend the enhanced Child Tax Credit (“CTC”) from the American Rescue Plan through 2025. The enhanced CTC is equal to $3,600 for children under 6 years old and $3,000 for children ages 6 to 17. The enhanced credit begins to phase out at a 5% rate for joint filers with AGI of $150,000 but would not fall below the current law CTC of $2,000 which is phased out at $400,000. The CTC is fully refundable for 2021 and the budget proposes to make this permanent.
H. Make the expanded Child and Dependent Care Tax Credit (CDCTC) from the American Rescue Plan permanent. The maximum CDCTC is up to $4,000 for one child or $8,000 for two or more children. The credit rate is equal to 50% of expenses for joint filers with AGI up to $125,000. The credit rate is gradually reduced from 50% to 20% for joint filers with AGI between $125,000 and $183,000. The credit rate stays at 20% for joint filers with AGI between $183,001 and $400,000, but then is gradually reduced again from 20% to 0% for joint filers with AGI between $400,001 and $438,000. Like the CTC, the CDCTC is fully refundable for 2021.
Business Tax Aspects of the Budget
A. Increase the corporate income tax rate to a flat 28% from the current rate of 21%. For fiscal year taxpayers, the budget would apply a tax rate of 21% to the months that fall in 2021 and a tax rate of 28% to the months that fall in 2022.
B. Impose a minimum tax of 15% on corporations with worldwide book income in excess of $2 billion. The Treasury Green Book indicates that this minimum tax would only apply to approximately 120 companies.
C. Complete overhaul of the global intangible low-taxed income (“GILTI”). The budget proposes to:
- Eliminate the 10% qualified business asset income (“QBAI”) exemption.
- Increase the effective tax rate on GILTI from 10.5% to 21%.
- Require a “jurisdiction-by-jurisdiction” calculation to replace the current “global averaging” calculation for purposes of the global minimum tax, which has allowed income earned in higher-taxed foreign jurisdictions to reduce the residual U.S. tax paid on income earned in lower-taxed foreign jurisdictions.
- Repeal the high-tax exemption for both subpart F and GILTI.
D. Create a new business tax credit equal to 10% of eligible expenses in connection with onshoring a business. For this credit, onshoring a business would mean reducing or eliminating a business currently conducted outside the U.S. and starting up, expanding, or otherwise moving the same trade or business to a location within the U.S., to the extent that this action results in an increase in U.S. jobs. Conversely, the budget would also reduce tax benefits associated with a U.S. company moving jobs outside of the country by disallowing deductions for expenses incurred in connection with offshoring a U.S. business.
As always, seek the guidance of a tax professional in determining the best course of action based on the information above. This is a continually evolving situation that needs to be monitored closely.
Contributing Author: Shawn T. Layo, CPA, is a tax partner with over 19 years of experience in taxation and planning to a variety of clients. He concentrates in working with construction, retail automotive, manufacturing and high net worth individuals. Shawn offers extensive experience in individual and corporate tax planning, financial planning, multi-state taxation, research and development and New York State tax credits.