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Higher taxes are likely in 2022 – the question is, which taxes will be impacted and by how much?

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Featured insights from EY*

On May 28, 2021, Treasury released its “Green Book,” providing additional details and effective dates of the Biden Administration’s individual and investment revenue proposals related to the American Jobs Plan and the American Families Plan. High-income individuals should take note as the legislative proposals would increase the top individual income tax rate from 37% to 39.6% and call for additional tax increases that, if enacted, would tax certain capital gains and dividend income as ordinary income. The impact of dividend payments would be relative to changes in dividend tax rates.

The plans also propose to tax asset appreciation transferred by gift or by death; limit deferral of gain from real property like-kind exchanges; expand the 3.8% Medicare tax to incomes in excess of $400,000; and permanently extend the current limitation in place that restricts large, excess business losses. 

In addition, IRS audits of high-income individuals, businesses and estates may increase as well, as the proposals allocate additional resources to help fund audits and enforcement activities, requiring enhanced reporting of financial accounts and listed transactions, and expanded broker reporting for cryptocurrency assets. 

Highlights of the Green Book tax proposals

• Increasing the top individual income tax rate from 37% to 39.6%

Effective date: Taxable years beginning after December 31, 2021.

Application: Applies top rate to taxpayers with adjusted gross income of greater than $509,300 for married taxpayers filing jointly and $452,700 for single taxpayers – Could impact timing on IRA withdrawals and Roth conversions as well as planning around accelerating or deferring charitable giving.

• Taxing long-term capital gains and qualified dividends at ordinary rates

Effective date: “The date of announcement” of the American Jobs Plan, April 28th, 2021.

Application: Long-term capital gains and qualified dividends of taxpayers with adjusted gross income greater than $1 million would be taxed at ordinary income tax rates, at 37% (40.8% including the Net Investment Income (NII) tax). In conjunction with the proposal to increase the top marginal tax rates, capital gains would be taxed at 39.6% (43.4% including the NII tax). Should also consider exclusions from deemed realization events, such as exclusion of $1 million per person for gift or death transfers.

• Repeal of stepped-up basis for estate and gift tax purposes

Effective date: Effective for gains on property transferred by gift, and on property owned at death by decedents after December 31, 2021, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2022.

Application: A sale will be deemed to occur at death and either the estate will pay tax on the gains on a federal estate tax return or the decedent will pay tax on their final individual income tax return. For lifetime gifts, the donor will be taxed on the capital gains.

• Expansion of 3.8% Medicare tax

Either through the Net Investment Income Tax (NIIT), and the Self Employment Contributions Act (SECA) tax, to incomes in excess of $400,000 (including active income earned by partnerships and S corporations).

Effective date: Taxable years beginning after December 31, 2021.

Application: taxpayers with adjusted gross income in excess of $400,000; LPs, LLCs and S corporation members alike who provide services and materially participate in partnerships, LLCs and S corporations.

• End Section 1031 like-kind exchanges for gains greater than $500,000

$1 million in the case of married individuals filing a joint return each year for real property like-kind exchanges.

Effective date: Taxable years beginning after December 31, 2021.

• Disallowance of excess business losses (under Section 461(l)) made permanent

Effective date: Extend application to taxable years beginning after December 31, 2021.

Application: Impacts the individual owner of a pass-through entity like a closely held business to deduct tax losses. While this often hits the hedge fund and private equity fund sector, individuals who own operating businesses and are continuing to run at losses in a post-COVID environment could also be significantly impacted.

• Notable provisions absent from Green Book proposals

• State and local tax deduction
• Personal exemption phase outs and Pease itemized deduction limitation

Thinking ahead considerations
  • Year-end modeling and planning
  • Gifting review and plans
  • Changing residency plans

Moving forward

August and September 2021 will be key months in the evolution of these plans. The key will be watching comments from Capitol Hill on what is politically possible and what is not. Nonetheless, it is likely that federal taxes will be higher in 2022 — the question is, which taxes will be impacted and by how much?

Alert on risk of audit increase 

Residency audit alert

Wealth transfer tax planning

Charitable giving

For more information on what this means for you, your family or your business, please contact your financial professional or tax advisor.

For the latest developments on the Green Book proposal and other tax matters in Washington, please visit Ernst & Young LLP’s What to expect in Washington.

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* Nuveen is not affiliated with EY. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

This report is provided for informational and educational purposes only. Although this report contains general tax information, it should not replace a client’s consultation with a professional advisor regarding their tax situation. Nuveen is not a tax advisor. This information is not intended to provide legal or tax advice. Clients should consult with their legal and tax advisors regarding their personal circumstances. This report contains no investment recommendations and should not be construed as specific tax, legal, financial planning or investment advice. Information was obtained from third party sources, which we believe to be reliable but not guaranteed. Tax rates and IRS regulations are subject to change at any time, which could materially affect the information provided herein. Data herein has been sourced from EY.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

This presentation is © 2021 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this material or its contents by any third party.

The information presented above is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide accounting, tax, or other professional advice because it does not take into account any specific taxpayer’s facts and circumstances.

Neither EY nor any member firm thereof shall bear any responsibility whatsoever for the content, accuracy, or security of any third-party websites that are linked (by way of hyperlink or otherwise) in these materials. 

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