Summary of proposed changes to federal tax law in 2021 | Burr & Forman
President Biden has proposed major changes to federal tax laws, some of which are expected to come into effect earlier in 2021 (i.e. changes to the law may be passed by Congress or at a later effective date (as in effective Jan. 1, 2022). The Biden administration’s proposals must first be approved by Congress. While Congress is currently considering these tax law change proposals, here is a summary of some of the most important:
- Increase the corporate tax rate from 21% to 28%.
- Impose a corporate tax of at least 15% on the “accounting” profits of large corporations.
- Eliminate incentives for fossil fuels and add / increase incentives for alternative energy.
- Increase the personal income tax rate:
- The proposal would raise the top marginal personal income tax rate to 39.6%. This rate would be applied to taxable income exceeding the 2017 upper bracket threshold, adjusted for inflation. In the 2022 tax year, the top marginal tax rate would apply to taxable income over $ 509,300 for married persons filing a joint return, $ 452,700 for unmarried persons (other than surviving spouses), $ 481,000 for the declaring head of the family and $ 254,650 for married persons. file a separate return. After 2022, the thresholds would be indexed to inflation.
- Increase the rate of surplus value:
- Long-term capital gains and eligible dividends from taxpayers with adjusted gross income over $ 1 million would be taxed at regular tax rates, with 37% generally being the highest rate (40.8%, including tax on net investment income), but only to the extent that the taxpayer’s income exceeds $ 1 million ($ 500,000 for marriages filed separately), indexed for inflation after 2022. A separate proposal would first increase the top ordinary personal income tax rate to 39.6% (43.4%, including tax on net investment income).
6. Subject donations and death transfers to capital gains tax (at the new rates above):
- The proposal would allow an exclusion of $ 1 million per person from the recognition of other unrealized capital gains on property transferred by donation or held at death.
- In addition, the gain on unrealized appreciation of the assets would be recognized by a trust, partnership or other unincorporated entity that owns the asset if that asset has not been subject to a recognition during the previous 90 years, with such a test period starting January 1, 1940. The first possible recognition event for any taxpayer under this provision would therefore be December 31, 2030.
- The beneficiary’s basis in property received due to the death of the deceased would be the fair market value of the property on the death of the deceased. The same basic rule would apply to the donee of a given property to the extent that the unrealized gain on that property at the time of the donation was not protected from being a recognition event by the exclusion of $ 1 million. donor dollars. However, the donee’s base in property received by donation during the donor’s life would be the donor’s base in that property at the time of the donation to the extent that the unrealized gain on such property was deducted from the exclusion of $ 1 million. recognition donor dollars.
- Increase federal employment taxes and “net investment income tax”:
- Proposal (i) would ensure that all business income passed on from high-income taxpayers is subject to net investment income tax (“NIIT”) or self-employed contribution tax (” SECA â), (ii) the SECA’s application to partnership and LLC income more consistent for high-income taxpayers, and (iii) the SECA’s application to ordinary business income for owners of non-S corporations. passive high income.
- First, the proposal would ensure that all business or business income of high-income taxpayers is subject to the 3.8% Medicare tax, either through the NIIT or SECA tax. In particular, for taxpayers whose adjusted gross income exceeds $ 400,000, the definition of net investment tax would be amended to include gross income and gains from any trade or business that are not otherwise subject to the tax. tax on employment.
- Second, limited partners and LLC members who provide services and materially participate in their partnerships and LLCs would be subject to SECA tax on their distributive shares of partnership or LLC income to the extent that such income exceeds certain thresholds. SECA tax exemptions under current law for certain types of partnership income (for example, rents, dividends, capital gains, and certain retired partner income) would continue to apply to these types of income. .
- Third, owners of S corporations that materially participate in the trade or business would be subject to SECA taxes on their distributive shares of the business’s income to the extent that such income exceeds certain thresholds. The SECA tax exemptions provided by current law for certain types of S corporation income (for example, rents, dividends and capital gains) would continue to apply to these types of income.
- Fourth, to determine the amount of partnership income and S corporation income that would be subject to SECA tax under the proposal, the taxpayer would add (a) ordinary business income from S corporations in which the owner is materially involved in the trade or business, and (b) ordinary business income from either limited partnership interests or interests in LLCs that are classified as partnerships in the to the extent that a limited partner or member of the LLC is materially involved in the business or business of its partnership or LLC.
- Starting in 2022, the additional income that would be subject to SECA tax would be the lesser of (i) the potential SECA income, and (ii) the excess of more than $ 400,000 of the sum of the potential SECA income, income salary subject to FICA under applicable law, and 92.35% of self-employed workers’ income subject to SECA tax under applicable law. The threshold amount of $ 400,000 would not be indexed for inflation. Significant participation standards would apply to natural persons who participate in an enterprise in which they have a direct or indirect participation. Taxpayers are generally considered to be materially participating in an enterprise if they are involved in it on a regular, continuous and substantial basis. Often this means that they work for the company at least 500 hours per year. The statutory SECA tax exception for limited partners would not exempt a limited partner from SECA tax if the limited partner has otherwise materially participated.
- Tax “deferred” interest (profits) as ordinary income:
- The proposal would generally tax as ordinary income the share of a partner’s income on an “investment services partnership” (“ISPI”) interest in an investment partnership, regardless of the nature of the income at the level. partnership, if the partner’s taxable income (from all sources) exceeds $ 400,000. Thus, this income would not be eligible for the reduced rates applicable to long-term capital gains. In addition, the proposal would require partners in such investment partnerships to pay self-employment taxes on this income. In order to prevent income from labor services from escaping taxation at ordinary income rates, this proposal assumes that the gain recognized on the sale of an ISPI would generally be taxed as ordinary income, and not as a capital gain, if the partner is above the income threshold. In order to ensure more consistent treatment with sales of other types of businesses, the Administration remains committed to working with Congress to develop mechanisms to ensure the appropriate amount of revenue requalification when the business is in good traffic or other assets unrelated to the services of the ISPI holder.
- An ISPI is a profit participation in an investment partnership owned by a person who provides services to the partnership. A partnership is an investment partnership if almost all of its assets are investment-type assets (certain securities, real estate, investments in partnerships, commodities, cash or cash equivalents, or derivative contracts relating to these assets. ), but only if more than half of the partnership’s contributed capital comes from partners in whose hands the interests constitute property not held in the course of a trade or business. To the extent that (1) the partner who owns an ISPI contributes “invested capital” (which is usually money or other property) to the partnership, and (2) the invested capital of that partner is a qualifying capital participation (which generally requires that (a) partnership allocations to invested capital be made in the same way as allocations to other participations held by partners who do not hold an ISPI and (b ) the attributions to these non-holders of ISPI are significant), the income attributable to the capital would not be requalified. Likewise, the portion of any gain recognized on the sale of an ISPI that is attributable to the invested capital would be treated as a capital gain. However, âinvested capitalâ will not include contributed capital attributable to the proceeds of any loan or advance made or guaranteed by a partner or the partnership (or any person related to such persons).
- In addition, any person who provides services to an entity and holds an âineligible interestâ in the entity is subject to tax at the rates applicable to ordinary income on any income or gain received in respect of interest, if the person’s taxable income (from all sources) exceeds $ 400,000. A âdisqualified interestâ is defined as convertible or contingent debt, an option or any derivative in respect of the entity (but does not include an interest in a partnership, shares in certain taxable companies or shares in an S corporation). This is an anti-abuse rule designed to prevent the avoidance of property through the use of compensatory arrangements other than partnership interests. Other anti-abuse rules may be necessary.
- Significantly limit the carry over of “like-for-like exchange” in Section 1031:
- The proposal would allow the deferral of the gain up to a total amount of $ 500,000 for each taxpayer ($ 1 million in the case of married persons filing a joint return) each year for exchanges of real estate of the same nature. Any gain from similar exchanges exceeding $ 500,000 (or $ 1 million in the case of married persons filing a joint return) in a taxation year would be recognized by the taxpayer in the year in which the taxpayer transfers the real estate that is the subject of the exchange.
- Significantly increase IRS funding for audits and tax law enforcement.