What President Biden’s Budget Proposal Means For Your Income Taxes

Date June 21, 2021
Article Authors
HBK CPAs & Consultants

The long-awaited proposed budget from President Biden has been revealed and includes, among other things, an increase to the capital gains tax and changes to the corporate tax rate. This proposed 2022 fiscal year budget, nicknamed the “Green Book” would call for an increase in the top capital gains rate to 39.6%.

Capital gains tax is imposed on the profits earned from the disposition of various assets such as real estate, passive investments, and stock, to name a few. Capital gains are calculated as the difference between the cost basis and sale price with the term dependent on how long the asset has been held before sale. Currently, assets generating short term capital gains are taxed at the taxpayer’s ordinary income level, while long term capital gains are taxed at preferential rates of 0%, 15% and 20%. The proposed budget seeks to remove the preferential long term capital gains rates and impose tax on these transactions subject to the ordinary gains tax for certain taxpayers.

Under the proposed language, the capital gains rate would mirror ordinary income rates for Taxpayers who’s Adjusted Gross Income (AGI) exceeds $1 million. Further, the budget would increase the top marginal tax rate from 37% to 39.6%. For taxpayers subject to the Net Investment Income Tax (“NIIT”), this would mean some types of income could be taxed as high as 43.4% after the additional 3.8% NIIT is applied. Under current law, long term capital gains and qualified dividends are taxed at preferential rates that generally do not exceed 23.8% (with some exceptions). This creates a significant rate differential between income taxed at these rates, and income, such as wages and retirement income, that is taxed at a high ordinary income tax rate of 37%.

To further demonstrate how this could impact a taxpayer’s investment income, a taxpayer with $1,000,000 in long term capital gains under the current rates would pay approximately $238,000 in federal taxes on such gains. Under the proposed changes these long term gains would have federal tax totaling $434,000 for high earning taxpayers. This results in an increase of $196,000 in tax.

President Biden’s proposal also seeks to increase the corporate tax rate from 21% to 28%. While this seems like a huge increase, it is still lower than the 35% rate that was in place prior to the Tax Cuts and Jobs Act. Even if the 28% rate passes, income earned in a C corporation would be less than the rate of earnings taxed to the owners of passthrough entities, which are currently taxed at the owner’s marginal tax rate. President Biden’s plan also seeks to impose a 15% minimum tax on book income of certain large corporations, though it is not clear what rules would govern the calculation of book income.

In addition to the proposed changes above, President Biden’s proposal would also prioritize clean energy by eliminating certain tax preference items for fossil fuels and extending and enhancing incentives in the renewable and alternative energy space, which may or may not have a direct impact to your investments. There is also a provision that seeks to eliminate basis step up at death and accelerate capital gains on assets that are inherited.

Tax Laws are always subject to change and proper planning can help to minimize and mitigate the impact of some of these changes. At HBK we stive to keep you informed of changes as they happen. If you would like to discuss how these proposed changes may impact your situation, please contact your HBK Tax advisor.

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