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New proposals could affect income tax rates

The new $2.4-trillion infrastructure plan could change tax plans for 2021 and 2022.

Throughout 2017, numerous articles were written and presentations given about President Trump’s and the Republican Party’s tax cut proposals and how they might impact the tax returns Americans would file in 2018.

As the Christmas holidays approached, Trump administration officials and the Republican congressional leadership reached agreement on what became the Tax Cuts and Jobs Act of 2017, one of the most far-reaching overhauls of the tax code in decades.

Could the Biden administration’s American Jobs Plan, a $2.4-trillion proposal to rebuild the nation’s highways, bridges, locks and dams, ports and other transportation facilities, become a case of déjà vu all over again, requiring tax professionals to quickly interpret multiple changes to the tax laws for 2021 and 2022?

“Some people might wonder why we would spend time looking at proposals when there’s likely a chance everything will change and evolve over time,” said Kristine Tidgren, director of Iowa State University’s Center for Agricultural Law & Taxation. She spoke at this year’s virtual Mid-South Agricultural and Environmental Law Conference.

“In this case, I think it’s important for everyone involved in agriculture or small business to take a look at these and follow the progress of the negotiations to see which proposals take on legs and have a chance of moving forward. That’s because of what happened with the Tax Cuts and Jobs Act of 2017.”

Some of the proposals in the latter weren’t finalized until a few hours before the bill, H.R. 1, was passed by both houses of Congress during the budget reconciliation process and signed into law on Dec. 22, she noted.

“In the end, we ended up with a very significant tax law change,” she said. “There wasn’t a lot of time to adjust or adapt to, and it was important to follow along so that you knew what was possibly going to happen. I would suggest that these proposals being discussed now have even more chance of significantly impacting agricultural producers.”

Possible changes

Tidgrin said the current administration’s proposals, which appeared in The Green Book issued by the U.S. Treasury Department in May, so far only have to do with income tax changes, primarily capital gains and ordinary income tax rates.

“I want to say at the outset that this is a layered approach,” she said. “The first prong or layer would be to go back to having a top tax rate of 39.6%. Under current law, we have a 37% top tax rate, and that 37% isn’t triggered until we get to $628,000 of income as married filing jointly.

“The proposal would increase that top tax rate to 39.6%, and it will lower the income threshold to $509,000 of income as married filing jointly.”

Another, perhaps more significant proposal, is that beginning after April 28, 2021, long-term capital gains for those who have income of more than $1 million would be taxed at ordinary income rates, she said.

“So notice this would be a retroactive change. Instead of having a preferential capital gains tax, which under current law is 20%, you would pay a top tax rate on that capital gain of 39.6% for a gain that’s over a million dollars.”

An example from the Green Book shows that a taxpayer with $900,000 in labor income and $200,000 in preferential capital income would have $100,000 of that capital income taxed at 20% even under the new law, she noted. But $100,000 of it would be taxed at ordinary income tax rates.

“So it proposes that this change would be in effect in 2021 to prevent people from dumping all of their highly appreciated assets this year before this change is made. Notice that the increase in the tax rate from 37% to 39.6% is not proposed to take effect until 2022. What this means is that if I was subject to this new tax rate in 2021 the top tax rate I would be subject to is still 37%.”

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