Just as many in the tax community had expected, President Biden in his 2022 Budget outlined sweeping tax proposals aimed at high income earners and other wealthy individuals. If that was not enough to keep high-net-worth individuals (and their accountants!) busy, it is likely that many of his proposals could face resistance in Congress or, at the very least, emerge as legislation in a drastically different form. In fact, the current state of affairs is, more than anything, one of profound uncertainty — and that is what is creating a major tax planning challenges for the individuals affected.
With all that is going on, BPM understands that our clients desire and deserve the latest information on this pressing topic. To that end, here is an overview of the significant Biden Budget proposals. Above all, remember that none of the proposals are law and that modifications are to be expected during the legislative process.
Raise the Top Marginal Tax Rate to 39.6%
Biden’s budget proposes to increase the top marginal tax rate for individuals to 39.6% for tax years beginning after Dec. 31, 2021. The 39.6% rate would apply to 2022 taxable income of $509,300 for married couples filing jointly or $452,700 for individuals filing single. Note that the proposed higher tax rate would kick in at a lower level of taxable income than the existing top tax rate of 37%, which for 2021 applies to taxable income over $628,000 for married, joint filers (MJF) and $523,600 for single filers.
Increase Long-Term Capital Gains and Qualified Dividends Tax Rate for Individuals Earning More Than $1 Million
Under current tax rules, federal net long-term capital gains (LTCGs) and qualified dividends (QDs) are taxed at rates up to 23.8%. Biden’s budget proposes to tax LTCGs and QDs at a rate of 43.4% for individuals with an adjusted gross income (AGI) of more than $1 million for tax year 2022. (The rate would be 40.8% for tax year 2021.) Although not specified in the budget or the Green Book, per administration officials, the effective date of the proposed increased tax rate for long-term capital gains for taxpayers with AGIs greater than $1 million would be April 28, 2021.
Treat Transfers of Appreciated Property by Gift or Death as Taxable Events
One of Biden’s proposals is to treat transfers of appreciated property by gift or death as taxable events, effective for gifts or deaths after Dec. 31, 2021. There would be a $1 million per individual lifetime exclusion (with spouse portability) and an additional $250,000 per person exclusion for the principal residence. This proposed change could raise a tax planning opportunity for individuals to make gifts in 2021 before the proposed change potentially goes into effect. With regard to this potential estate tax planning strategy, note that there are special rules for transferring appreciated property into trusts such that the tax on the appreciation is generally due Dec. 31, 2030. Fractional or partial interest discounts are not allowed for gifts or deaths after Dec. 31, 2021. In general, gifts to spouses or to qualified charities would not be a taxable event resulting in gain or utilization of the proposed $1 million lifetime exclusion. As always, contact your BPM CPA to receive tailored advice for your specific circumstances.
In addition, readers should note that the proposed budget does not otherwise alter the current estate and gift regime. So, for instance, payment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the business is sold or is no longer family-owned or -operated — meaning, if an heir were continue to operate the business, tax would not be due upon transfer.
Also of note in Biden’s plan is a proposed election that would allow taxpayers to opt for a 15-year fixed-rate payment plan for taxes arising from illiquid assets transferred at death.
Other Biden Budget Items That Could Affect Certain High-Net-Worth-Individuals
Biden’s Budget also includes the following proposals that, if passed, could increase the tax burden of many high-net-worth individuals:
Apply Section 1411 net investment income tax to owners of S corporations and LLC owners who do not pay self-employment tax on their LLC income
End the “loophole” on profits interests and carried interests for owners of certain investment and real estate partnerships
Eliminate Section 1031 deferral treatment for annual gains in excess of $500,000 ($1 million for married couples filing jointly)
Make Section 461(l) “excess business loss” limit permanent for individuals
What Is NOT in the Biden Budget Proposals
The Biden Budget did not propose modifications to the Section 199A 20% deduction for qualified business income of certain flow-through businesses such as LLCs, partnerships, S corporations and sole proprietorships. However, Senate Finance Committee Chairman Wyden has proposed significant changes to the qualified business income deduction that could affect higher-income business owners.
No changes to the state and local tax (SALT) annual deduction cap of $10,000 for individual taxpayers have been formally proposed.
Changes to the alternative minimum tax (AMT) — including the increased AMT exemption amount provided for under TCJA — do not appear to be on the table.
We do not currently know how the proposed increased rates for LTCGs and QDs for higher income taxpayers would be applied for trusts.
Touch Base With Your BPM Accounting Team Today to Discuss Your Options
Whether a wait-and-see approach or a more aggressive approach is warranted, the professionals in BPM’s Private Client Services group have the knowledge and the resources to lay out your tax planning options so you can make the best decisions about your wealth. Potential tax reform is a subject that changes on a near-daily basis, so do not hesitate to reach out to your BPM accounting team today to ensure that you have a full and accurate picture of potential outcomes during these uncertain times.