President Biden’s American Families Plan – Green Book provides details for provisions impacting high-income taxpayers

The White House and the US Treasury Department released the Fiscal Year 2022 Federal Budget along with the Treasury Green Book on May 28, detailing proposed tax changes in the American Families Plan (the Plan), including provisions that will raise taxes on high-income taxpayers if enacted into law.

The budget’s release typically marks the opening of a dialogue with Congress that will culminate in appropriation bills and tax legislation.  The effective date of newly enacted legislation is expected to be January 1, 2022, although certain provisions are proposed to come into effect earlier.

Individual ordinary income tax rates

The Plan increases the top marginal income tax rate from 37% to 39.6%, effective January 1, 2022.  The rate would affect single individuals with taxable income over $452,700 and married couples with taxable income over $509,300 ($254,650 married filing separately), and $481,000 for head of household.

Even if this proposal does not become law, the top marginal rate is scheduled to increase to 39.6% in 2026.

Capital gains and dividends tax rates

There is a proposal to tax long-term capital gains and qualified dividend income at ordinary income tax rates for high earners.  Assuming the top marginal rate is also increased, this proposal increases the long-term capital gains tax rate from 20% to 39.6% to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately).  Add to this the 3.8% tax on investment income and the maximum rate is 43.4%.  The effective date of the increase is proposed to be “the date of announcement,” which could mean April 28, 2021 (the date the American Families Plan was announced).

Carried interests

Certain partners receive an interest in future partnership profits in exchange for services.  These interests are commonly known as “carried interests.” Income related to carried interests received  from an investment services partnership which is currently taxed at the lower capital gains rate is proposed to be taxed at ordinary rates and the income would also be subject to self-employment tax for those with taxable income in excess of $400,000.   See Mazars’ Tax Alert “Carried Interest Tax Treatment: Green Book Proposed Changes”  for additional information.

Like-kind exchanges

The Plan modifies the like-kind exchange rules of Internal Revenue Code Section 1031.  It does not eliminate like-kind exchange deferral entirely, allowing for the deferral of gain up to an aggregate amount of $500,000 for each taxpayer annually ($1 million for married filing joint filers) for like-kind exchanges of real property.

Unchanged items

Some noteworthy provisions that were not included in the American Families Plan include:

  • An elimination or relaxation of the $10,000 limitation on deduction for state and local taxes.
  • A restoration of the 3% Pease limitation on itemized deductions.
  • A limitation on the Section 199A 20% pass-through deduction which allows certain pass-through business owners to deduct up to 20% of qualified business income.

The Biden Administration budget proposals lay the groundwork for Congress to enact legislation.  The proposed changes could be modified – or eliminated – once tax legislation moves through Congress.  We will continue to keep you informed so that planning can be done to take advantage of the proposals to minimize tax liabilities and maximize wealth.

Please contact your Mazars professional for additional information.

Published on June 9, 2021