President Biden has proposed major changes to federal tax laws, some of which are due to come into effect earlier in 2021 (i.e., we are already working on those changes if they are passed later), compared to the date the new tax law changes were allowed by Congress or at a later point in time when it comes into force (e.g. from January 1, 2022). The Biden government’s proposals must first be approved by Congress. Now that Congress is considering these tax law amendments, the following is a summary of some of the most important ones:
- Increase in the corporate tax rate from 21% to 28%.
- Corporate income tax of at least 15% must be levied on the “book profits” of large companies.
- Eliminate fossil fuel incentives and add / increase alternative energy incentives.
- Increase in the individual income tax rate:
- The proposal would raise the highest individual income tax rate to 39.6%. This rate would be applied to taxable income adjusted for inflation in excess of the 2017 ceiling. In tax year 2022, the maximum tax rate on taxable income over $ 509,300 would apply to married individuals filing a joint tax return, $ 452,700 for unmarried individuals (excluding surviving spouses), $ 481,000 for the head of household, and $ 254,650 for married individuals filing a separate return. After 2022, the thresholds would be indexed to inflation.
- Increase Capital Gain Rates:
- Long-term capital gains and qualified dividends from taxpayers with adjusted gross income greater than $ 1 million would be taxed at the ordinary income tax rate, with 37% generally being the highest rate (40.8% including net wealth tax) but only as far as income taxpayer exceeds $ 1 million ($ 500,000 for separate marriages) indexed for post-2022 inflation. A separate proposal would initially increase the highest ordinary income tax rate to 39.6% (43.4% including net wealth tax). .
6. Subject gifts and death transfers to capital gains tax (at the new rates mentioned above):
- The proposal would allow for an exclusion of $ 1 million per person from recognition of other unrealized capital gains on gifts or assets held for death.
- In addition, a gain on an unrealized increase in the value of assets of a trust, partnership or other non-corporate entity that owns the property would be recognized if that property was not the subject of a recognition event in the previous 90 years with such a test period beginning on Jan. January 1940. The first possible recognition event for any taxpayer under this provision would therefore be December 31, 2030.
- The basis of the recipient’s assets obtained through the death of the testator would be the market value of the property at the time of the death of the testator. The same basic rule would apply to the donee of a gifted property, unless the unrealized gain on that property at the time of the donation was not protected from being an event of appreciation by the donor’s exclusion of $ 1 million. However, the recipient’s asset base, preserved by donation during the donor’s lifetime, would be the donor’s base in that property at the time of donation, provided the unrealized gain on that property against the donor’s exclusion from recognition of 1 million US dollars are counted.
- Increase in federal wage taxes and the “net investment income tax”:
- The Proposal would (i) ensure that all passed business income from high income taxpayers is subject to either Net Investment Income Tax (“NIIT”) or Self Employment Contribution Tax (“SECA”); (ii) the application of SECA to income from partnership and LLCs, which are more consistent for high income taxpayers, and (iii) applying SECA to the normal business income of owners of non-passive high income suburban companies.
- First, the proposal would ensure that all business or business income from high-income taxpayers is subject to Medicare tax at 3.8%, through either NIIT or SECA tax. Specifically, for taxpayers with adjusted gross income greater than $ 400,000, the definition of net investment tax would be changed to include gross income and profits from businesses or businesses that are otherwise not subject to employment tax.
- Second, limited partners and LLC members who provide services and materially participate in their partnerships and LLCs would be subject to SECA tax on their distributing interest in the income of the partnership or LLC if that income exceeded certain thresholds. The SECA tax exemptions currently available on certain types of partnership income (e.g., rent, dividends, capital gains, and certain income from retired partners) would continue to apply to that income.
- Third, S corporation owners materially involved in the trade or business would be subject to SECA taxes on their distributing shares of the company’s income if that income exceeded certain thresholds. The SECA tax exemptions that current law provides for certain types of S-corporate income (e.g., rents, dividends, and capital gains) would continue to apply to that income.
- Fourth, to determine the amount of income from partnerships and S-corporations that are proposed to be subject to SECA tax, the taxpayer would aggregate: and (b) ordinary business income derived from either limited partnerships or shares in LLCs, classified as partnerships if a limited partner or LLC member has a material interest in the trade or business of its partnership or LLC.
- As of 2022, the additional income that would be subject to SECA tax would be the lower of (i) potential SECA income and (ii) the excess of over $ 400,000 of the sum of potential SECA income, wage income that is subject to FICA under applicable law and 92.35% of self-employed income is subject to SECA tax under applicable law. The threshold of $ 400,000 would not be indexed to inflation. Material ownership standards would apply to individuals who have an interest in a company in which they are directly or indirectly involved. Taxpayers are generally considered to have a material interest in a company if they are regularly, continuously and significantly involved in it. This often means they work for the company for at least 500 hours a year. The statutory exemption from SECA tax for limited partners would not exempt a limited partner from SECA tax if the limited partner was otherwise materially involved.
- Taxes “carried” (profit) Interest as ordinary income:
- The proposal would generally tax a partner’s share of the income of an Investment Services Partnership Interest (“ISPI”) in an investment company as ordinary income if the partner’s taxable income (from all sources) exceeds that, regardless of the type of partnership income $ 400,000. Accordingly, such income would not be eligible for the reduced rates applicable to long-term capital gains. In addition, the proposal would require the partners of such investment companies to pay self-employment taxes on this income. To prevent income from labor services from escaping taxation at ordinary income rates, this proposal assumes that the gain recognized from the sale of an ISPI would generally be taxed as ordinary income rather than capital gain if the partner is above income Threshold. In order to ensure more consistent treatment with sales of other types of businesses, the government remains committed to working with Congress to develop mechanisms to ensure the appropriate level of income remodeling when the business has goodwill or other assets that do not related to the services of the ISPI holder.
- An ISPI is a profit-sharing interest in an investment company held by an individual who provides services to the partnership. A partnership is an investment company if essentially all of its assets are investment-like assets (certain securities, real estate, equity interests in partnerships, raw materials, cash or cash equivalents or derivative contracts relating to these assets), but only if more than half of the invested capital The partnership comes from shareholders in whose hands the holdings represent assets that are not held in connection with a trade or company. To the extent that (1) the partner holding an ISPI brings “invested capital” (which is generally money or other property) into the partnership and (2) that partner’s invested capital is a qualifying equity interest (which generally requires that (a) the partnership allocations to invested capital are made in the same manner as allocations to other equity interests held by partners who do not hold an ISPI, and (b) the allocations to such non-ISPI holders are material), Income attributable to invested income Capital would not be re-characterized. Likewise, that portion of any gain recognized on the sale of an ISPI that is attributable to the invested capital would be treated as a capital gain. However, “invested capital” does not include contributed capital derived from the proceeds of a loan or advance granted or guaranteed by any partner or partnership (or any person associated with them).
- In addition, any person who provides services to a company and has an “excluded interest” in the company is subject to tax on any income or profits generated in relation to the interest at the rates applicable to ordinary income, if the individual’s taxable income (from all sources) exceeds $ 400,000. A “disqualified interest” is defined as a convertible or contingent liability, option or derivative instrument in relation to the company (but does not include partnership interests, interests in certain taxable corporations, or interests in an S company). This is a fraud prevention rule that aims to prevent the evasion of property through the use of compensation arrangements other than corporate interests. Other anti-abuse rules may be required.
- § 1031 “Exchange of the same kind” significantly restrict:
- The proposal would allow for the deferral of profits up to a total of $ 500,000 for each taxpayer ($ 1 million in the case of married people filing a joint declaration) per year for real estate exchanges of a similar nature . Any profit from exchanges of the same kind that exceeds $ 500,000 (or $ 1 million in the case of married persons filing a joint declaration) during a tax year will be recognized by the taxpayer in the year in which the taxpayer paid transfers the property subject to the exchange.
- Significant increase in funding for the IRS for audits and tax enforcement.