Article Highlights Long-Term Capital Gains Rates Top Individual Tax Rate Pass-Through Income Subject to 3.8% NIIT or SECA Tax Limit Nonrecognition of Like-Kind Exchanges Transfer of Appreciated Property by Gift or Death Family-Owned and -Operated Businesses 15-Year Fixed-Rate Payment Plan Excess Business Loss Limitation Carried Interest Enhanced Financial Account Reporting The U.S. Treasury has released the Biden administration’s 2022 Fiscal Year Budget, which includes a general explanation of the administration’s 2022 revenue proposals. The publication is commonly referred to as the Green Book and outlines the Biden administration’s tax proposals. Keep in mind that these are proposals and will have to be passed by Congress. The Green Book proposals include both domestic and international taxes; however, this article will only cover domestic tax issues that deal with individuals and small businesses. Also included in the Green Book are proposals to extend, expand or create new energy-related tax credits; we have not included any of these proposals in this article. Long-Term Capital Gains Rates Currently, long-term capital gains and qualified dividends are taxed at the following rates. CG TAX RATES BY AGI RANGE FOR 2021 Filing Status Zero Rate 15% Rate 20% Rate Single 0 - $40,400 $40,401 – $445,850 $445,851 and above Head of Household 0 - $54,100 $54,101 – $473,750 $473,751 and above Married Filing Joint 0 - $80,800 $80,801 – $501,600 $501,601 and above Married Filing Separate 0 - $40,400 $40,401 – $250,800 $250,801 and above The Green Book proposals would increase the tax rate for long-term capital gains and qualified dividends to 39.6% (the proposed increase to the top individual rate) from the current 20% rate to the extent the taxpayer’s AGI exceeds $1 million. That will result in a tax as high of 43.4% when including the 3.8% net investment income tax imposed on investment income of middle- to higher-income taxpayers. The proposal suggests making the retroactive rate change effective for gains and income recognized after April 28, 2021. Example: Under the proposal, a taxpayer with $900,000 of wage income and $200,000 of long-term capital gain income would have $100,000 of capital income taxed at the current preferential tax rate and $100,000 taxed at ordinary income tax rates. Top Individual Tax Rate The Green Book proposes an increase in the top individual rate from the current 37% to 39.6%. This will return the top rate to where it was before the passage of the Tax Cuts and Jobs Act (TCJA). Note: under the TCJA, the 37% rate applies only through 2025. The table below shows the taxable income threshold for the top tax rate in 2021, and only income above that level is taxed at the top tax rate. Tax rate brackets are currently adjusted annually for inflation; the proposed 2022 thresholds will be inflation-indexed in future years. TAXABLE INCOME THRESHOLD* FOR THE TOP INDIVIDUAL TAX BRACKET Filing Status 2021 Proposed 2022 Single 523,600 452,700 Head of Household 523,600 481,000 Married Filing Joint 628,300 509,300 Married Filing Separate 314,150 254,650 *top rate applies to taxable income above these amounts Pass-Through Income Subject to 3.8% NIIT or SECA Tax Under current law, S-corporation shareholders and limited partners are not subject to self-employment tax on pass-through income. However, the Green Book proposes changing that for high-income taxpayers with adjusted gross income of more than $400,000. The proposal would ensure that all trade or business income of high-income taxpayers is subject to the 3.8 percent Medicare tax, either through the net investment income tax (NIIT) or the Self-Employment Contributions Act (SECA) tax. The NIIT base would be expanded to include income and gain from trades or businesses not otherwise subject to employment taxes, and the 3.8% NIIT tax would be redirected to the Hospital Insurance Trust Fund. The 3.8% SECA tax would apply to the ordinary business income of high-income non-passive S corporation owners (those whose AGI is greater than $400,000). 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 this income exceeds certain threshold amounts. The exemptions from SECA tax provided under current law for certain types of S corporation income (e.g., rents, dividends and capital gains) would continue to apply to these types of income. Material participation standards would apply to individuals who participate in a business in which they have a direct or indirect ownership interest. Taxpayers are usually considered to materially participate in a business if they are involved in it in a regular, continuous and substantial way. Often, this means they work for the business for at least 500 hours per year. The statutory exception to SECA tax for limited partners would not exempt a limited partner from SECA tax if the limited partner otherwise materially participated. To determine the amount of partnership income and S corporation income that would be subject to SECA tax under the proposal, the taxpayer would sum: (a) ordinary business income derived from S corporations for which the owner materially participates in the trade or business and (b) ordinary business income derived from either limited partnership interests or interests in LLCs that are classified as partnerships to the extent a limited partner or LLC member materially participates in its partnership’s or LLC’s trade or business (this sum is referred to as “potential SECA income”). Beginning in 2022, the additional income that would be subject to SECA tax would be the lesser of: (i) the potential SECA income or (ii) the excess over $400,000 of the sum of the potential SECA income, wage income subject to FICA under current law, and 92.35 percent of self-employment income subject to SECA tax under current law. The $400,000 threshold amount would not be indexed for inflation. Limit Nonrecognition of Like-Kind Exchanges The Tax Cuts and Jobs Act did away with all Sec 1031 “like-kind” exchanges (tax-deferred exchanges) except those related to real property. The Green Book proposes going a step further and would limit eligibility for Section 1031 exchanges by permitting each taxpayer to defer only up to $500,000 ($1 million for married taxpayers filing jointly) of real property gain each year. Any gain more than the $500,000 ($1 million) limit would be recognized as taxable income in the taxable year in which the taxpayer transfers the real property. These changes would require REITs to distribute gains on property sales that could otherwise be deferred under Section 1031. Caution: The proposal would apply these rules to exchanges “completed after taxable years beginning after December 31, 2021. However, deferred ex-changes may be completed in 2022, but the property given up may have been transferred in 2021, and thus may be taxable in 2021. Transfer of Appreciated Property by Gift or Death