This article represents Windes’ analysis of the Biden Administration’s tax proposals provided in the “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals” document prepared by the Department of the Treasury (Treasury), released on May 28, 2021. This document, better known as the Green Book, outlines the Administration’s proposals in greater detail than seen before, including information on effective dates, Treasury revenue estimates, and design choices.
The Fiscal Year (FY) 2022 Green Book represents the Biden Administration’s current tax priorities, signaling to Congress the administration’s position that these tax initiatives are of great importance to his current legislative agenda. With Congress gearing up to do major tax and infrastructure legislation changes later this year, the Green Book proposals are likely to be central to those discussions.
The following analysis includes observations on what Biden’s proposals might mean for taxpayers, observations on what the proposals include and exclude.
President Biden’s tax plan was built around raising the corporate tax rate, raising taxes on the foreign earnings of U.S. multinationals, and raising taxes on wealthy individuals (including increases in the ordinary and capital gains tax rates). The plan proposes to redirect that tax revenue to other priorities, such as infrastructure spending and support for middle and low-income earners.
This Plan proposes tax law changes that could significantly impact high-net-worth individuals. Because high-net-worth individuals often utilize charitable giving to lower their tax liability, these changes could indirectly impact the charitable sector.
Below are 7 ways Biden’s tax plan could indirectly impact nonprofits.
1. Lifetime Gift and Estate Tax Exemptions
Current Law: The 2021 estate and gift tax exemptions are currently $11.7 million per taxpayer, with asset values in excess of that amount taxed at 40% before passing to heirs.
Biden’s Proposal: The estate tax exemption will be reduced to $3.5 million per taxpayer and the lifetime gift tax exemption reduces to $1 million. Amounts transferred in excess of these amounts will be taxed at 45%.
Nonprofit Impact: Wealthy donors might look to charitable strategies to reduce estate tax. Charitable strategies could include creating private foundations, setting up charitable remainder trusts, and establishing bequests to nonprofit organizations.
2. Property Step-Up in Basis
Current Law: The federal income tax basis of an inherited asset is the stepped-up fair market value as of the decedent’s date of death.
Biden’s Proposal: Either the current step-up basis of the inherited assets will be eliminated, or death will be treated as a realization event and the unrealized appreciation in the decedent’s gross estate will be taxed at the applicable long-term capital gain rate.
Nonprofit Impact: Wealthy taxpayers might bequest property to nonprofit organizations to reduce their estate tax or to avoid capital gains tax.
3. Corporate Tax Rate
Current Law: Corporations are subject to a single flat tax rate of 21%.
Biden’s Proposal: Increase the statutory corporate tax rate from 21% to 28% for tax years after December 31, 2021.
Nonprofit Impact: This rate would apply to unrelated business taxable income earned by tax-exempt corporations and would also be the rate for the excise tax under Section 4960 on compensation over $1 million paid by tax-exempt employers to certain covered employees. This proposal would be effective for tax years beginning after December 31, 2021. For fiscal year corporations with a tax year that straddles January 1, 2022 (i.e., a tax year beginning in 2021 and ending in 2022), the proposal would apply a tax rate equal to (i) 21% plus (ii) 7% multiplied by the portion of the tax year that occurs in 2022.
House ways and means Committee Proposal: On September 13, 2021, the House ways and means Committee announced that the Committee will continue consideration of legislative proposals under the budget reconciliation instructions. The measures will level the playing field by cutting taxes for our nation’s smallest businesses and bringing the corporate tax rate to 26.5%.
The Section 138101 provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18%on the first $400,000 of income; 21% on income up to $5 million, and a rate of 26.5% on income thereafter. The benefit of the graduated rate phases out for corporations making more than $10,000,000. Personal services corporations are not eligible for graduated rates. The domestic dividends received deduction is adjusted to hold constant the tax on domestic corporate-to-corporate dividends.
4. Individual Income Tax Rate
Current Law: The top marginal tax rate for the individual income tax is 37%. For taxable years beginning after December 31, 2025, the top marginal tax rate for the individual income tax is 39.6%.
Biden’s Proposal: Increase the top marginal individual income tax rate to 39.6%. This rate would be applied to taxable income in excess of the 2017 top bracket threshold, adjusted for inflation.
Nonprofit Impact: High earners might increase their charitable donations to reduce their taxable income.
5. Capital Gains Tax Rate
Current Law: Most realized long-term capital gains and qualified dividends are taxed at graduated rates under the individual income tax, with 20% generally being the highest rate.
Biden’s Proposal: Long-term capital gains and qualified dividends of taxpayers with AGI of more than $1 million would be taxed at ordinary income tax rates, with 37% generally being the highest rate but only to the extent that the taxpayer’s income exceeds $1 million. The effective date would be April 28, 2021, eliminating the opportunity to sell the appreciated property in 2021.
Nonprofit Impact: Investors might donate long-term investment property to limit capital gains tax.
6. 1031 Tax Free Exchanges
Current Law: Allows the swap of one investment property for another that allows capital gains taxes to be deferred. Frequently used with real estate investments.
Biden’s Proposal: Impose a $500,000 per person limit ($1 million in the case of married couples filing a joint return) on the aggregate amount of Section 1031 like-kind exchange gain deferral for each year, with any excess recognized as a current capital gain.
Nonprofit Impact: Investors might donate investment property that surpasses the $500,000 limit ($1 million in the case of married couples filing a joint return) to reduce capital gains tax.
7. Treat transfers of appreciated property by gift or on death as realization events
Current Law: Under current law, neither a transfer at death nor a gift during life is a realization event subject to federal income tax (although such transfers may be subject to federal gift, estate, and/or generation-skipping transfer tax). Section 1014 provides that the basis of property acquired from a decedent generally is the fair market value of the property on the decedent’s date of death (often referred to as a “stepped-up basis”). Section 1015 provides that the basis of property received by gift is generally the same as that of the donor (often referred to as a “carry-over basis”).
Biden’s Proposal: The administration’s FY 2022 proposal would treat a transfer (as defined under the gift and estate tax rules) of an appreciated asset, either at death or by gift during life, as an income tax realization event. Gain, equal to the excess of the fair market value of the asset over the donor’s basis on the date of death or gift, would be taxable income to the decedent or the donor and would be reported on the estate or gift tax return or a separate capital gain return. Capital losses and carry-forwards from transfers at death would be allowed to offset capital gains recognized at death and up to $3,000 of ordinary income on the decedent’s final income tax return. Taxes on gains deemed realized at death would be deductible on the decedent’s estate tax return.
Transfers to certain persons or transfers of certain property would not result in the deemed realization of gain. For example, no gain would be realized on a transfer at death to a U.S. spouse; the surviving spouse would own the property with a carry-over basis and gain would only be recognized when the spouse subsequently disposed of the assets or died. In addition, no gain would be generated on the transfer of appreciated property to charity. However, in the case of a transfer of appreciated assets to a charitable split-interest trust (e.g., charitable remainder trusts and charitable lead trusts), only the charity’s share of the gain would be excluded.
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