US Tax - Biden Administration Tax Update

Ed Rieu, our US Tax Specialist, discusses the recent US tax announcements:

'I write here to update that on 28 May 2021 the Biden administration issued an explanation of the tax provisions to its budget for fiscal year 2022. This budget and the Biden Administration's explanation (the so-called Green Book) contain a few surprises over prior proposals. Noteworthy highlights include:

Individuals

1)    Increase the top individual rate to 39.6% on income over $509,300 for married couples filing a joint return, $254,650 for married filing separate, and $452,700 for single taxpayers;

2)    The favourable rates for long terms capital gain (12 month holding period), will be removed on adjusted gross income in excess of $1,000,000.  Surprisingly, the proposal calls for the effective date for this change to be retroactive to April 2021 (presumably because this is when the proposals were first introduced);

3)    Another striking change is the proposal to tax the appreciation in assets transferred by gift or at death. What was previously proposed as only a disallowance of a basis step up on death. The proposal here to actually tax the appreciation both at death or as a gift is markedly different. The gain is measured by looking to the value at the date of gift or death less the donor/decedent's basis in the asset. A loss in an asset may be used for decedents, but not donors, against capital gains. Gains will also be realised and taxed on transfers to trusts (other than grantor trusts), partnerships or other non-corporate entities. Certain exclusions would apply including the $250,000 exclusion for gain on a principal residence and a $1,000,000 lifetime gain exclusion per person. Certain other exceptions also may apply such as transfers to charity and transfers of family businesses. While these proposals will be effective for tax years beginning after 31 December 2021, some consideration is strongly advised to be ready for any change particularly for those considering gifting assets into a vehicle like a family limited partnership;

4)    The proposals also call for a change to the 3.8% net investment income tax to include trade or business income earned through a partnership or limited liability company (usually treated as a partnership for US tax purposes) – Effective 1 January 2022;

5)    The capital gain treatment for carried interests structured as partnership interests held for more than 3 years would be eliminated where the partner's total income from all sources exceeds $400,000 and also would require partners to pay self-employment income tax on such interests - Effective 1 January 2022;

6)    Repeals deferral from gain in excess of $500,000 per person - Effective 1 January 2022;

7)    There are other proposals on tax credits such as increasing employer provided child care credit, extending child tax credit beyond 2025, and the earned income tax credit among others; 

Corporations

8)    Increase the rate from 21% to 28% with effect for tax years beginning after 31 December 2021.  Where a company is on a fiscal year, the Green Book notes the increase would be applied as 21% plus 7% time the portion of the taxable year occurring in 2022;

9)    The proposed rules would require the global intangible low tax income regime to be applied on a country by country basis – much as expected;

There are of course a host of other proposed changes, mostly tax increases, that are beyond the scope of what may be of mainstream interest. It is important to note that the above are only proposals that will begin to go through the congressional legislative process and many of these will be subject to negotiation and compromise. The most likely chance for much of the increases noted above to be passed is through a budget reconciliation process, which will take place at some time during the fall. The reason this process will increase the likelihood of passage is because votes in both houses only require a simple majority.'

Should you wish to discuss anything in more detail please contact Ed Rieu, US Tax Specialist. Alternatively, you can complete our online contact form, email us at enquiries@sopherco.com or call 020 8207 0602.