Taxpayers earning more than $452,700 a year would pay nearly 40% in income tax under the proposed 2022 federal budget released by the Biden Administration late last month.

The tax and revenue proposals are defined under two plans, the American Families Plan and the American Jobs Plan. Here are the highlights:

American Jobs Plan

  • Increases the income tax rate for C corporations from 21% to 28% starting in 2022. The Tax Cuts and Jobs Act of 2017 implemented the flat 21% rate for C corporations, replacing a graduated tax bracket that resulted in an average rate of 35%.

American Families Plan

  • Boosts the top marginal income tax rate for high-income taxpayers from 37% to 39.6%. For tax year 2022, the top rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for single taxpayers, $481,000 for head of household and $254,650 for married individuals filing separate. If you include the Net Investment Income Tax of 3.8%, this proposal would result in a federal rate of 43.4%.
  • Taxes long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million at ordinary income tax rates. This would apply to the taxpayer’s income that exceeds $1 million indexed for inflation after tax year 2022. This proposal would be effective for gains recognized after the “date of the announcement.” The date of announcement is unclear: It could be May 28 when the budget was unveiled or April 28 when The American Families Plan was first announced. Either way, it’s a retroactive tax.
  • Starting next year, the transfer of appreciated property on death or by gift would be treated as a realization event. A donor would have to recognize the gift as a gain on the excess of the fair market value on the date of the gift over the donor’s basis. Likewise, a decedent would recognize the gain for the fair market value of the asset that exceeds the decedent’s basis. This would not only be applicable to individuals but also trusts, partnerships, and other non-corporate entities. There are certain exceptions for transfers to a spouse or charity.
  • Limits the deferral of gains from “like-kind” real property exchanged to $500,000 per taxpayer or $1 million for married filing joint taxpayers. This proposal would be effective for like-kind exchanges completed next year and beyond.

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