Tax Provisions of the Biden 2023 Budget Proposals

Overview of Possible Tax Changes for High-Net Worth Individuals and Businesses

On March 28, 2022, President Biden released the 2023 budget proposals, which includes many of the proposals from the Build Back Better legislation. The budget proposal does include new provisions, as well.

Billionaires Tax Proposal

The big headliner from the budget proposals is the so-called Billionaires tax. The proposal would impose a minimum tax of 20% on total income, including unrealized capital gains for all taxpayers with net wealth that is greater than $100 million.  Under the proposal, taxpayers could choose to pay the first year of this minimum tax liability in nine equal, annual installments. For subsequent years, taxpayers could pay any additional amounts off the minimum tax in five equal, annual installments.

Payment of the minimum tax would be treated as a prepayment that could be used to offset future income and minimum taxes on realized capital gains.

Taxpayers with wealth greater than the threshold would be required to report to the IRS on an annual basis, separately by asset class the total estimated value of each asset class, the tax basis of each asset class and the total amount of their liabilities. The proposal contains provisions for valuing non-tradeable assets. The proposal was projected to raise about $360 billion over 10 years.

The proposal would be effective for tax years beginning after December 31, 2022.

In addition to the Billionaires tax, the budget also outlines the following proposals:

• Raise corporate tax rates to 28% from 21%

  Effective for tax years beginning after December 31, 2022

• Provide tax incentives for location jobs and business activity in the US
  

  A new general business credit equal to 10 percent of expenses paid or incurred in connection with onshoring a US trade or business, excluding capital expenditures.

• The top individual marginal tax rate would be increased from 37% to 39.6%
  

  Effective for tax years beginning after December 31,2022. The tax rate would apply to taxable income over $450,000 for married filing joint taxpayers and $400,000 for unmarried taxpayer. After 2023, these amounts would be indexed for inflation.

• Reform/Increase the tax rate on capital gain realized by high income taxpayers

  The proposal would tax long term capital gains and qualified dividends at the highest ordinary income tax rates, currently 37%. The proposal would be effective for gains and dividends recognized after the date of enactment.

• The proposal would treat transfers of appreciated property by gift or death as an income realization event.

  The gains would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains tax return. Transfers to a charity or a US spouse would not be subject to this tax. The charity or US spouse would carry over the basis of donor or decedent. A subsequent transfer by the US spouse would then be subject to this tax. The proposal would allow a $5 million per donor exclusion from recognition under this tax. This proposal is effective for transfers after December 31, 2022.

• Tax Carried (Profits) Interests as Ordinary Income
  

  This proposal effective for tax years beginning after December 31, 2022, would effectively tax as ordinary income all profits from a carried interest, including long-term capital gains if the partner owning the carried interest has taxable income over $400,000.

• Repeal Like-Kind Exchanges Deferral
  

  Effective for exchanges completed in tax years beginning after December 31, 2022, the proposal would only allow deferral of gain up to an aggregate amount for each taxpayer of $500,000 ($1 million in the case of married taxpayers filing a joint return).

• Require 100% Recapture of Depreciation as Ordinary Income for Real Property

  The gain on the sale of section 1250 real property held for more than one year would be treated as ordinary income to the extent of cumulative depreciation deductions taken after the effective date of this provision, taxable years beginning after December 31, 2022. The provision would not apply the individual taxpayers with taxable income below $400,000. Existing law would apply to gains attributable to depreciation deductions taken on real property prior to the effective date.

• Grantor Trust Proposals

  The budget proposal would require that the remainder interest in a GRAT at the time the interest is created have a minimum value for gift tax purposes equal to the greater 25% of the value of the assets transferred or $500,000.

The proposal would require that a GRAT have a minimum term of 10 years and a maximum term of the life expectancy of the annuitant plus 10 years.

Gains from the sale of assets to a grantor trust not fully revocable by the grantor, would now be subject to income tax.

The proposal would also provide that the payment of income tax on the income of a grantor trust would now be treated as gift on December 31 of the year that income tax is paid unless the grantor is reimbursed from the trust

The Grantor trust provisions would apply to all trusts created after the date of enactment.

Lifetime Gift and Estate Tax Exemptions

It should be noted that the budget proposals contain no provisions dealing with the current rules related to the current lifetime gift and estate tax exemptions.

Many of the above provisions were contained in initial versions of the Build Back Better bill that was introduced by Congress in 2021 but failed to pass the Senate. At this time is it unclear how much Congressional support these provisions will have, especially in the Senate.

Keiter will continue to monitor these budget provisions and any legislation from the proposals that move through Congress.

Questions on tax compliance and planning for you and your business? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000

Source
Thomson Reuters