Tax Strategy: What’s new in the FY 2022 budget and the Green Book?

Although there have been exceptions in the past, generally Congress has not enacted tax increases retroactively. They have most commonly been effective as of the enactment date or the beginning of the year following enactment. Particularly in the case of tax increases related to particular types of transactions, the effective date has sometimes been the date on which the tax increase was first proposed, based on the theory that taxpayers had warning of the tax change at that point.

The administration’s Fiscal Year 2022 Budget generally indicates that the tax increases being proposed would be effective for tax years beginning on or after Jan. 1, 2022. In the case of the proposed corporate tax rate increase, for fiscal-year corporations the budget proposes to prorate the tax increase to the portion of the tax year beginning on Jan. 1, 2022. In the case of the proposed capital gains rate increase, the budget proposes a retroactive effective date back to the date the proposed increase was announced, which has been interpreted as the date on which the American Families Plan was announced, April 28, 2021.

The American Families Plan had proposed elimination of the step-up in basis at the death of a taxpayer. This left some confusion as to whether elimination of the step-up in basis meant the substitution of carryover basis, as was done in 2010, the last year that step-up in basis was eliminated, along with elimination of the estate tax for that year, or whether it meant treating death as a realization event and with income taxation of the assets in the estate at death based on their fair market value. The Green Book makes clear that the administration is contemplating the income taxation of capital gains at death, subject to a $1 million-per-person exclusion, indexed for inflation after 2022. For certain family-owned businesses, including farms, the tax would not be due until the family-owned business is sold or otherwise ceases to be family-owned. In the case of illiquid assets, the proposal would allow a 15-year period for payment of the tax due on the appreciated assets.

The Green Book states that other recognition events could include the transfer of assets to or from a trust, partnership or other non-corporate entity. Transfers out of a revocable grantor trust could be a recognition event to the extent that the transfer is to someone other than the deemed owner of the trust, the spouse of the deemed owner, or a distribution to discharge a debt of the deemed owner. Some Democrats in Congress have indicated that they would prefer carryover basis at death to taxation of gains at death.

Other provisions that President Biden had mentioned during the campaign, including reducing the estate and gift tax exemption amount and raising the estate and gift tax rate, are not addressed in either the budget or the Green Book.

Many of the individual tax breaks included in the Tax Cuts and Jobs Act enacted at the end of 2017 expire under the terms of that law after 2025. The 2022 budget appears to assume that those provisions would be allowed to expire. President Biden had proposed phasing down the 20 percent Qualified Business Income Deduction for pass-through businesses under Code Sec. 199A, but that provision was not specifically addressed in the American Jobs Plan or the American Families Plan. The 2022 budget seems to indicate that the provision might simply be left to expire in 2026; however, congressional Democrats may be seeking to include Code Sec. 199A changes in forthcoming legislation.

Other proposals of President Biden would impact additional individual tax provisions under the Tax Cuts and Jobs Act. These include an increase in the top individual tax rate and expansion of the Child Tax Credit.