On May 28, 2021, the Ministry of Finance published “General Notes on the Administration’s Proposed Revenue for Fiscal Year 2022”. This document, commonly referred to as the “Green Paper”, summarizes the tax proposals of the Biden government, which are included in the budget proposal for the financial year 2022.
Although the items in the Green Paper are merely suggestions for possible future tax law changes and do not represent actual tax law changes that have already occurred, it is still important to consider the possible impact of these proposed changes when considering certain transactions in 2021.Some of the proposals in the Green Paper include:
– The federal tax rate for C companies will be increased from 21 percent to 28 percent, while a minimum tax of 15 percent will be introduced on the book profits of certain large companies.
– Increase in the highest individual marginal tax rate from 37 percent to 39.6 percent.
– Increase the long-term capital earnings ratio and the qualifying dividend ratio to 39.6 percent for the portion of taxable income that exceeds $ 1 million. Please note that this change would take effect retrospectively as of the announcement date in 2021.
– Limit the annual deferral of profits to the total amount of IRC §1031-like type exchanges to US $ 500,000 per person (US $ 1 million in the case of married persons filing a joint statement). Please note that this would be effective for exchanges made in tax years beginning after December 31, 2021, and could result in an exchange beginning in the second half of 2021 having less than 180 days to clear the Complete replacement property.
– Treat transfers of estimated assets by gift or death as liquidation events that require a capital gain at the time of the transfer. The proposal would allow for a lifetime exclusion of $ 1 million per person and would be effective for gains on gift transferred property and on property in the event of the death of the deceased who die after December 31, 2021. The per-person exclusion would be indexed for inflation beyond 2022 and would be transferable to the surviving spouse of the deceased under the same rules that apply for inheritance and gift tax purposes (effectively making the exclusion $ 2 million per couple). Payment of taxes on the appreciation of certain family owned and operated businesses would not become due until the stake in the business is sold or the business is no longer family owned and operated.
– All passed business income from high income taxpayers would be subject to either 3.8 percent net investment income tax or 3.8 percent Medicare tax under the Self Employed Contribution Act.
– Carried interests would be taxable as ordinary income and subject to self-employment tax.
– Limiting excessive business losses [i.e., losses from business activities over the sum of (a) gains from business activities and (b) a specified threshold amount)] would be made permanent.
Please ask your tax advisor how the Green Paper may affect your specific situation.
Joel A. Bock, CPA, MST, is a partner at Daniells Phillips Vaughan & Bock, an accounting firm based in Bakersfield.