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

Date June 21, 2021
Authors HBK CPAs & Consultants
Categories

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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Qualified Opportunity Zone Funds – UPDATE

Date March 11, 2019
Authors HBK CPAs & Consultants

Of the many changes that came from the Tax Cuts and Jobs Act (“The TCJA”), Qualified Opportunity Zones (“QOZ”) have been one of the most talked about provisions as the 2018 tax season progresses. As a recap, through QOZs, taxpayers may elect to temporarily defer the tax to be paid on capital gains until the 2026 tax year that are invested in a Qualified Opportunity Fund (“QOF”) within 180 days of gain recognition, the QOF must invest 90 percent of its capital in QOZ Property. Taxpayers who hold investments in a QOF for at least five years may exclude 10 percent of the original deferred gain, and investments held for more than seven years qualify for an additional five percent exclusion of their original deferred gain. In what could be the most attractive feature of the new law, after 10 years, post-acquisition appreciation is 100 percent excluded from taxable income for federal tax purposes. Many states are still evaluating how they are going to deal with the new QOZ rules.

Click here to read the full update.

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Proposed Rules on Qualified Opportunity Zones

Date October 22, 2018
Authors HBK CPAs & Consultants
Categories
The Internal Revenue Service has just released its first installment of the much anticipated proposed rules relating to Qualified Opportunity Zones (QOZ) that will help investors use a new tax incentive created by 2017 Tax Cuts and Jobs Act. QOZs are underdeveloped areas that have been certified by the federal government allowing for special tax breaks to promote investment in these nearly 9,000 U.S. regions. These proposed rules would govern investments made in QOZs to provide various tax advantages to investors in two ways. First, capital gains placed in certified opportunities zone funds will be deferred and not be taxed through the 2026 tax year, or until the time in which the investment is sold, whichever occurs first. Second, gains from these QOZ investments are “permanently” shielded from income taxes if such investments are held for at least 10 years. Otherwise, gains from the initial investments in qualified opportunity funds will be discounted by up to 15% if held for 7 years and 10% for 5 years. The proposed rules state that any type of capital gains including from marketable securities are eligible for this preferential tax deferral. Additionally, the opportunity to invest in these qualified opportunity funds is available to individual taxpayers, business entities, REITs and estates and trusts. The proposed rules also clarify how to calculate substantial improvements in the property. and The rules state that taxpayers do not need to include the value of the land for the purpose of calculating how much the law requires they spend on qualifying renovations, or refurbishments of the property. For example, if a taxpayer paid $10 million for a warehouse and land, with the building being valued at $500,000, the fund must spend at least what the building is valued, or $500,000 as opposed to the total $10 million purchase price, in renovations. This exclusion of land value for the purposes of determining substantial improvements made within a QOZ applies to both tangible property, such as equipment, and realty. This will create an increased importance as to the qualified valuations performed on property located in within the boundaries of a QOZ. Additionally, investors will have 180 days from the sale of stock or businesses to place the proceeds from those sales in opportunity funds to qualify for these tax breaks. The Internal Revenue Service (IRS) also stated in these proposed rules that funds have 30 months from when the money is placed in them to perform the required renovations. The Treasury also created a 70-30 rule that measures whether a given business counts as having “substantially all” of its assets in an opportunity zone. Under that rule, as long as 70% of a business’s tangible property is in a zone, the business doesn’t lose its ability to qualify for the tax break. In the proposed regulations, Treasury does ask for input on a couple of technical questions, such as what happens if a business abandons property in an opportunity zone and how to treat movable property, such as vehicles, that may possibly spend part of their time outside the QOZ. While these rules have provided some of the answers to questions on the minds of taxpayers, some additional items still remain unanswered.
  • Will grace periods will be permitted related to the proceeds of large scale asset sales?
  • Will the emerging cannabis and gambling industries will be permitted benefit from these tax advantages?
  • What benefits will be able to be yielded by lessees of QOZ properties?
  • Will partnerships and partners need to invest as a singular unit or if partners are permitted to invest their portions of asset sales individually into their own qualified opportunity zones?
The Treasury is expected to announce additional guidance on opportunities zones before the end of the year and are currently under review by the IRS. In the meantime, taxpayers can rely on the proposed regulations while the IRS solicits comments and considers changes in the final version. Since this is a developing area, HBK will continue to provide updates on the QOZ issue as it becomes available. Committing capital to a QOF is an option with many variables and it is a decision investors/taxpayers should weigh carefully. If there are any questions on this, please contact your local HBK team representative to discuss further. For more details or other related questions, please contact a member of the HBK Tax Advisory Group.

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