The Treasury Department Releases its “Green Book” to Explain the Biden Administration’s New Revenue Proposals

July 1, 2021

The US Department of Treasury has released its “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” better known as the “Green Book, which provides detailed descriptions of the Biden Administration’s legislative tax proposals for the fiscal year 2022, including various tax proposals recently previewed in President Biden’s American Families Plan.

The last time that Treasury released a Green Book was in 2016. The Biden Administration has continued the tradition of releasing a detailed summary of its legislative tax proposals. Although the Biden Administration’s revenue proposals reflect tax policies, it would like to see enacted into law, understand that these are proposals. Historically many of the tax proposals described in past Green Books were never enacted into law. Still, here is a summary of how some of the most relevant proposals may impact taxpayers and business owners.

Increase Corporate Income Tax Rate to 28 Percent
Prior to what is commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”), “C corporations” were subject to a graduated tax schedule with a maximum tax rate of 35 percent. Under the TCJA, the federal income tax rate for C corporations was reduced to a flat 21 percent. The Biden Administration is proposing to increase the federal income tax rate for C corporations to 28 percent effective for taxable years beginning after December 31, 2021 (along with a phase-in rule for non-calendar year corporations).

Increase Top Marginal Income Tax Rates From 37% To 39.6% For High Earners
The Administration proposes an increase in the top individual income tax rate to 39.6%. For 2022, that top rate would apply to taxable income over $509,300 for married joint filers and $452,700 for single filers (effectively moving a portion of the current 35% bracket into the 39.6% bracket). For 2021, the top individual income tax rate is 37% and applies to taxable income over $628,300 for married joint filers and $523,600 for single filers. Thresholds would be inflation-indexed after 2022.

Impose a 15 Percent Minimum Tax on Book Earnings of Large Corporations
The Administration is proposing to impose a 15 percent minimum tax on worldwide pre-tax book income for corporations with annual book income in excess of $2 billion, effective for taxable years beginning after December 31, 2021. For these purposes, book tentative minimum tax (“BTMT”) would equal 15 percent of worldwide pre-tax book income (net of book net operating loss deductions), less general business credits (including research and development credits, clean energy, and housing tax credits) and foreign tax credits. Any excess of tentative minimum tax over regular tax would result in a book income tax. Taxpayers may also be allowed a book tax credit in future years so long as it does not reduce that year’s BTMT liability.

Tax Capital Gains and Qualified Dividends of High Earners at Ordinary Income Rates (up to 39.6%) Instead of Capital Gains Rates (20%)
For taxpayers with income over $1 million ($500,000 for married filing separately), the Administration’s proposal would tax long-term capital gains and qualified dividends (capital income) at ordinary income tax rates of up to 39.6% (if the top ordinary income tax rate is increased) plus the 3.8% net investment income tax to the extent it applies. Currently, capital income is taxed at a top rate of 20% (or 23.8% if the 3.8% net investment income tax applies).

Changes in Self Employment Taxes
Currently, an owner-employee of an S corporation is not subject to employment tax on distributions of S corporation earnings. Likewise, such owner-employees are not subject to the “net investment income tax” (“NIIT”) on distributions of S corporation earnings. The Green Book proposes to ensure that all trade or business income of high-income taxpayers (adjusted gross income exceeding $400,000) is subject to the 3.8 percent Medicare tax, whether through the NIIT or self-employment tax. For taxpayers with adjusted gross income in excess of $400,000, the NIIT would be amended to include gross income and gain from any trade or business that is not otherwise subject to employment taxes. The proposal would be effective for taxable years beginning after December 31, 2021.

Treat Gifts and Bequests of Appreciated Property as Realization Events for Capital Gain
Under current law, lifetime gifts and transfers of assets at death do not trigger gain. Gift recipients take a “carryover” income tax basis in the asset (deferring gain recognition until a later taxable transfer, if any), while appreciated inherited assets receive a “stepped-up” basis to fair market value as of the decedent’s death (avoiding capital gains tax on any appreciation). The Administration proposes to change these rules.

$1 Million Exemption (Portable)
Each individual would have a $1 million exclusion ($2 million for married couples) from capital gain recognition for assets transferred by gift or at death. The exclusion would be inflation-indexed and portable between spouses, subject to the same rules for estate and gift tax exemption portability.

How AbitOs Can Help
This Alert is designed only to be a brief overview of some of the most relevant new proposals to high-income earners and business owners. The entire Green Book can be accessed here.

While it is not definite that any of the proposals in the Green Book will become law, with the Democrats controlling both houses of Congress, they are likely to be enacted in some form. In any case, the Green Book proposals could be in effect after the end of this year. The time to plan for what could be significant changes in your tax obligations and tax strategies for FY 2022 is now.

We can help to make sure that you understand any changes you will need to make in light of the Green Book proposals.

AbitOs specializes in the unique needs of high net-worth individuals with international lifestyles and accounting concerns. Compliance with the proposed new Green Book revenue regulations can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Alert, do not hesitate to contact us.