President Biden released his Fiscal Year 2022 budget last week. The plan outlines $6 trillion in federal spending, $4.1 trillion in revenue, and clarifies how changes to the tax code will fund these policy priorities.
These changes, though still in the proposal phase, would have significant impact for income, portfolio, and transfer tax planning.
Here are some notable potential changes:
- Marginal rate for top earners increase from 37% to 39.6%
- Corporate tax rate increase from 21% to 28%
- Adjusting the taxes hedge fund and private equity partners pay on carried interest from capital gains to ordinary tax rates
- Ending 1031 like-kind exchange rules for gains on real estate in excess of $500,000
Under the new proposal, taxpayers with adjusted gross income of more than $1 million would face a nearly-doubled tax rate of 39.6% on capital gains and dividends. Many experts speculate that a capital gain rate increase in the range of 25-35% is more likely (to avoid taxpayers deferring asset sales indefinitely). There is also language that indicates the potential for retroactive changes to capital gains tax rates, with language stating that the tax proposal would be retroactive from “date of announcement.” We are awaiting clarity as to whether that refers to President Biden’s unveiling of the American Families Plan in April, or the May release of the budget proposal.
New Realization Events
Increases and decreases in the value of assets is actualized only at the time of a realization event, such as a sale. Currently, gifts and transfers upon death are not treated as taxable events. Under the new proposal, realization of capital gains – in excess of $1 million per person – would be realized upon transfer of appreciated assets at death or by gift, including distributions from and transfers to partnerships and irrevocable trusts.
If a property has not been the subject of a recognition event within the prior 90 years, gains on unrealized appreciation would be recognized by a partnership, trust, or other non-corporate entity, with the first possible recognition event to take place on December 31, 2030. Under Biden’s new proposal, gains could be paid over 15 years. There would be no gain recognition or partial interest discount on any transfer to spouses or charities at death.
More Details to Come
It is important to remember that, at this point, these are just proposals and will likely be subject to a great level of debate in Congress before being finalized. We will continue to provide updates as they become available, and are always here to answer your questions.