Update on Biden Administration FY22 Budget Request & Treasury “Green Book”

The Biden Administration this afternoon released its FY22 Budget Request. The proposal, which is estimated to cost more than $6 trillion, would dramatically expand the size and scope of the federal government and be paid for by increasing taxes on corporations and the wealthy.

The Administration also released this afternoon the FY22 Treasury “Green Book,” which provides additional detail about many of the tax proposals outlined in the President’s request, including increasing the corporate tax rate to 28-percent, increasing the top individual tax rate to 39.6-percent for taxpayers with income in excess of the 2017 top bracket threshold (adjusted for inflation), and increasing funding for the Internal Revenue Service (IRS) to improve tax compliance of corporations and high-income taxpayers.

Additional proposals of particular interest to Family Enterprise USA members include:

• Elimination of step-up in basis and treating transfers of appreciated property by gift or on death as realization events.
  • The donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer.
    • For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset.
    • For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset.
  • Gain on unrealized appreciation also would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years.
  • For purposes of taxing appreciated assets:
    • a transferred partial interest would be its proportional share of the fair market value of the entire property; and
    • transfers of property into, and distributions in kind from, a trust, partnership, or other non-corporate entity, other than a grantor trust that is deemed to be wholly owned and revocable by the donor, would be recognition events.
      • The deemed owner of such a revocable grantor trust would recognize gain on the unrealized appreciation in any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of the deemed owner, other than a distribution made in discharge of an obligation of the deemed owner. All of the unrealized appreciation on assets of such a revocable grantor trust would be realized at the deemed owner’s death or at any other time when the trust becomes irrevocable.
  • Capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate.
  • Exclusions:
    • $1 million per-person exclusion (or $2 million per couple), indexed for inflation after 2022 and portable to the decedent’s surviving spouse, from recognition of other unrealized capital gains on property transferred by gift or held at death.
      • The recipient’s basis in property received by reason of the decedent’s death would be the property’s fair market value at the decedent’s death.
      • The same basis rule would apply to the donor of gifted property to the extent the unrealized gain on that property at the time of the gift was not shielded from being a recognition event by the donor’s $1 million exclusion. However, the donor’s basis in property received by gift during the donor’s life would be the donor’s basis in that property at the time of the gift to the extent that the unrealized gain on that property counted against the donor’s $1 million exclusion from recognition.
    • Additionally:
      • Transfers by a decedent to a U.S. spouse or to charity would carry over the basis of the decedent. Capital gain would not be recognized until the surviving spouse disposes of the asset or dies, and appreciated property transferred to charity would not generate a taxable capital gain.
      • The proposal would not recognize any gain on tangible personal property such as household furnishings and personal effects (excluding collectibles).
      • The $250,000 per-person ($500,000 per couple) exclusion under current law for capital gain on a principal residence would apply to all residences and would be portable to the decedent’s surviving spouse.
      • The exclusion under current law for capital gain on certain small business stock would also apply.
  • For family-owned and operated businesses, payment of tax on the appreciation of the business would not be due until the interest in the business is sold or the business ceases to be family-owned and operated. These businesses would also have a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made. However, the IRS is authorized to require security at any time when there is a reasonable need for security to continue this deferral.
  • The proposal would be effective for gains on property transferred by gift, and on property owned at death by decedents dying, after December 31, 2021, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2022.
• Tax capital gains for high-income earners at ordinary rates:
  • Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, with 37 percent generally being the highest rate (40.8 percent including the net investment income tax), but only to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022.
  • This proposal would be effective for gains required to be recognized after the date of announcement.

We will keep you apprised of relevant developments as the FY22 budget and appropriations process moves forward, but please let us know if you have any questions in the interim.