On May 28, President Biden released a $ 6 trillion budget proposal, the first of his presidency, which calls for a dramatic increase in federal government spending levels, funded in part by tax increases on the federal government. companies and high incomes.

The over 1,000-page budget proposal estimates $ 4.17 trillion in revenues with just over $ 6 trillion in spending, resulting in an annual budget deficit of $ 1.83 trillion for fiscal year 2022. Overall, the budget shows annual deficits of $ 1.3 trillion or more for each year from 2022 to 2031. In addition, the budget proposal estimates that GDP growth will increase to around 2% throughout the decade, while debt will reach 117% of GDP by the end of fiscal 2031.

It appears that most of the new spending would go to the U.S. Jobs Plan (e.g., transportation, water and broadband connectivity infrastructure, and clean energy and climate change spending) and the U.S. plan for families (p. – and middle-income families, paid family and medical vacations, and various tax credits for families and workers) that Biden announced earlier in the year, as well as the sustainability various provisions of the American Rescue Plan.

The tax and expenditure part of the 2022 budget does not include any specific changes in pension policy, which in some ways is good news because, for example, it does not include proposals for retirement. Biden’s campaign to equalize savings incentives in DC plans or to impose a financial transaction tax.

The budget includes several proposed tax increases to help pay for all of the proposed new spending programs. Over the 2022-2031 period, the Biden administration is calling for more than $ 2 trillion in corporate tax reforms, $ 754 billion in new revenue from higher income tax increases and elimination loopholes, and $ 717 billion for improved tax compliance and administration. Proposals that may be of particular interest to the advisor and plan sponsor community are discussed below.

Tax treatment of capital gains

The Fiscal Year 2022 budget calls for taxing long-term capital gains and eligible dividends for taxpayers with AGIs over $ 1 million at regular tax rates, with 37% generally being the top rate. higher (40.8%, including tax on net investment income), but only to the extent that the taxpayer’s income exceeds $ 1 million ($ 500,000 for married separately), indexed to the inflation after 2022. This would represent an increase from the current tax rate of 23.8% on capital gains – the marginal rate of 20% plus a net rate of 3.8% investment tax that was imposed to help pay for President Obama’s Medicare expansion.

Notably, the proposal would be effective for gains to be recognized after the announcement date, which in this case was April 28, 2021, when the Biden administration first announced the proposal.

In addition, the deceased donor or owner of a valued asset would realize a capital gain upon transfer. For a donor, the amount of the gain realized would be the excess of the fair market value of the asset at the date of the donation over the donor’s basis in that asset. For a deceased, the amount of the gain would be the excess of the fair market value of the asset at the date of the deceased’s death over the deceased’s basis in that asset. This gain would be taxable income for the deceased on the federal gift or estate tax return or on a separate capital gains return.

Increase the highest tax rate

The FY2022 Budget also aims to “get high-income Americans to pay the taxes they owe under the law – ending the unfair enforcement system that collects nearly all taxes owed on wages, while regularly collecting a smaller share of corporate income and capital. “

As such, the proposal would increase the top marginal personal income tax rate to 39.6%, which would be applied to taxable income in excess of the 2017 upper bracket, adjusted for inflation. Essentially, that would bring the top marginal tax to 43.4% for those earning over $ 1 million, given the current 3.8% surtax. In the 2022 tax year, the top marginal tax rate would apply to taxable income greater than $ 509,300 for married persons filing a joint return, $ 452,700 for unmarried persons (other than surviving spouses), $ 481,000 for heads of household filers and $ 254,650 for married persons producing a separate return.

Increase the corporate tax rate

On corporate tax code restructuring “to ensure wealthy corporations pay their fair share and invest here at home,” budget calls for raising corporate tax rate to 28% and a global minimum tax. The plan also includes measures to prevent business reversals and relocations, as well as a new minimum tax on corporate accounting income.

Interest

With respect to “loopholes”, the proposal would generally tax as ordinary income the share of a partner’s income on an “investment services company interest” (ISPI) in an investment company, regardless of the size. nature of the income at the partnership level, if the partner’s taxable income (from all sources) exceeds $ 400,000.

Therefore, this income would not qualify for the reduced rates that apply to long-term capital gains. In addition, the proposal would require partners in such investment partnerships to pay self-employment taxes on this income. To prevent income from labor services from being taxed at ordinary income rates, the proposal assumes that the gain recognized on the sale of an ISPI would generally be taxed as ordinary income, and not as a capital gain, if the partner is above the income threshold.

Disclosure of information and enforcement

In the area of ​​improving compliance, the proposal would create a comprehensive reporting regime on financial accounts. As such, financial institutions reported financial account data in an information return. The annual report will show gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.

This requirement would apply to all business and personal accounts of financial institutions, including bank, loan and investment accounts, with the exception of accounts below. de minimis gross cash flow threshold of $ 600 or fair market value of $ 600.

The proposal would also expand the scope of disclosure by brokers with respect to cryptocurrency assets to include reports on certain beneficial owners of entities holding accounts with the broker. According to the Treasury Department, this would allow the United States to automatically share this information with the appropriate partner jurisdictions. The proposal, if passed and combined with existing law, would require a broker to report gross proceeds and any other information the Secretary of the Treasury may require with respect to sales of crypto assets to the to customers, and in the case of some passive entities, their significant foreign owners.

And after?

The president’s budget submission is generally seen as the opening salvo of the annual fiscal policy debates between Congress and the president.

In most cases – especially when Congress and the President are divided – a President’s budget proposal is immediately declared “dead in arrival,” but as is not the case with the current rule of thumb. single party, some aspects of the president’s budget may have legs. In fact, many infrastructure proposals are already being negotiated between the Biden administration and members of Congress.

Yet with the margins particularly tight in the Senate, it will likely be difficult to enact any of the various tax increases.

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