President Biden’s budget proposal includes a number of provisions that would enact campaign promises. If passed, it will result in key 2022 tax changes of interest to those holding significant wealth. Specifically, the proposal aims to end some of the exemptions and deferrals instituted in the Tax Cuts and Jobs Act, many of which applied to higher net worth individuals.
One potential law, Build Back Better, is off the table with insufficient Senate votes. However, Nancy Pelosi, the Speaker of the House, has vowed to bring it back to the floor for a vote. As one of the most powerful members of congress, we should take her at her word. Here is what you need to know if she succeeds.
With regard to income tax rates, the proposed budget raises the top marginal tax rate from the current rate of 37% to 39.6% for taxpayers who report an AGI of $1 million. In addition, tax carried interest would be treated as ordinary income for individuals who make over $400,000 annually.
The Details to Be Aware Of
The budget proposal covers several other areas of interest for HNWI, including changes to capital gains, pass-through income, tax-deferred exchanges and loss limitation.
Capital Gains
– Long-term capital gains and qualified dividends for individuals with an AGI of $1 million (or $500,000 for married filing separately), indexed for inflation after 2022, would be taxed at ordinary income tax rates.
– Tax-free step-up basis for appreciated property upon death or gifting would be eliminated. Exceptions are made for transfers to U.S. spouses and qualified charities.
– Gain on unrealized appreciation would be recognized by the trust, partnership or non-corporate entity that owns the property that has not been the subject of a recognition even within the past 90 years, beginning January 1, 1940.
Pass-through income
– All pass-through trade or business income would be subject to net investment income tax or self-employment tax for taxpayers making $400,000 or more.
Tax-deferred exchanges
– Section 1031 real estate exchanges would be limited to a deferral of taxes on a maximum of $500,000 of gains.
Loss limitations
– The limit on business loss deductions exceeding $250,000 ($500,000 for joint filers) would become permanent. (This limit was originally due to expire in 2026, and was temporarily suspended from 2018-2020.)
Plan Ahead, Starting Now
Until the budget formally passes, there may be some tweaks and changes, but with the potential impacts on HNWI, proactive planning is highly recommended. Getting ahead of the tax proposal is part of overall asset protection planning and critical to protecting your wealth. Click here to read more about how asset protection creates risk mitigation. Please feel free to call our offices with questions about the proposed 2022 tax changes or to schedule a consultation regarding the best asset protection plan for you and your family.