The Biden Administration recently released the Fiscal Year 2022 Budget, and the “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” commonly referred to as the “Green Book.” 

The Green Book is complex and nuanced. While it summarizes the Administration’s tax proposals contained in the Budget, it is not a proposed legislation as each of the proposals will have to be introduced and passed by Congress. As bills are passed by both arms of Congress, we will be providing you more in depth coverage since the Green Book is solely the desire of the President and not what is worked out by both the House and the Senate. However, these proposed changes are significant to the tax regime and tax planning will be integral to help diminish the impact to your bottom line.

Increasing Income Tax Rate

The proposal would increase the top marginal individual income tax rate from 37% to 39.6%. This rate would be applied to taxable income greater than the 2017 top bracket threshold, adjusted for inflation.

Reformation of Capital Gains

Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, with 37% generally being the highest rate, but only to the extent that the taxpayer’s income exceeds $1 million, indexed for inflation after 2022. The current law taxes capital income at graduated rates under individual income tax with 20% generally being the highest rate.

Treatment of Property Gifted or Transferred at Death Rules

Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains return.

A transfer would be defined under the gift and estate tax provisions and would be valued using the methodologies used for gift or estate tax purposes. However, for purposes of the imposition of this tax on appreciated assets, the following would apply:

  1. A transferred partial interest would be its proportional share of the fair market value of the entire property.
  2. Transfers of property into, and distributions in kind from, a trust, partnership, or other non-corporate entity, other than a grantor trust that is deemed to be wholly owned and revocable by the donor, would be recognition events.

The deemed owner of such a revocable grantor trust would recognize gain on the unrealized appreciation in any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of the deemed owner, other than a distribution made in discharge of an obligation of the deemed owner. All the unrealized appreciation on assets of such a revocable grantor trust would be realized at the deemed owner’s death or at any other time when the trust becomes irrevocable.

90-year rule: Gain on unrealized appreciation also would be recognized by a trust, partnership, or other noncorporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030.

Certain exclusions would apply. Please contact our team to review.

We recommend reading this article from The National Law Review with a full analysis of the FY2022 Green Book: https://www.natlawreview.com/article/treasury-s-green-book-provides-details-biden-administration-s-tax-plan

When will these changes take effect?

Most proposed changes will be effective on December 31, 2021. The capital gains tax proposal would be effective for gains required to be recognized after “the date of announcement,” which could be April 20, 2021 (American Families Plan announcement) or May 28, 2021 (Budget and Green Book release).

These proposed changes are causing individuals to shift away from gift or estate tax planning and move attention to income tax planning. Need help planning for your 2021 taxes? We’ve compiled a list of 2021 Tax Preparation FAQs to help you get started. If you have any questions about the impact on “Green Book” on you and your business, contact our team today.