President Biden released a $ 6 trillion budget on May 28, the first of his presidency, calling for a dramatic increase in federal government spending, funded in part by corporate and high income tax hikes.
The budget proposal – which is more than 1,000 pages long – estimates revenue of $ 4.17 trillion on spending just over $ 6 trillion, resulting in an annual budget deficit of $ 1.83 trillion for the fiscal year 2022 leads. Overall, the budget has annual deficits of $ 1.3 trillion or. to more for each year from 2022 to 2031. In addition, the budget proposal estimates an increase in GDP growth of around 2% over the decade, while debt would rise to 117% of GDP by the end of FY 2031.
It appears that most of the new spending is going to the American employment plan (e.g. transportation, water and broadband infrastructure, and spending on clean energy and climate change) and the American family plan (z- and middle-income families, paid families and Sick leave and various tax breaks for families and employees) that Biden announced earlier this year, along with the establishment of various provisions of the American bailout plan.
The 2022 tax and spending parts do not contain any specific changes in pension policy, which is good news in some ways, given that they include Biden’s campaign proposals to align savings incentives in DC plans or to impose a financial transaction tax.
The budget includes several proposed tax increases to help fund all proposed new spending programs. Between 2022-2031, the Biden government is calling for more than $ 2 trillion in corporate tax reforms, $ 754 billion in new revenue from high-income tax hikes and closing loopholes, and $ 717 billion in improved tax compliance and administration . Suggestions that may be of particular interest to the consultant and plan sponsor community are discussed below.
Tax treatment of capital gains
The 2022 fiscal year budget provides for the taxation of long-term capital gains and qualifying dividends for taxpayers with an AGI greater than $ 1 million at normal income tax rates, with 37% generally being the highest (40.8% including net investment tax) but only to the extent that the taxpayer’s income exceeds $ 1 million ($ 500,000 for separate marriages) indexed for post-2022 inflation. This would be an increase over the current capital gains tax rate of 23.8% – the marginal tax rate of 20% plus 3.8% net investment tax imposed to fund President Obama’s Medicare expansion.
In particular, the proposal would be effective for profits to be recorded after the date of the announcement, in this case on April 28, 2021 when the Biden government first announced the proposal.
In addition, the donor or deceased owner of an estimated asset would make a capital gain at the time of transfer. For a donor, realized gain would be the amount that exceeds the market value of the asset on the day of the gift above the donor’s base in that asset. For a testator, the profit amount would be the excess of the fair value of the asset on the date of death of the testator over the base of the testator in that asset. This profit would be the deceased’s taxable income in the federal gift or inheritance tax return or in a separate capital gains return.
Increase the top tax rate
The 2022 fiscal year budget is also designed to ensure “that high-income Americans pay the taxes they owe by law, ending the unfair enforcement system that collects almost all taxes on wages, while regularly a smaller percentage business and capital income is confiscated. ”
Therefore, the proposal would increase the highest individual income tax rate to 39.6%, which would be applied to taxable income above the 2017 upper threshold, adjusted for inflation. Essentially, this would increase the top tax to 43.4% for those making over $ 1 million, when factoring in the existing 3.8% surcharge. In tax year 2022, the upper marginal tax rate on taxable income would be over $ 509,300 for married individuals filing a joint tax return, $ 452,700 for unmarried individuals (excluding surviving spouses), $ 481,000 for heads of household, and $ 254,650 for married individuals filing a separate return .
Increase in the corporate tax rate
In the area of reorganizing the corporate tax law “to ensure that wealthy companies pay their fair share and invest here at home”, the budget calls for an increase in the corporate tax rate to 28% and a worldwide minimum tax. The plan also includes measures to prevent corporate inversions and offshoring, as well as a new minimum tax on corporate book income.
Carried interest
Regarding “closing loopholes”, regardless of the type of partnership-level income, the proposal would generally tax a partner’s share of the income of an “Investment Services Partnership Interest” (ISPI) in an investment company as ordinary income if the taxpayer is taxable Partner income (from all sources) exceeds $ 400,000.
Accordingly, such income would not be eligible for the reduced rates applicable to long-term capital gains. In addition, the proposal would require the partners of such investment companies to pay self-employment taxes on this income. To prevent income from labor services from escaping taxation at ordinary income rates, the proposal assumes that the gain recognized from the sale of an ISPI would generally be taxed as ordinary income rather than capital gain if the partner exceeded the income threshold.
Information reporting and enforcement
In the area of improving compliance, the proposal would create a comprehensive system for reporting financial account information. As such, financial institutions would report financial account data in an informational feedback. The annual return shows gross inflows and outflows with a breakdown by cash, transactions with a foreign account and transfers to and from another account of the same owner.
This requirement would apply to all business and personal accounts of financial institutions, including bank, credit and investment accounts, with the exception of accounts below a de minimis $ 600 or fair market value of $ 600.
The proposal would also broaden the scope of information reporting by brokers regarding assets in cryptocurrencies to include reporting of certain beneficial owners of companies holding accounts with the broker. According to the Treasury Department, this would enable the US to automatically share such information with the appropriate partner jurisdictions. The proposal, if adopted and combined with applicable law, would require a broker to report gross proceeds and other information required by the Treasury Secretary in relation to the sale of crypto assets in relation to clients, and in the case of certain passive companies, their substantial foreign owners.
What’s next?
The presentation of the President’s budget is generally seen as the opening salvo in the annual budget debates between Congress and the President.
In most cases – especially when Congress and President are divided – the president’s draft budget is immediately declared “dead on arrival”, but since this is not the case under the current one-party rule, certain aspects of the presidential budget can have a leg up. In fact, many infrastructure proposals are already being negotiated between the Biden administration and congressmen.
Nevertheless, given the particularly tight margins in the Senate, it will be difficult to enforce the various tax increases.
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