In prior Tips, we have examined several proposed Federal Income and estate/gift changes.
This Tip focuses on an update of some of these areas of potential tax changes on the Federal level, recognizing that many of the proposed changes by the Biden Administration were included in his Build Back Better (BBB) position. Since this proposed law and other tax bills were not enacted, it is good to think about what laws will continue to apply for 2022+ as to Federal Income Tax, along with a few thoughts on other laws of interest to real estate and business folks, such as those that impact Estate and Gift tax.
Tax Rates:
Income Tax Rate:
Proposals by the Biden Administration (BA) pushed to increase the Federal tax rates. The rate being advocated for the top rate on ordinary income was 39.6% for Federal Income Tax. The current rate, which remains, today, as the highest rate in this setting is 37%. The 39.6% rate was the rate that existed prior to the 2017 Tax Cuts and Jobs Act that reduced the rate, under the support of President Trump.
If we have new tax legislation this year, 2022, it seems likely that this rate will move back to the 39.6% rate; however, whether any such legislation will be enacted in 2022 remains open to question.[1]
Estate and Gift Rate:
If an estate is taxable, after exhausting any exemption or deductions that may apply, the rate is 40%. The BA had pushed to move the rate to 45%, a small increase. However, again, because no new legislation on this issue was passed in 2021, the rate remains at the 40% level.
Capital Gain Rate:
The BA at one time was supporting an increase in the long-term capital gain (LTCG) rate, to move it, once ceilings on gain were reached, to the same rate that is paid on ordinary income. This was an extreme position; however, it was proposed. Such rate increase was not passed. Thus, the LTCG rate remains at the maximum of 20%, excluding any other related taxes, such as the 3.8% “Medicare Tax.” Will this rate be increased? If new legislation is passed in this tax area, there is some support for a maximum 25% rate. However, again, it remains to be seen if any tax legislation will be approved in 2022.
Corporate Tax Rate:
Since the 2017 Tax Cuts and Jobs Act, the corporate income tax rate was changed to a maximum of 21%. The BA wanted to move this rate up, to a high of 28%. Although such a change was not made, it appears the BA will continue to advocate to raise the corporate rate.
Estate and Gift Tax Changes:
There were many proposed changes in 2021 to the Estate and Gift tax rules. Many proposals were extreme. These changes included such items as:
1. Step up in Basis: The BA proposed to eliminate the Step up in basis that exists under IRC Section 1014, when receiving property from a decedent. For example, if X died and had a warehouse with an adjusted basis of $500,000, but a fair market value of 5 million, the AB that applies for a beneficiary receiving this property is the 5 million. If the BA proposal would have passed, the basis to the beneficiary would be only $500,000. Will the BA try to push this legislation through? In my view, it is unlikely that such a change will be passed in 2022. However, such change, if it ever passes, would be very damaging to most estates, large and small, that have appreciated assets.
2. Tax Gain on Death: Another proposal by the BA was to tax all appreciation on the death of the given taxpayer. Using the above numbers, this would result in an income tax of $4,500,000 on the death of the taxpayer, since there was 4.5 million of appreciation. Once again, thankfully, this change did not pass. I doubt such a proposal will be supported in 2022.
3. Exemption Amount: The current exemption, where no estate tax or gift tax is paid, is slightly over 12 million. That is, if a taxpayer, ignoring other exclusions and rules, was to give a friend or child, as an example, 12 million or less on death or during life, there would be no estate or gift tax owing. That is, this lifetime exemption protects the taxpayer from any estate or gift tax owing, where the total given does not exceed, in the lifetime of the donor/decedent, the 12 million amount. This exemption has been increasing each year. (Such amount will be changed after 2025.[2]) It is unlikely that any change on this exemption will occur in 2022. Of course, there have been many proposals to totally repeal the estate and gift tax on the Federal level. However, it is not likely that such a position will take place, if at all, in 2022.
Tax-Deferred Exchanges:
There have been many proposals to repeal the tax-deferred exchange rules under Code Section 1031. Such repeal has already taken place for exchanges involving personal property as opposed to real estate. The BA had talked about repealing Code Section 1031 as to real estate or reducing the amount that could be deferred from current income tax. Such proposals did not pass. However, these proposals keep coming up as another approach for Congress to raise more tax revenue. Look for this repeal proposal to be moved forward again, but probably not in 2022.[3]
Tax legislation is not dead. It is postponed. How soon will there be changes in the Federal tax law on the above issues? No one knows; however, it appears that with the November 2022 elections coming, broad, new tax legislation will not be easily approved.
By
Dr. Mark Lee Levine, JD, LLM (tax), PhD, CCIM, CRE, MAI
University of Denver
[1] For more on this, see Real Estate Transactions, Tax Planning, by Levine, Mark Lee and Segev, Libbi Levine, published in 2022 by Thomson/Reuters/West. [2] See supra, footnote 1. [3] For more on exchanges, see Levine, Mark Lee, “Handbook on Exchanging Real Estate,” 2020 edition, PP&E, Inc. and on Amazon.com.
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