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There is a new administration in town, and taxpayers can expect significant changes in the tax laws. With the $1.9 trillion COVID relief package in the rearview mirror and additional spending bills on the road ahead, the Biden Administration is expected, consistent with President Biden’s campaign promises, to raise taxes via the budget reconciliation process.

Although the precise timing of the legislation and the effective dates are unknown, Congressional committees are in the midst of working on tax and budget proposals that will become part of a second budget reconciliation bill. Biden’s fiscal year 2022 budget is slated to be released in mid or late April with the actual enactment expected in the fall of 2021.

This article summarizes many of the proposed changes, which include substantial increases to the corporate tax, individual and capital gains rates, and sweeping changes to the estate and gift tax regime. Future updates will be provided as to actual changes in the tax laws, but for now, the expected changes are significant enough that individual taxpayers and business owners should be aware of the potential new laws so they can strategize and perhaps take current actions in anticipation of the changes.

Capital Gains and Dividend Tax Rate Increases for High-Income Individuals

  • Federal capital gains and dividend tax rates for certain high-income taxpayers are expected to increase from 23.8% to 43.4% (not clear on the exact threshold, but these rates are expected to apply to taxpayers with AGI of $1,000,000 or more)
    • This would put the maximum capital gains and dividend rates close to 50% for high-income taxpayers who live in states with a state income tax

Individual Tax Rate Increases and Associated Changes

  • Increase federal rates from current maximum level of 37% to 39.6% for individuals earning more than $400,000
  • Removal of Section 199A pass-through deduction eligibility (which allows certain pass-through business owners to deduct up to 20% of their qualified business income) for taxpayers with income in excess of $400,000.
  • Repeal $10,000 cap on state and local tax deductions to be replaced with limitations on itemized deductions for taxpayers earning in excess of $400,000
  • Expansion of child tax credits
  • Proposed introduction of first time homebuyer’s credit of $15,000

Estate and Gift Tax Changes

  • Reduce estate and gift tax exemption from current level of $11,700,000 per person ($23,400,000 per couple) to $5,300,000 per person ($10,600,000 per couple)
  • Increase the estate tax rate on value of assets exceeding exemption from 40% to 45%
  • Eliminate step-up in tax basis for assets inherited at death and institute carry-over basis rules
  • Continue portability of estate and gift tax exemption amount between spouses

Corporate Tax Rate Increases and Associated Changes:

  • Increase corporate tax rates from 21% to 28%
  • Eliminate the Section 199A pass-through deduction for taxpayers earning more than $400,000
  • NOL carrybacks will be prohibited for tax returns that have not yet filed
  • Impose a 15% “minimum tax” on book profits in excess of $100 million
  • Impose an “offshoring penalty” surtax on U.S company offshore production profits for sales back into the U.S., increasing overall tax rate on those profits to 30.8%
  • Denial of all deductions for moving jobs or production overseas
  • Establishment of a 10% advanceable “Made-in-America” tax credit for certain service or call center jobs transferred back to the U.S.
  • Increasing tax credits and incentives for manufacturing, renewable energy, carbon capture, and small businesses
  • Repeal of fossil fuel tax preferences
  • Elimination of deductions for consumer drug advertising
  • Repeal of the increase in bonus depreciation (from 50% to 100%)

Carried Interest and Like-Kind Exchange Changes

  1. Revisit issue of taxing profits from carried interests at ordinary income tax rates
  2. Full repeal of like-kind exchange (Section 1031) rules more information, please contact your attorney at Ray, Quinney & Nebeker, visit our Tax, Trust and Estate Section page, or contact Section Chair Gary Longmore at moc.nqr@eromgnolg, or Angela Atkin at moc.nqr@niktaa.

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