On May 28, 2021, the Treasury Department released its General Explanations of the Biden Administration’s Fiscal Year 2022 Revenue Proposals (the Greenbook). The Administration asserts that over the next 10 years, the proposals will raise $3.6 trillion, calculated as follows: $858 billion from raising the corporate tax rate; $779 billion from enhanced IRS enforcement measures; $691 billion from income and capital gains tax increases; $534 billion from imposing a 21% global minimum tax; $390 billion from the corporate anti-inversion rule; and $349 billion from the other proposals.
Following is a summary of the tax proposals that will be of interest to U.S. companies, the energy industry, wealthy families and high-income individuals.
Tax Rate Increases
Tax proposals would raise the top individual tax rate from 37% to 39.6%, increase the corporate tax rate from 21% to 28%, and impose a 15% minimum tax on corporations with book income in excess of $2 billion.
Capital Gains Rate Increase
It is proposed that for individuals with an adjusted gross income of more than $1 million, their capital gains will be subject to federal tax at the rate of 40.8% (i.e., a 37% tax rate, plus the 3.8% net investment tax).
Impose Capital Gains Tax on Gifts and Bequests
Long-standing tax rules provide that a person’s unrealized capital gains are not taxed when they make a gift of appreciated property, or when they bequeath appreciated property upon their death. This would be changed effective December 31, 2021, such that when a gift or bequest is made, the gain at the time of that event generally would be recognized by the transferor. Exceptions provide that no gain is recognized on the transfer to one’s spouse or charities, and each transferor has a lifetime exclusion whereby the first $1 million of gains will not be subject to tax. In addition, special rules apply for transfers of personal property (other than collectibles), primary residences, family businesses and small business stock.
Change Energy Tax Policy
Numerous proposals would eliminate tax preferences for the fossil fuel industry, while subsidizing various forms of clean energy. For a more detailed discussion of the energy-related provisions see our advisory entitled, "Tax Proposals Target Fossil Fuels in Favor of Green Energy."
Eliminate Tax Policy Preferences
“Carried Interest” sales will be taxed as ordinary income if the taxable income of the partner from all sources exceeds $400,000. Proposed rules would only allow a “Like-Kind Exchange” to shelter real estate gains up to $500,000 for individuals, and $1 million for married couples.
International Tax Changes
The Administration has proposed a number of very specific changes to the U.S. international tax rules, all of which have the general thrust of increasing the tax cost for U.S. multinational corporations that operate outside the U.S. through foreign affiliates.
Improve Tax Compliance and Administration
Various proposals would increase IRS auditing resources (which will be used to focus on high-income taxpayers), require banks to report more information to the IRS, compel cryptocurrency exchanges to report information to the IRS and mandate more tax returns be filed electronically (which facilitates IRS audits).
Tax Credits Designed to Benefit Lower Income Taxpayers
Several provisions would directly benefit low-income taxpayers, and other changes would encourage investment in low-income housing. It is not clear which of these provisions will be enacted, but there is a good chance some of them will become law later this year.