It is worth mentioning a related proposal in the AFP ending the step up in basis at death for gains in excess of $1 million per person (or, $2.5 million per couple when including existing real estate exemptions). Further, the SECA tax rules would be revised such that many limited partners and LLC members – as well as S corporation owners – with material participation would be subject to SECA tax on their share of income exceeding certain thresholds. The definition of “net investment tax” would be expanded to include income from trades or businesses that is not already subject to employment taxes for taxpayers with AGI over $400,000. Briefly, all pass-through income of high-income taxpayers would be subject to either the NIIT or SECA tax, a departure from current law in which many pass-through owners could escape those taxes on that income. The Green Book also explains a new provision that would significantly expand the application of the Net Investment Income Tax (NIIT) and the Self-Employment Contributions Act (SECA) tax to earnings from pass-through entities. “A taxpayer with $900,000 in labor income and $200,000 in preferential capital income would have $100,000 of capital income taxed at the current preferential tax rate and $100,000 taxed at ordinary income tax rates.” The Green Book does go further to offer a simple example as to the mechanics of this taxation for taxpayers near the noted thresholds. It should also be noted that the net investment income tax of 3.8% would be imposed in addition to the income tax, resulting in a tax rate of 43.4% on capital gains for high earners. Currently, the top ordinary rate for individuals is 37%, but the AFP also proposes a return to 39.6% for the top marginal tax rate for individuals. In the American Families Plan (AFP), the Biden Administration is proposing an increased tax rate on capital gains and qualified dividends to equal the top ordinary income tax rate of 39.6% for households earning over $1 million (or $500,000 if married filing separately). While no legislation has yet been passed, it is worth taking a moment to review the “What, When, and Why” of these significant, proposed changes. In April 2021, the president addressed the public with a speech and subsequent fact sheet outlining his proposed “American Families Plan.” The Treasury provided further detail and guidance into the matter through the release of its General Explanation of the Administration’s Fiscal Year 2022 Revenue Proposals (i.e., the “Green Book”) in May 2021. President Biden and his administration have long indicated there would be a change coming to the way capital gains are taxed for individuals, decedents, and even noncorporate entities, such as trusts and partnerships.
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