April 29, 2021 / North America
As widely anticipated, U.S. President Joe Biden delivered news of impending tax increases in a speech to a joint session of U.S. Congress on Wednesday evening. A wide-reaching spending and investment plan (with a $4 trillion price tag) also accompanied tax increases, mostly aimed at the wealthy and corporations.
Tax highlights include:
A reintroduction of the 39.6% top tax rate (more than $400,000) for individuals. It should be noted that this would have been reintroduced for 2026 regardless due to existing sunset provisions.
A new provision will tax individual’s Long Term Capital Gains and Qualified Dividends (for those with ‘income’ over $1m) at the top rate of tax (39.6% proposed). Net Investment Income Tax (NIIT) would also apply, taking the overall rate to a potential 43.4%.
Closing of the “carried interest loophole” and eliminating the tax benefit this being to certain taxpayers. Of course, anyone who has an income of over $1m will be affected by the above regardless.
Estate tax changes to the stepped up basis of inherited assets at death for gains in excess of $1 million ($2.5 million for joint filers “when combined with existing real estate exemptions”) and taxing those gains (except when the property is donated to charity).
A new IRS focus on the tax affairs of the wealthy. Whilst taxpayers who comply with U.S. tax law have nothing to fear, and there may be an increased chance of an audit.
Repealing the deferral of gain in a like-kind exchange of real property under Section 1031 for gains greater than $500,000.
Making permanent the limitation on business losses in excess of $250,000 ($500,000 for joint filers) enacted in the TCJA.
The corporation tax rate will increase from 21% to 28%. It should be remembered that state corporate taxes are in addition.
It would seem that the rate increases for certain investment income will be based around AGI.
For U.K. resident, U.S. taxpayers, there are several points this raises:
Whilst the U.S. top tax rate increase may be unwelcome, this is still below the U.K. top rate of 45%, and U.S. tax bands are generally broader. However, state taxes need to be considered.
This may affect decisions on whether to be taxed on the arising or remittance basis for non-domiciles.
The potential new U.S. tax rate on Qualified Dividends of 39.6% (plus NIIT) is marginally more than the U.K. 38.1% rate.
The increase in capital gains rates for some U.S. persons will take these out of alignment with the U.K. rate of 20%. However, an increase in CGT is widely speculated here in the U.K., so regardless of where the respective rates fall in either jurisdiction in the longer term, plans should be reviewed now.
Proposed changes to basis step-ups for inherited assets also have been discussed in the U.K. Again, planning now rather than later will be key.
The proposed U.S. increase in corporation tax will affect the U.S./U.K. owners of companies subject to GILTI; with the U.K.’s impending increase to 25%, this may mean that U.K. companies no longer qualify for high tax exemption.
As with all tax-related changes, the devil will be in the detail. Given the finely balanced state of U.S. politics, it will be interesting to see how much of both the wider spending plans and the proposed tax changes that accompany it come to pass in this form. The reintroduction of the 39.6% rate is one example of how much political capital the U.S. President is willing to expend on something that will come to pass at the start of 2026 if no one does anything (though of course, future administrations may change this). Conversely, perhaps notable by its absence was any mention of the SALT cap introduced by TCJA despite this being something that many Democratic states consider a priority.
Whilst nothing is currently set in stone, change is coming, and U.S. taxpayers should watch this space!