BG Tax Alert – Take Two: Biden’s Budget Proposes Tax Hikes | Bailey & Glasser LLP

On March 28, 2022, President Biden announced his 2023 Federal Budget (Budget), often referred to as the President’s Green Paper. Although a large part of the budget refers to the “Build Back Better Framework” (Frame), the budget scales back some of the framework’s more ambitious goals and refocuses on Biden’s “new economic vision.” which is about cutting costs for families, reducing the deficit and building a better America. Specifically, Biden said that:

“[i]It delivers on my absolute promise that no one earning less than $400,000 a year would pay a penny more in new taxes, while ensuring that America’s wealthiest and biggest corporations start paying their fair share. That said, the budget contains a myriad of proposals, including:

  • Increase the top individual marginal rate from 37% to 39.6% for those who are: (1) married filing jointly with taxable income over $450,000; (2) heads of household whose taxable income exceeds $425,000; and (3) single filers with taxable income over $400,000. These tariffs would come into effect in 2023.

  • Raise the corporate income tax to 28% from the Trump-era corporate tax cut of 21%.

  • $14.1 billion for the IRS to expand customer service, improve technology and improve digital compliance tools.

  • $331 million for the Community Development Financial Institutions Fund.

  • $210 million for the Financial Crimes Investment Network.

  • The Budget proposes a new tax credit “equal to 10[%] …eligible expenses paid or incurred in connection with the relocation of a business or business to the United States. The tax code would also be amended to prevent companies from deducting expenses related to moving jobs or businesses overseas.

  • Partnership Tax § 754 Revision. Currently, a partnership can make an election under section 754 of the Code (election §754), which allows that partnership to adjust the basis of assets distributed to a partner. The budget purports to end the §754 election when made between related partners because the Treasury claims it allows parties to switch bases among themselves in a way that was seen as abusive.

  • Making the New Markets Tax Credit permanent. This is a credit of up to 39% for making a qualified investment in low-income communities, which was due to expire at the end of 2025.

  • Elimination of tax preferences for fossil fuels. This proposal includes the elimination of: (1) the enhanced oil recovery credit for certain projects; (2) credit for oil and gas extraction from marginal wells, intangible drilling costs; (3) expensing exploration and development costs; and (4) accelerated depreciation of air pollution control facilities.

  • Restore and increase the Superfund excise tax on imported crude oil and oil production to 16.4 cents per barrel.

  • Similar exchanges. The deferral of the gain from the exchange of real property used in a trade or business or held for investment purposes would be limited to $500,000 per taxpayer and any gain in excess of this amount would be subject to tax in the year in which the exchange of the same nature takes place.

  • Limiting the GST Exempt Status of Trusts. The Green Paper proposes to limit the duration of a trust’s exempt status for generation-skipping transfer tax (GST) purposes so that it does not last longer than the lifetime of the great-grandchildren. children who were alive: (1) when the trust was created (for trusts to be created in the future); or (2) on the date of enactment of this proposal (for pre-existing trusts).

Reform the taxation of capital gains

Currently, fixed assets held for more than one year receive preferential long-term capital gains treatment and are taxed at 20%. An effective tax planning tool is to transfer a capital asset, either by gift or upon the death of the taxpayer, to a new owner. There are two tax savings with this approach: first, the new owner receives an increase in the asset base to the then applicable fair market value of the asset; and second, the taxpayer does not trigger any tax recognition at that time because the asset is not considered “sold” (and the recognition of a gain or loss is generally only triggered when it is sold). The budget proposes to eliminate this tax benefit for certain taxpayers. First, the budget would require taxpayers with annual taxable income over $1 million to treat long-term capital gains and eligible dividends as ordinary income, subject to ordinary income rates of 37% to 39.6% . Second, the budget would also create a taxable event when a taxpayer transfers capital property that has appreciated in value to another taxpayer in one of three main situations; namely: (1) upon death; (2) by life gift; or (3) through a trust that holds these assets beyond a specified period of 90 years. For example, if a taxpayer purchased shares for $1 and left that same share to his daughter in his will when it was worth $10,000, the daughter would then have to pay tax on the gain inherent in that transferred share. In other words, the daughter would have to pay tax on that $9,999 gain that was realized (but not recognized) during her father’s period of ownership. There are, however, two main exceptions to this proposed new treatment. First, gifts made during the taxpayer’s lifetime or upon death to a “US spouse” would be excluded and this tax would only apply when the US spouse dies or no longer owns the asset as a result of a sale or a transfer. Second, charitable donations made during the taxpayer’s lifetime or death would not trigger a taxable event. The proposals do not propose any adjustment for the part of realized capital gains that only represents the effects of inflation, as is the case in some other national tax systems.

“Billionaire Tax”

The budget also contemplates a minimum tax on wealthy individuals, often dubbed “the billionaire tax.” This tax would be a 20% tax on total income, including unrealized capital gains, for people with wealth over $100 million. Taxpayers can prepay this tax in installments, similar to estimated quarterly payments required of some taxpayers. These advance payments would offset any tax owing at the end of the year and the billionaire tax would be credited to the taxpayer when a fixed asset is ultimately sold, to avoid double taxation. The budget also proposes valuation methods, including using year-end market price for marketable assets, but would not require valuations for non-marketable assets. Instead, non-marketable assets could be valued by reference to adjusted cost base, using the valuation disclosed in the financial statements, or by another accepted method and would increase in value each year by a “floating annual return prudent (the five-year Treasury rate plus two percentage points)”. This concept was also discussed in the Framework and continues to be rejected by several members of Congress.

Licensing trusts and GRATS

Grantor Retained Annuity Trusts (GRAT) and Grantor Trusts are tax-efficient estate planning techniques used to limit taxes while transferring wealth from one generation to the next. However, the budget would significantly reduce the benefits of these options by implementing the following changes that would: (1) require a minimum taxable gift portion from trusts of 25% of trust assets or $500,000; (2) impose a ten-year minimum term on the GRAT; (3) limit a settlor’s ability to grow assets tax-free within a GRAT; (4) taxing the transfer of assets into a GRAT; and (5) ensure that any taxes paid by the settlor are treated as additional taxable gifts to the trust.

Conservation easements

The IRS continues to crack down on the use of conservation easements as levied tax shelters through civil and criminal enforcement. As President Biden suggested in the framework, the budget also includes a proposal to prohibit conservation contributions above two and a half times the donor-partner base in the entity. However, the rule would not apply to real property held by the partnership for more than three years.

The budget did not include several provisions that have appeared in previous Congressional tax bills and frameworks, such as: (1) the 15% minimum tax on large corporations and a 1% surtax on corporate buyouts. shares of companies; (2) the millionaire surcharge; (3) changes in the taxation of S-Corporations; (4) changes in cryptocurrency taxation; (5) changes to state and local tax credits; or (6) student loan forgiveness. While the president’s budget proposals are generally more properly framed as a sort of “wish list”, many similar proposals have received significant pushback in 2021 and the outlook for 2022 doesn’t look any brighter. Adding to the craziness, the IRS is still processing thousands of tax returns in its backlog and many taxpayers will still be waiting months for tax refunds to be issued. While tax increases are rarely greeted by cheering crowds, after years of pandemic life and the clouds of a possible looming recession, any of these proposed tax changes are unlikely to be met. welcomed with enthusiastic support.

Comments are closed.