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

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

June 10, 2021 9:00 AM

On May 28, 2021, the Biden administration released its Fiscal Year 2022 Budget to Congress and the “Green Book,” the U.S. Treasury’s analysis of President Biden’s tax proposals, primarily the American Jobs Plan and the American Families Plan.

In anticipation of possible tax increases if these proposals are enacted, taxpayers and their advisors have been looking for more details about what those provisions might involve and when they might become effective. The effective date information may provide an indication of whether it is possible to take planning steps in advance of any tax increases.

President Joe Biden speaks during a joint session of Congress.

The complete details on these proposals still awaits the drafting of legislative language by the congressional tax-writing committees. As of this writing, the administration is still working to craft a bipartisan infrastructure bill. Although initial expectations were that we might see legislation prior to the August recess, many commentators are starting to predict that we will end up with one large, combined tax bill, passed under budget reconciliation, enacted around the October 2021 timeframe.

Until we get that legislative language, the Fiscal Year 2022 budget and the 114 pages of the Treasury’s Green Book provide some additional guidance beyond the outlines of the American Jobs Plan and the American Families Plan of what those proposals might look like and possible effective dates. This may provide planners with some additional information to consider in preparing their clients for possible tax increases as we continue to await legislative language.

Effective dates

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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.

Step-up basis on death

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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.

Temporary provisions of the TCJA

A printout of Congress's tax reform bill, "The Tax Cuts and Jobs Act," alongside a stack of income tax regulations

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.

Loophole closers

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The Biden administration has proposed elimination of a number of what it considers to be tax loopholes. These include subjecting certain income of pass-through entities to employment taxes, taxing carried interests at ordinary income tax rates, and eliminating real estate like-kind exchanges, all subject to certain thresholds. It also proposes to make permanent the excess business loss limitation of non-corporate taxpayers, currently set to expire after 2026. The Green Book provides some additional details on these proposals.

Energy-related provisions

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The Green Book provides additional details about the energy-related tax provisions that President Biden has proposed, primarily in the American Jobs Plan. This includes details with respect to the repeal of the tax breaks related to fossil fuels and additional details with respect to proposed clean energy provisions.

Corporate international tax changes

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To pay for the American Jobs Plan, President Biden had proposed, in addition to a corporate rate increase and a corporate minimum tax, a large number of changes in international corporate taxation in the Made in America Tax Plan. The Green Book also provides additional details on these international tax proposals.

Improving compliance and tax administration

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The Green Book also goes into more detail about President Biden’s proposals to increase funding for the IRS, add additional third-party reporting, and regulate tax return preparers to improve compliance. Improved compliance is designed to raise revenue by helping to reduce the tax gap — the amount of uncollected revenue due to the government.