In early June, the U.S. Treasury Department released its general explanations of proposed changes to the U.S. tax code.
Please note, the following items have only been proposed. In order to become law, they must pass through both the U.S. House of Representatives and the U.S. Senate.
According to the Treasury Department, President Joe Biden’s proposed tax code changes are generally in line with the items he discussed during his campaign. They include provisions targeting high-income individuals and extending certain tax benefits to low- and middle-income taxpayers, housing and infrastructure, clean energy incentives, and reforms for corporate and international taxation, among others. The President’s tax code proposal generally assumes temporary provisions provided by the Tax Cuts and Jobs Act (TJCA), which are available through 2025, will expire.
Proposed tax code changes for high-income taxpayers would increase the top marginal income tax rate from the current 37 percent to 39.6 percent for tax years beginning after 2021.
In addition, long-term capital gains and qualified dividends would be taxed at ordinary income rates rather than capital gains rates to the extent the taxpayer’s income exceeds $1 million. The threshold amount would be indexed for inflation after 2022.
The proposal would eliminate a step-up in basis by a taxpayer of appreciated property upon death or received as a gift. Instead, the deceased owner or donor of the appreciated asset would realize a capital gain at the time of the transfer. Gain on unrealized appreciation would also be recognized by a trust, partnership, or other non-corporate entity that is the owner of property in certain circumstances. The proposal would allow certain exclusions for tangible personal property and a $1 million per person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death.
Several changes would also apply to net investment income tax (NIIT) and self-employment taxes for certain high-income individuals. Most importantly, the proposal would ensure all pass-through trade or business income is subject to the taxes.
Families and Workers
President Biden proposes extending or making permanent several provisions provided to help families and workers during the COVID-19 pandemic. These include:
- Extending through 2025 changes made to the child tax credit including the advance refund of 50 percent of the credit.
- Making permanent the expansion of the earned income tax credit for workers without qualifying children.
- Making permanent changes to the child and dependent care credit.
- Making permanent the expansion of the premium tax credit for health insurance.
- The increase in the employer-provided child care tax credit for businesses.
Housing and Infrastructure
The Biden administration is proposing several changes to encourage the building of affordable homes, as well as improvements to America’s infrastructure. The proposals include expanding the low-income housing credit by creating an additional type of Housing Credit Dollar Amount (HCDA) for projects in difficult to develop areas. The new markets tax credit would also be permanent with allocations indexed for inflation after 2026.
Another proposed change would create a new tax credit to support new construction for sale, substantial rehabilitation for sale and substantial rehabilitation for existing homeowners in distressed neighborhoods. The Neighborhood Homes Investment Credit (NHIC) would be available for constructed or rehabilitated residences that are a single-family home (including homes with up to four dwelling units), a condominium or a residence in a housing cooperative.
The budget proposal would create a new federally subsidized state and local bond to renovate aging schools. The qualified school construction bonds (QSCBs) would be similar to the Build American Bonds available in 2009 and 2010 with interest on the bonds taxable and the bondholder’s interest would take the form of a tax credit or receive cash from the bond issuer. The proposal would also expand the category of private activity bonds for highway and freight transfer facilities.
Prioritize Clean Energy
President Biden proposes multiple changes to prioritize clean energy over fossil fuels. This includes extending and enhancing renewable electricity production credit and a production credit for electricity generation from eligible existing nuclear power facilities. Enhancements would also apply to existing clean energy incentives such as the nonbusiness energy credit under Code Sec. 25C, the credit for construction of energy efficient homes, the carbon oxide sequestration credit, the credit electric vehicle charging stations and the deduction for energy efficient commercial building property under Code Sec. 179D.
New tax credits would also be provided for:
- Investing in qualifying electric power transmission property.
- Electricity produced from eligible existing nuclear power facilities.
- Qualifying advanced energy manufacturing.
- Medium- and heavy-duty zero emission vehicles.
- Production of sustainable aviation fuel.
- Low-carbon hydrogen production using zero-carbon emissions electricity (renewables or nuclear).
- Qualified disaster mitigation expenditures.
The proposal would also repeal several credits, deductions and other special provisions targeted towards encouraging oil, gas and coal production such as:
- The tax credit for enhanced oil recovery (EOR) costs.
- Tax credit for oil and gas produced from marginal wells.
- The expensing of intangible drilling costs, as well as exploration and developmental costs.
- The use of percentage depletion with respect to oil and gas wells and hard mineral fossil fuels, and capital gains treatment for royalties.
Reforming Corporate Taxation
For corporations, the federal income tax rate is proposed to increase from 21 percent to 28 percent. The change would apply to tax years beginning after 2021, but a blended rate would apply for tax years beginning in 2021.
A 15 percent minimum tax on worldwide book income for corporate income of more than $2 billion is also proposed.
Among the proposals to reform the U.S. international tax system are provisions that would:
- Revise the global minimum tax regime with respect to controlled foreign corporation (CFC) earnings by eliminating the exemption for qualified business asset income (QBAI) and reducing a corporate U.S. shareholder’s Code Sec. 250 deduction for the global minimum tax inclusion (GILTI) to 25 percent.
- Reform the taxation of foreign fossil fuel income by repealing the exemption from GILTI for foreign oil and gas extraction income (FOGEI).
- Repeal the deduction for foreign-derived intangible income (FDII).
- Replace the Base Erosion Anti-Abuse Tax (BEAT) with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) rule that would disallow a deduction to a domestic corporation by reference to low-taxed income of entities that are members of the same financial reporting group with global annual revenues in excess of a de minimis threshold.
- Limit foreign tax credits from sales of hybrid entities by applying 336(h)(16) to determine the source and character of any item recognized in connection with a direct or indirect disposition of an interest in a specified hybrid entity.
- Restrict the deductions of excessive interest of members of financial reporting groups for disproportionate borrowing in the U.S.
- Provide an expanded general business credit for locating jobs and business activity in the U.S. and disallowing deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business.
Additional Revenue Raisers
Furthermore, the President proposes to raise additional revenue by taxing carried interests in partnerships as ordinary income rather than capital gains if the partner’s taxable income from all sources exceeds $400,000.
The proposal would repeal Code Sec. 1061 for such taxpayers, but would require partners in such investment partnerships to pay self-employment taxes on such income.
An additional proposed revenue raiser would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like kind. Any gains from like-kind exchanges of more than $500,000 (or $1 million in the case of married individuals filing a joint return) during a tax year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.
Code Sec. 461(l), which covers excess business loss limitation on non-corporate taxpayers for tax years beginning after 2026, would be made permanent.
Compliance and Tax Administration
Finally, the proposed changes would improve tax compliance and tax administration.
For example, the administration would increase the IRS budget for enforcement and operations. It would also create comprehensive financial account reporting rules. This would require financial institutions to report data on financial accounts in an information return, including crypto asset exchanges and custodians. The proposal would also give the Treasury Department the explicit authority to regulate all paid preparers of federal tax returns, including mandatory minimum competency standards.
In the following weeks and months, potential changes to the tax code may be changed as they are debated in Congress. Once changes are put into law, the Zinner & Co. Tax Team will be available to answer any questions you may have on how the changes may affect you.