A General Explanation of the Administration’s 2022 Revenue Proposals (Green Book)

Recently, the Treasury Department released its General Explanation of the Administration’s 2022 Revenue Proposals (the “Green Book”). Highlighted below are some of the key tax domestic proposals. All of the proposals are in the early stages of negotiations and each one could change dramatically before enactment, if enacted at all.

Unless indicated otherwise, all proposed changes, if enacted, would take effect in taxable years beginning on or after January 1, 2022.

INDIVIDUAL TAX PROPOSED CHANGES

• The top marginal tax rate will be returned to the pre-2018 39.6 percent level for joint returns with taxable income over $509,300 (Single $452,700). Interestingly, there does not appear to be an increase in fiduciary tax rates.
• For taxpayers with adjusted gross income higher than $1 million, their long-term capital gains and qualified dividend income tax rate will increase to the maximum income tax rate (37 percent in 2021 and 39.6 percent in 2022) plus the 3.8 percent Net Investment Income Tax. This change would be effective for gains and qualified dividends recognized on or after April 28, 2021.
• Transfers of appreciated property to or distributions of such property from partnerships and trusts (other than revocable grantor trusts) would be treated as a taxable transfer.
• Self-employment tax rules would be changed to subject material participants in both S Corps as well as partnerships and LLCs to the same rules including an increase in SE tax on earned income in excess of $400,000.
• The temporary expansion of the earned income and child care credits enacted in early 2021 would be made permanent.
• The Excess Loss Limitation applicable to non-corporate taxpayers would be made permanent.
• The proposal does NOT remove the cap on the SALT deduction.

BUSINESS TAX PROPOSED CHANGES

• Increase the income tax rate for C corporations from 21 percent to 28 percent for taxable years beginning after December 31, 2021. For taxable years beginning after January 1, 2021 and before January 1, 2022, the tax rate would be equal to 21 percent plus 7 percent times the portion of the taxable year that occurs in 2022.
• Support Housing and Infrastructure by (i) expanding the Low-Income Housing Tax Credit, ii) providing Neighborhood Homes Investment Tax Credit, (iii) make permanent the New Markets Tax Credit (NMTC) and (iv) providing federally subsidized State and Local Bonds for Infrastructure.
• Tax carried (profits) interests as ordinary income in an Investment Services Partnership regardless of the character of the income at the partnership level if the partner’s taxable income (from all sources) exceeds $400,000.
• Repeal the Section 1031 deferral of gain from Like-Kind Exchange for gains in excess of $500,000 per year per taxpayer ($1,000,000 in the case of married individuals filing joint return), effective for exchanges completed in tax years beginning after December 31, 2021.
• Impose a 15 percent minimum tax on worldwide pre-tax book income for C corporations whose book income exceeds $2 billion annually. In addition, C corporations would be allowed to claim a book tax credit (generated by a positive book tax liability) against regular tax in future years, but this credit cannot reduce tax liability below book tentative minimum tax in that year.
• Prioritize Clean Energy by eliminating fossil fuel tax incentives and create, extend, and enhance renewable and alternative energy incentives through various tax credits for:
  
  • Investments in Electricity Transmission
  • Electricity Generation from Existing Nuclear Power Facilities
  • Establish New Tax Credits for Qualifying Advanced Energy Manufacturing
  • Establish Tax Credits for Heavy and Medium-Duty Zero Emissions Vehicles
  • Provide Tax Incentives for Sustainable Aviation Fuel
  • Provide a Production Tax Credit for Low-Carbon Hydrogen
  • Extend and Enhance Energy Efficiency and Electrification Incentives
  • Provide a Disaster Mitigation Tax Credit
  • Expand and Enhance the Carbon Oxide Sequestration Credit
  • Extend and Enhance the Electric Vehicle Charging Station Credit
  • Reinstate Superfund Excise Taxes and Modify Oil Spill Liability Trust Fund Financing

ESTATE AND GIFT TAX PROPOSED CHANGES

• Treats transfers of appreciated property upon death OR by gift as a “recognition event” for income tax purposes. This effectively would repeal, with some exceptions, the step up in basis rules.
• The Donor or deceased owner would realize a capital gain at the time of the transfer. The gain would be the excess of the asset’s fair market value on the date of death or the date of the gift over the donor’s basis in the asset.
• The gain would be reported on either a gift or estate return or on a separate capital gains return.
• The income taxes due at death would be treated as a deduction for Estate Tax purposes. It is unclear how the income tax due on a gift would be treated.
• The decedent or donor would be allowed to use any capital loss carryovers against the capital gains.
• There would be an exclusion for donations and certain personal property and deferral of gain for family-owned AND operated businesses. Any estate tax would not be due until the business is sold OR the business ceases to be family-operated. There would be a 15-year fixed-rate payment plan for illiquid assets transferred at death.
• Gains on unrealized appreciation also 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. The first possible recognition event would be December 31, 2030 and it is unclear if this is intended to apply to only family-controlled non-corporate entities.
• Valuation methodologies for assets would be the same as those currently used for estate and gift tax purposes; however, a major change would be that no discounts for lack of control, lack of marketability would be allowed. Instead, values would be determined by arriving at an enterprise value times the percent ownership of the business.
• Transfers between spouses would have carryover basis and gain would not be recognized until the surviving spouse disposes of the asset or dies.
• The $250,000 per person ($500,000 joint) exclusion under current law for capital gain on a principal residence would apply and be portable to the surviving spouse.
• The proposal would allow a $1M per-person exclusion (indexed for inflation) on unrealized capital gains on property transferred by gift or death. These assets would have a carryover basis.
• Interestingly and somewhat surprisingly, there are NO proposals to increase the Estate and Gift Tax Rates that are currently 40 percent, or to decrease the Unified Estate and Gift Tax Exemption which is currently $11.7M per individual.

If you have any questions, please reach out to your Citrin Cooperman advisor.