Article Highlights

Long-Term Capital Gains Rates
Top Individual Tax Rate
Pass-Through Income Subject to 3.8% NIIT or SECA Tax
Limit Nonrecognition of Like-Kind Exchanges
Transfer of Appreciated Property by Gift or Death
Family-Owned and -Operated Businesses
15-Year Fixed-Rate Payment Plan
Excess Business Loss Limitation
Carried Interest
Enhanced Financial Account Reporting

The U.S. Treasury has released the Biden administration’s 2022 Fiscal Year Budget, which includes a general explanation of the administration’s 2022 revenue proposals. The publication is commonly referred to as the Green Book and outlines the Biden administration’s tax proposals. Keep in mind that these are proposals and will have to be passed by Congress. The Green Book proposals include both domestic and international taxes; however, this article will only cover domestic tax issues that deal with individuals and small businesses. Also included in the Green Book are proposals to extend, expand or create new energy-related tax credits; we have not included any of these proposals in this article. Long-Term Capital Gains Rates Currently, long-term capital gains and qualified dividends are taxed at the following rates.

CG TAX RATES BY AGI RANGE FOR 2021

Filing Status
Zero Rate
15% Rate
20% Rate

Single
0 – $40,400
$40,401 – $445,850
$445,851 and above

Head of Household
0 – $54,100
$54,101 – $473,750
$473,751 and above

Married Filing Joint
0 – $80,800
$80,801 – $501,600
$501,601 and above

Married Filing Separate
0 – $40,400
$40,401 – $250,800
$250,801 and above

The Green Book proposals would increase the tax rate for long-term capital gains and qualified dividends to 39.6% (the proposed increase to the top individual rate) from the current 20% rate to the extent the taxpayer’s AGI exceeds $1 million. That will result in a tax as high of 43.4% when including the 3.8% net investment income tax imposed on investment income of middle- to higher-income taxpayers. The proposal suggests making the retroactive rate change effective for gains and income recognized after April 28, 2021. Example: Under the proposal, a taxpayer with $900,000 of wage income and $200,000 of long-term capital gain income would have $100,000 of capital income taxed at the current preferential tax rate and $100,000 taxed at ordinary income tax rates. Top Individual Tax Rate The Green Book proposes an increase in the top individual rate from the current 37% to 39.6%. This will return the top rate to where it was before the passage of the Tax Cuts and Jobs Act (TCJA). Note: under the TCJA, the 37% rate applies only through 2025. The table below shows the taxable income threshold for the top tax rate in 2021, and only income above that level is taxed at the top tax rate. Tax rate brackets are currently adjusted annually for inflation; the proposed 2022 thresholds will be inflation-indexed in future years.

TAXABLE INCOME THRESHOLD* FOR THE TOP INDIVIDUAL TAX BRACKET

Filing Status
2021
Proposed 2022

Single
523,600
452,700

Head of Household
523,600
481,000

Married Filing Joint
628,300
509,300

Married Filing Separate
314,150
254,650

*top rate applies to taxable income above these amounts

Pass-Through Income Subject to 3.8% NIIT or SECA Tax Under current law, S-corporation shareholders and limited partners are not subject to self-employment tax on pass-through income. However, the Green Book proposes changing that for high-income taxpayers with adjusted gross income of more than $400,000. The proposal would ensure that all trade or business income of high-income taxpayers is subject to the 3.8 percent Medicare tax, either through the net investment income tax (NIIT) or the Self-Employment Contributions Act (SECA) tax.

The NIIT base would be expanded to include income and gain from trades or businesses not otherwise subject to employment taxes, and the 3.8% NIIT tax would be redirected to the Hospital Insurance Trust Fund.
The 3.8% SECA tax would apply to the ordinary business income of high-income non-passive S corporation owners (those whose AGI is greater than $400,000).
Limited partners and LLC members who provide services and materially participate in their partnerships and LLCs would be subject to SECA tax on their distributive shares of partnership or LLC income to the extent that this income exceeds certain threshold amounts. The exemptions from SECA tax provided under current law for certain types of S corporation income (e.g., rents, dividends and capital gains) would continue to apply to these types of income.

Material participation standards would apply to individuals who participate in a business in which they have a direct or indirect ownership interest. Taxpayers are usually considered to materially participate in a business if they are involved in it in a regular, continuous and substantial way. Often, this means they work for the business for at least 500 hours per year. The statutory exception to SECA tax for limited partners would not exempt a limited partner from SECA tax if the limited partner otherwise materially participated. To determine the amount of partnership income and S corporation income that would be subject to SECA tax under the proposal, the taxpayer would sum:
(a) ordinary business income derived from S corporations for which the owner materially participates in the trade or business and (b) ordinary business income derived from either limited partnership interests or interests in LLCs that are classified as partnerships to the extent a limited partner or LLC member materially participates in its partnership’s or LLC’s trade or business (this sum is referred to as “potential SECA income”).
Beginning in 2022, the additional income that would be subject to SECA tax would be the lesser of:
(i) the potential SECA income or (ii) the excess over $400,000 of the sum of the potential SECA income, wage income subject to FICA under current law, and 92.35 percent of self-employment income subject to SECA tax under current law.
The $400,000 threshold amount would not be indexed for inflation. Limit Nonrecognition of Like-Kind Exchanges The Tax Cuts and Jobs Act did away with all Sec 1031 “like-kind” exchanges (tax-deferred exchanges) except those related to real property. The Green Book proposes going a step further and would limit eligibility for Section 1031 exchanges by permitting each taxpayer to defer only up to $500,000 ($1 million for married taxpayers filing jointly) of real property gain each year. Any gain more than the $500,000 ($1 million) limit would be recognized as taxable income in the taxable year in which the taxpayer transfers the real property. These changes would require REITs to distribute gains on property sales that could otherwise be deferred under Section 1031. Caution: The proposal would apply these rules to exchanges “completed after taxable years beginning after December 31, 2021. However, deferred ex-changes may be completed in 2022, but the property given up may have been transferred in 2021, and thus may be taxable in 2021. Transfer of Appreciated Property by Gift or Death The Green Book proposes changes to the rules for a gift donor or a deceased owner if an appreciated asset would realize a capital gain at the time of the transfer. The capital gain would be the excess of the asset’s fair market value (FMV) on the date of a deceased owner’s death (or the date the gift is given) over the decedent’s or donor’s basis in the property. The resulting gain would be taxable income for the decedent on a Form 709 Federal Gift Tax Return, Form 706 Estate Tax Return or a separate capital gains return. These changes would be effective for gains on property transferred by gift, property owned at death by decedents dying after December 31, 2021 and certain property owned by trusts, partnerships and other non-corporate entities on January 1, 2022. Normal gift or estate tax methodologies will be used to determine an asset’s FMV. However, for this tax on appreciated assets, the following would apply:

Partial Interests – The FMV of a partial interest will be based upon a proportional share of the FMV of the entire property.
Transfers – Transfers of property into and distributions in kind from a trust, partnership or other non-corporate entity (other than a grantor trust that is deemed to be wholly owned and revocable by the donor) would be recognition events.

The deemed owner of a revocable grantor trust would recognize gain on the unrealized appreciation of any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of the deemed owner, other than a distribution made in discharge of an obligation of the deemed owner. All the unrealized appreciation on assets of such a revocable grantor trust would be realized at the deemed owner’s death or at any other time the trust becomes irrevocable. 90-year rule – Gain on unrealized appreciation would also be recognized by a trust, partnership or other non-corporate entity that is the owner of the property if that property has not been the subject of a recognition event within the prior 90 years. The testing period for this provision would begin on January 1, 1940. Thus, the first possible recognition event under this provision would be December 31, 2030. Exclusions – Certain exclusions apply to the foregoing gain recognitions.

Transfers to a spouse or charity. Transfers by a decedent to a U.S. spouse or charity would have the following effects:

The basis of the decedent would carry over to the spouse or charity.
Capital gain would not be recognized until the surviving spouse disposes of the asset or dies.
Appreciated property transferred to charity would not generate a taxable capital gain.
Transfer of appreciated assets to a split-interest trust would generate a taxable capital gain, with an exclusion allowed for the charity’s share of the gain based on the charity’s share of the value transferred as determined for gift or estate tax purposes.

Tangible property and principal residence. The proposal would exclude from recognition any gain on tangible personal property, such as household furnishings and personal effects (excluding collectibles). The $250,000 per person exclusion under current law for capital gain on the sale of a principal residence would apply to all residences and would be portable to the decedent’s surviving spouse, making the exclusion effectively $500,000 per couple.
Small business stock. The exclusion under current law for capital gain on certain small business stock under Code Sec. 1202 would continue to apply.
New $1 million exclusion. The Green Book proposal would also allow a $1 million per-person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death, and will be inflation-adjusted after 2022. Thus, for a married couple, the exclusion would be $2 million.

The recipient’s basis in property received by reason of the decedent’s death would be the property’s FMV at the decedent’s death.
In the case of a gift, the recipient’s basis is the donor’s basis less any amount excluded by the donor using the $1 million exclusion.
Also, in the case of a gift, the donor would be subject to tax on unrealized gain less any amount excluded by the donor’s $1 million exclusion.

Family-Owned and -Operated Businesses – Payment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and -operated. 15-Year Fixed-Rate Payment Plan – Furthermore, the proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly-traded financial assets and businesses for which the deferral election is made. The IRS would be authorized to require security at any time there is a reasonable need for security to continue this deferral. That security may be provided from any person, and in any form, deemed acceptable by the IRS. Excess Business Loss Limitation Excess business loss is defined as the excess of losses from business activities over the sum of (a) gains from business activities and (b) a specified threshold amount. In 2021, these thresholds are $524,000 for married couples filing jointly and $262,000 for all other taxpayers; these amounts are indexed for inflation thereafter. The determination of excess business loss is made at the taxpayer level, aggregating across all business activities. However, gains or losses attributable to any trade or business of performing services as an employee are not considered. This provision is set to expire after 2026. The Green Book proposal would make the excess business loss limitation permanent for non-corporate taxpayers. Corporate Tax Rate Before the Tax Cuts and Jobs Act of 2017 (the TCJA), the highest marginal tax rate that applied to corporations was 35%. The Green Book proposes raising the corporate tax rate from the current 21% to 28%. The proposal would be effective for tax years beginning after 2021. However, there has been some news that the Biden administration may be willing to compromise on this issue and leave the rate at the current 21%. A 15% minimum tax on the book earnings of certain large corporations is also being proposed. Carried Interest The proposal would generally treat partnership income from carried interests as ordinary income subject to self-employment tax. Currently, this type of income is eligible for preferential long-term capital gains rates. Enhanced Financial Account Reporting The proposal includes a new comprehensive financial account information-reporting regime for banks and other financial institutions beginning in 2023. Financial institutions would be required to report gross inflow and outflow of accounts to the IRS annually, with a breakdown for physical cash, transactions with foreign accounts and transfers to and from another account with the same owner. Similar reporting requirements would apply to crypto asset ex-changes and custodians. While the purpose of this provision, as explained in the Green Book, is to provide more data to the IRS so they will have better “visibility of gross receipts and deductible expenses” of businesses, this requirement would apply to all business and personal accounts from financial institutions, including bank, loan and investment accounts, except for accounts below a gross flow threshold or FMV of $600. Many of the provisions included in this article are complicated, and not all the Green Book proposals have been covered. If you feel you need additional information, please give this office a call. Remember, these provisions are the Biden administration’s wish list and may not be passed into law as outlined in the Green Book.

Planning on flipping houses? Make sure to learn about the tax treatments of dealers, investors, and homeowners. Check out this helpful video for a quick summary of what you should know.  
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Article Highlights:

IRS Notices 
CP Series Notice 
Automated Notices 
Frequent Errors 
ID Theft 
Penalties and Interest 
What You Should Do 
What We Will Do 

Now that most tax refunds are deposited directly into taxpayers’ bank accounts, the dream of opening your mailbox and finding an IRS refund check is all but a thing of the past. However, since the IRS now does most of its auditing through correspondence, an IRS letter can likely increase your heart rate and, in some cases, ruin your day. CP-Series Notice – When the IRS thinks it detects a potential issue with your tax return, it will contact you via U.S. mail; this is done with a CP-series notice. Please note that the IRS’s first contact about a tax delinquency or discrepancy will never be a phone call or email. Such calls and emails are a common tool of scammers; if you get one, simply hang up the phone or delete the email. If you are concerned about the validity of a given message, please call this office. Most commonly, CP notices describe the proposed tax due, as well as any interest or penalties. The notice will also explain the examination process and describe how you can respond. These automated notices are sent out year-round, and they are quite common. As the IRS tries to close the tax revenue gap, it has become more aggressive in its collection efforts. In addition, as many taxpayers now use low-quality tax mills or do-it-yourself software, the number of notices sent because of preparer error have increased. Missed checkboxes, misunderstandings of available credits, and overlooked income all add up to more errors.The first step the IRS uses in this automated process involves matching what you reported on your tax return to the data that third parties (e.g., employers, banks, and brokers) reported. When this information does not agree, the automated collection effort begins. Don’t Panic – These notices often include errors. However, you do need to respond before the deadline specified on the notice (usually 30 days) or else face significant repercussions. The notice may even be related to suspected ID theft. For instance, someone may have gained access to your tax ID (or that of your spouse or one of your dependents) and tried to file a return using the stolen ID. The first step is to determine which type of notice you have received. A CP2000 notice is very different from the other CP notices (which deal with issues such as identify theft, audits, and the earned income credit). The CP2000 notice includes a proposed—almost always unfavorable—change to your tax return, and it gives you the opportunity to dispute the proposed change. Procrastinating or ignoring this notice will only cause the IRS to ratchet up its collection efforts, which in turn will make it more difficult for you to dispute the proposed adjustment. Sometimes, the IRS will be correct. You may have overlooked a capital gain or income from a second job. It is also possible that the IRS has caught someone else using your SSN in order to work or otherwise stealing your identity. Quite frequently, however, the IRS is incorrect, simply because its software isn’t sophisticated enough to pick up all the information that you report on the schedules attached to your return. These notices of proposed change will also include penalties and interest. Even if you do owe the tax, this office may be able to get the penalties and interest abated for due cause. When you receive an IRS notice, your first step should be to immediately contact this office and to provide us with a copy of the notice. We will review the notice to determine whether it is correct, and then we will consult with you to determine how best to respond.

If you’re thinking about moving from your current locale, you’re not alone. Americans are on the move for many different reasons: Remote work is increasingly popular and allows employees to live wherever they have access to WiFi, while tax changes introduced by the 2017 Tax Cuts and Jobs Act (TCJA) limited the important SALT (State and Local Tax) deduction to $10,000 for single and married individuals. That deduction had previously made living in high-tax states less costly for affluent individuals. When you combine those two factors alone, it makes sense that people are looking to see where the grass may be greener. There’s also a strong possibility that states may begin adding new taxes to make up for budget shortfalls – so, it’s no surprise there may be a significant number of people moving. Some say it has already started, using Florida’s net gain of $16 billion in adjusted gross income since 2018 as proof. Whether states begin adding new taxes or not, it seems clear that people are not staying put the way that they used to, and many are basing their decisions about where to go on tax considerations. If you have found yourself starting to look at real estate ads in a different state, it is important that you take a 360-degree view of what moving would mean for you. As attractive as it may seem to pick up your things and go to a state with a more appealing tax scheme, there are other things to think about, including ensuring that if you move, you do so in a way that accomplishes your tax goals. Here are the different factors you need to make sure to include in your decision-making process. TAXES ARE NOT THE ONLY CONSIDERATION Moving to another community is a shock to the system in more ways than one and moving to an entirely different state will have an even greater impact. Not only do you need to think about the quality-of-life issues involved, but also the implications for those who own multiple homes in multiple states, as they will need to make a choice as to where their primary residence is going to be, and make sure that they can prove that they are compliant. Non-tax-related considerations include:

Quality of life issues include your proximity to family and friends, familiarity with where all your resources are, access to mass transportation hubs for those who enjoy travel, culture, and climate are just a few things that have a direct effect on your level of satisfaction and enjoyment of life. Moving may leave you feeling isolated and uncertain after years of confidently navigating life from your current address. 
Availability of state-of-the-art medical care is not something to be taken for granted. If you currently live in an area where major teaching hospitals are essentially in your backyard and you are moving to a more remote location, you may find yourself regretting your decision, especially as you get older and the infirmities of age start to appear. 
Different areas of the country have different vulnerabilities to hurricanes, earthquakes and other types of disasters. If you are moving to an area that has a higher risk for any type of weather or naturally-caused damage it makes sense to investigate what your homeowners’ insurance costs are going to be – as well as to think about whether you are really willing to put yourself in the path of nature’s wrath.

THE TAXES WORTH CONSIDERING If you’ve already included the non-tax considerations listed above and you are still intent on making a move, then it is time to understand what doing so will mean to your economic picture. It’s a good idea to sit down and discuss your plans with your financial advisors long before putting your home up for sale, as you may have second thoughts after thinking about all of the consequences of a move. Among your considerations are:

There may be more to a state’s taxes then what you are thinking about. States require tax revenue to provide for public services, so though you may think you are considering a no-tax state, there is really no such thing. If they’re not taxing income, they are taxing something else. 
If you receive income from a trust you will need to look into exactly how it is taxed at the state level in the state you’re thinking about relocating to. Every state has its own strategy, and you may not be happy with what you learn. 
If your goal is to gain tax benefits rather than to actually move, you might want to consider taking advantage of friendlier tax laws such as those in Delaware or Nevada. You may be able to relocate your assets in a way that limits taxes and offers confidentiality and creditor protection while staying put where you are. This may or may not be possible depending upon your particular situation, but it may be worth exploring. 
If your compensation scheme includes deferred bonuses or salaries that will be paid out during your retirement, it is important to find out how the state you are considering relocating to treats deferred compensation, and how your specific pay will be treated.

MADE UP YOUR MIND? HERE ARE YOUR NEXT STEPS. Like everything else in life, relocating to another state and making it your primary residence is not as easy as just deciding to do it. There are essential steps that need to be followed in order to reap the tax rewards that you are seeking. Here are just a few of those steps: it is important that you do your due diligence to make sure that you have complied with everything required of your new home.

Change your vehicle registration to your new address
Apply for a driver’s license for your new address 
Register to vote from your new address 
Find out whether your state requires a “Declaration of Domicile” or similar document, and if so, apply for it and file it 
File your federal tax returns from the new address 
Obtain property and casualty insurance at the new address 
File state taxes as a new resident, as well as former state tax returns as a non-resident if you earn any income in that state 
Adjust all banking records, legal documents, and credit card records to reflect your new address 
Move your belongings to your new address 
Change the address on your passport 
Get established with community, professional, religious and social networks associated with the new address 
Establish relationships with medical providers proximal to the new address 
Host family and friends at the new address

Getting established in a new community is a challenge, but it is an important step to ensure that you will be able to prove your state residency and get the tax advantages you seek. Include contacting our office on your to-do list to make sure that you have addressed everything as needed and reviewed and updated your estate plan as well. You may also need to address the particulars of where some of your family members live and go to school to make sure that all of the legal and tax requirements have been met.

Article Highlights:

New Business Tax Break
Restaurant Purchased Meals
Qualifying Restaurants
Take-out Meals
Lavish Limitations
Taxpayer Presence
Substantiation

Congress has provided businesses with a temporary tax break as a means of helping the restaurant industry, which has been devastated by the COVID pandemic. Although the Tax Cuts and Jobs Act eliminated the business deduction for entertainment, it continued to allow a deduction for 50% of the cost of qualified business meals. As part of its COVID relief efforts Congress is allowing businesses to deduct 100% of business meals during 2021 and 2022, provided the meals are provided by a restaurant. Recent guidance from the IRS (Notice 2021-25) defines the term restaurant to mean a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk. In addition, an employer may not treat as a restaurant any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income under IRC Sec 119, or any employer-operated eating facility treated as a de minimis fringe benefit even if such eating facility is operated by a third party under contract with the employer. Business meals are deductible up to an amount not considered ‘lavish’ (reasonable under the circumstances). Also, the taxpayer (or a representative of the taxpayer) must be present. The representative could be, for example, the taxpayer’s employee, an attorney or an independent contractor who performs significant services for the taxpayer. A final hoop to qualify for the deduction is meeting the substantiation requirements. You must be able to establish the amount spent, the time and place, the business purpose and the business relationship and names of the individuals involved. Taxpayers should keep a diary, account book or similar records with this information and record the details within a short time of incurring the expenses – a timely kept record carries more weight in an IRS audit than one created months or years after the event occurred, when memory can be hazy. For expenses of $75 or more, documentary proof (receipts, etc.) is also required. Lastly, individuals who are employees cannot claim a deduction for business meals, even if all of the requirements noted above have been met. This is because the Tax Cuts and Jobs Act suspended the deduction of employee business expenses as an itemized deduction for years 2018 through 2025. Please give this office a call if you have questions.

July 1 – Self-Employed Individuals with Pension PlansIf you have a pension or profit-sharing plan, you may need to file a Form 5500 or 5500-EZ for calendar year 2020. Even though the forms do not need to be filed until August 2, you should contact this office now to see if you have a filing requirement, and if you do, allow time to prepare the return July 15 – Non-Payroll WithholdingIf the monthly deposit rule applies, deposit the tax for payments in June. July 15 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in June.
July 31 – Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2021. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.

July 1 – Time for a Mid-Year Tax Check-Up Time to review your 2021 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.
July 12 – Report Tips to EmployerIf you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.