President Biden’s budget contains a number of tax proposals as detailed in an article by the AICPA. This is a short summary of some of the more important changes, and more details are available in the article.
- Increase the top marginal tax rate from 37% to 39.6% for taxable income over $509,300 for married filing joint taxpayers and $452,700 for single taxpayers
- Increase the capital gains rate from 20% to 37% for individuals with an AGI over $1 million
- Impose capital gain tax on property transferred by gift or death
- Impose self-employment and net investment income tax on all passthrough business income
- Limit like-kind exchange deferral gains to $500,000 per single taxpayer per year ($1 million per year for married filing jointly taxpayers)
- Expand a number of credits for lower income taxpayers including the premium assistance, earned income, and child and dependent care tax credits
- Increase the corporate income tax rate from 21% to 28%
- Revise GILTI and FDII international tax provisions
- Replace international tax rules under BEAT with a new SHIELD rule
- Impose 15% minimum tax on book earnings of large corporations
- Provide tax incentives for keeping US jobs and disincentives for moving US jobs overseas
- Various housing and infrastructure credit changes
- Various clean energy tax incentives
The two items that most warrant comment in my opinion are the changes to the taxation of passthrough business income and imposition of capital gain tax on property transferred by gift or at death.
Tax practitioners have realized that S-corporations are more advantageous for small businesses in a number of situations relative to partnerships and proprietorships since both the self-employment tax and the net investment income tax are potentially lower for S-corporations. This advantage may be eliminated if the budget proposal is adopted.
It may be attractive for revenue enhancement to impose capital gain tax on property transfers at death. However, as a practical matter, finding the basis of assets passed along by deceased taxpayers is often an exercise in frustration. If a decedent does not clearly identify the basis of each asset transferred and provide supporting documentation prior to death, the heirs may inherit a substantial tax bill. Furthermore, gifts of appreciated property will potentially incur capital gain tax by the donor upon transfer rather than by the recipient upon disposition.
I suppose spending $6 trillion will need to be paid for eventually.