Understanding the "Green Book" and How Potential Tax Law Changes Impact You

Tax Reform in large, black letters on rusted metal backdropUnderstanding existing tax laws can be difficult enough. However, if you’re hoping to plan and prepare for your taxes in advance, it’s also important to be aware of potential changes to tax laws and how they might impact your tax situation. As tax advisors, we strive to keep proposed changes to tax laws on our radar so that we can appropriately advise clients. These potential changes are outlined in the US Department of the Treasury’s “Green Book,” which includes the current administration’s proposed budget for the coming year. Here’s what you need to know about the Green Book, the proposed tax legislation it includes, and how those changes might impact you.

Proposed Tax Law Changes for Individual Tax Rates

There are many proposed tax law changes in the Green Book, but many of them cover obscure tax laws that only impact a very small number of people. Here, we’ll be focusing on key proposed changes that would most likely impact our clients. There are a total of three proposed tax law changes related to tax rates for individuals that may impact you. These include:

  • Increased tax rate on high-income taxpayers – Currently, the highest tax rate is 37%. The Green Book proposes increasing this tax rate to 39.6%.
  • Dropping threshold for top tax bracket – The top tax bracket mentioned above currently applies to individuals with over $539,900 or joint filers with over $647,850 of taxable income each year. The Green Book proposes lowering that threshold to $400,000 for individuals and $450,000 for married couples filing jointly.
  • Implementing a minimum tax requirement – Currently, there is no minimum tax requirement for individuals. New tax laws propose a minimum 20% tax rate on total income, including unrealized capital gains, for all taxpayers with a total wealth over $100 million. Provisions of this proposed change include the ability to pay a minimum tax liability in nine installments over the first year. Subsequent years would allow the minimum tax liability to be payable in five installments throughout the year.

While the minimum tax requirement isn’t likely to impact a large percentage of people, the other two changes listed above may impact many of our clients. While these changes may or may not be approved over the course of this year, it’s a good idea to stay informed so you can plan for your taxes accordingly.

Proposed Changes That May Impact Your Investments

If you are a high-income taxpayer with significant investments that provide you with long-term capital gains and qualified dividends, there is one proposed change you should be aware of. Currently, the top tax rate on these income sources is 20%, and applies to long-term capital gains and qualified dividends generate if your income exceeds the following thresholds:

  • $459,750 for individuals
  • $517,200 for joint filers
  • $488,500 for heads of household
  • $258,600 for married couples filing separately

As mentioned above, a new top tax rate of 39.6% has been proposed and would be applied to these income sources. When combined with the Net Investment Income Tax (NIIT), which is currently 3.8%, this would result in a federal tax of 43.4% on long-term capital gains and qualified dividends for those impacted by the change. This higher tax rate, however, would only be applied to the extent that your taxable income exceeds the applicable threshold amounts indexed for inflation after 2023. Those amounts are $1,000,000 for married couples filing jointly, and $500,000 for married couples filing separately.

If approved, this proposed change would apply retroactively for gains and dividends received on or after the date of enactment.

Proposed Changes That May Impact Business Owners

There are several proposed tax law changes that would impact our clients who own businesses. These proposed changes include:

  • Increase in corporate tax rate – C corporations are currently taxed at 21%. The new tax rate would be 28%, effective for tax years beginning after December 31, 2022.
  • Limitations on shifting tax basis to family partners – Currently, you can use a partnership to shift the tax basis of your assets between family members. The proposed law would reduce this ability.
  • Treatment of carried interest – The current law does not consider “profits” interest in a partnership to be taxable when received in exchange for services. Instead, the recipient is taxed based on their share of the partnership income and the character of the income at the partnership level. Proposed changes would treat tax-carried profits interests in a partnership as ordinary income and subject it to self-employment taxes.
  • Limits on 1031 exchanges – A 1030 exchange allows you to defer the value of your gain when exchanging real property for another real property. The new law would limit this deferral to an aggregate amount of $500,000 for each taxpayer per year.

Again, please keep in mind that all of these changes are currently only being proposed, and will need to be reviewed and voted on by Congress during the course of the year. If you have questions about these changes, please reach out to us. However, we will ensure that our clients are informed of any approved tax law changes that will impact their taxes for 2023.