The Green Book is effectively President Biden's wish list for future tax policy to provide funding for his proposed budget. It is a proposal. It is not yet legislation and it is clearly not law. It is an insight into where changes in the tax code might occur. For taxpayers, it is important to understand what types of transactions will be impacted if part or all of the Green Book becomes law. This note is intended to be a quick overview of the Green Book focusing on its impact on private clients. It is not an exhaustive analysis of all provisions of the Green Book.
Given the razor-thin Democratic majorities in the House of Representatives and the Senate, President Biden would need near Democratic unanimity in the House, and could not lose a single Democratic Senator if he hoped to enact the Green Book. The Green Book supports Biden's political agenda as well as serving as a proposed blueprint for the U.S. Tax Code. Most of the proposals in the Green Book havebeen included in President Biden's tax positions since the early Democratic primaries, but the Green Book does contain some surprises.
It is as important to understand what President Biden omitted from the Green Book as well as to consider what he included. There is no discussion of Estate Tax increases, Estate Exemption decreases or a reduction or curtailment of Qualified Business Income under §199A for owners of passthrough entities. The proposal to impose the OASDI portion of Social Security on wages or self-employment income at or above $400,000 is not included. A broad reinstatement of state and local tax deductions is also absent. This is not a guarantee that these proposals may not ultimately be included in legislation.
I. EXECUTIVE SUMMARY
- Individual income tax rates raised to 39.6%, with significant compression of the top bracket.
- A capital gains hike to 37% (plus 3.8% NIT) retroactive to April 28, 2021 for individuals with adjusted gross incomes of $1 million or more in 2021. Capital Gains rates are likely to rise to 39.6% for individuals with adjusted gross income of $1 million or more in 2022.
- At death, the elimination of the step-up in basis on investment assets with cumulatively over $1 million of built in appreciation.
- At death, the elimination of the step-up in basis on personal residences with built in appreciation over $250,000.
- Taxation of all unrealized appreciation on death or gift subject to exclusions.
- Limited exclusions are available for transfers by gift or at
- family owned and operated businesses
- individual exclusion of $1 million of appreciation plus $250,000 of appreciation on personal residence
- C Corporation income tax increases to 28%
- Elimination of Carried Interest treatment for hedge fund, private equity and real estate clients
- Elimination of §1031 like kind exchanges on real estate for more than $500,000 of appreciation per year
- Permanent imposition of the Excess Loss Limitation under §461(l)
- SECA tax imposed on all trade or business income of S corp owner/employees
- Enhanced regulation of cryptocurrency transactions
- A global minimum tax on earnings of foreign subsidiaries of at least 21%
- A change to the inversion rules that would make it more difficult for companies to move the parent company out of the United States
- Expansion of U.S. Tax Base Erosion Rules
II. INDIVIDUAL TAX CHANGES
A. Individual Income Tax
The Green Book would raise the top marginal individual income tax rate to 39.6% (the top marginal individual rate is 37% in 2021). There would also be rate compression. Beginning in 2022, the top marginal rate would apply to taxable income in excess of $509,300 for married couples filing jointly (as opposed to $628,300 in 2021), $452,700 for single taxpayers (as opposed to $523,600 in 2021), $481,000 for head of household filers (as opposed to $523,600 in 2021), and $254,650 for married individuals filing separately (as opposed to $314,000 in 2021).
This proposal would be effective for tax years beginning after December 31, 2021. In tax years beyond 2022, the rate thresholds would be indexed for inflation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.