The Treasury Department last week released more details on the administration’s proposed tax increases included in the American Jobs Plan (AJP) and the American Families Plan (AFP).
In its “General Explanation of the Administration’s Revenue Proposals” — or Green Book — the department provides additional clarity on how the proposed changes would impact taxpayers.
Here are five key takeaways from the report.
1. Corporate tax rate increase remains at 28%
Although there has been some recent discussion of reducing the proposed tax increase to 25% instead of 28%, the Green Book retains the original proposed figure included in the AJP. Our base case still calls for a likely 25% rate if we do see an increase in the corporate rate.
2. Clarity on where the proposed top tax rate would apply
The AFP calls for increasing the top marginal tax rate on ordinary income from 37% back to a pre-TCJA (Tax Cuts and Jobs Act) rate of 39.6%, although it was not entirely clear where the bracket would apply. The Green Book calls for a 39.6% rate applied to income levels at the top bracket applied before the tax cuts of 2017 ($452,700 for individuals, $509,300 for couples). Currently, the 37% tax rate applies at $523,600 and $628,300. This means that some income currently taxed at the 35% rate would be taxed at 39.6% under the proposal.
For more information about the AFP, which combines tax rate increases with additional spending for education, healthcare, and child care and other family-related support, read our recent blog post, “White House proposes tax hikes for high earners.”
3. Midyear effective date for capital gains and dividend tax rate increases
The AFP calls for taxing long-term capital gains and qualified dividends as ordinary income (as high as 43.4%) for those reporting more than $1 million in income. The Green Book sets an effective date for this increase to apply to transactions “after the date of announcement,” presumably April 28, when the AFP was introduced.
4. Lifetime gifts would trigger a tax event
Under the AFP, the transfer of appreciated assets to (non-spouse) heirs at death would be considered a tax realization event, triggering a tax on capital gains. The Green Book extends this to gifts made during lifetime (except to spouses or charities). That is, if a taxpayer gifts appreciated stock to a child, it would trigger taxes on the capital gains. There would be a $1 million lifetime exclusion for assets transferred while living or at death. Transfer of family business ownership interests to other family members would avoid taxation until sold by the family to non-family members. Lastly, those transferring illiquid assets could pay the taxes over a 15-year period.
5. No changes to SALT or estate and gift taxes
Consistent with the AFP, the Green Book does not call for changes to the SALT deduction or increasing estate and gift taxes. However, talks to modify these areas could return at some point in the legislative process.
More clarity, but still a long road ahead
It’s important to remember that the Green Book represents the administration’s “wish list” on tax law changes. While any of these tax increases will proceed via the budget reconciliation process (requiring no Republican votes to pass), we expect to see modifications as the legislative process advances. For example, the proposals to repeal the step-up in cost basis and tax investment income as ordinary income as they exist currently do not likely have enough support in the Senate to proceed. Of course, this could change as negotiations continue. Overall, expect a lot of twists and turns as debate among lawmakers heats up.
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