On Thursday, March 7, 2023, President Biden released a $6.8 trillion budget proposal for the 2024 fiscal year (which begins Oct. 1, 2023). This Alert summarizes some proposed tax changes included in the budget.
The Tax Cuts and Jobs Act (TCJA) lowered the corporate tax rate to 21%. The president proposes to increase this to 28% in the budget plan.
The current Medicare tax rate is 2.9% assessed on earned income, half of which is paid for by the employee and half by the employer. There is also a 0.9% additional Medicare tax on earned income over $250,000 (for joint return filers) as well as a 3.8% net investment income tax on unearned income over $250,000 (for joint return filers). The president’s budget proposal would increase the rate of both additional taxes to 5% for annual income over $400,000. The filing status to which the threshold applies is unspecified.
The budget also calls for removing certain exceptions to the self-employment tax and the net investment income tax, effectively subjecting most taxable income to one of these two additional taxes once these dollar amount thresholds are met. Essentially, the budget proposal would subject all pass-through business income to either the additional Medicare tax or the net investment income tax.
There is currently no proposal to adjust these income thresholds for inflation.
The White House proposes to increase the top individual tax rate to 39.6%, from 37%, for taxpayers making more than $400,000 (single filers) and $450,000 (joint filers). For those making more than $1 million, the capital gains tax rate would increase to 39.6%. Taxpayers making over $1 million could ultimately be subject to a federal tax rate of 44.6% (including the proposed increased Medicare and net investment income taxes). In addition, taxpayers with income over $400,000 (single filers) or $450,000 (joint filers) would be limited as to how much could be contributed to tax-deferred retirement accounts. Those taxpayers with vested account balances exceeding $10 million would also be required to distribute 50% of the excess.
For very wealthy households, the budget proposes a 25% minimum tax on earned income plus unrealized gains for taxpayers with a net worth exceeding $100 million. Net wealth (assets less liabilities) would be reported to the IRS annually.
The proposal would increase the effective tax rate U.S. shareholders of controlled foreign corporations pay on their global intangible low-taxed income (GILTI) to 21% from 10.5%. It would also repeal deductions for foreign-derived intangible income (FDII), restrict deductions of excessive interest of members of financial reporting groups, and limit deductions for dividends received by certain U.S. corporation shareholders from noncontrolled foreign corporations. The proposal also would augment and make stricter the inversion rules that provide limitations on the ability of U.S. corporations to expatriate and make revisions to the taxation of foreign oil and gas extraction income (FOGEI) and foreign oil related income (FORI).
The budget proposal also includes steps to conform U.S. tax law to the agreement reached in the Organization for Economic Cooperation and Development (OECD) regarding a 15% global minimum tax. This includes a proposed repeal of the base erosion and anti-abuse tax (BEAT) and its replacement with an undertaxed profits rule (UTPR) consistent with the UTPR described in the Pillar Two Model Rules and revisions to the calculation of GILTI (and, separately, the application of foreign tax credit limitation) on a more restrictive “jurisdiction-by-jurisdiction” approach.
Managers of investment funds (such as private equity and hedge funds) often qualify for favorable capital gain rates on their income by receiving a “carried interest” in the funds they manage. The budget proposes to eliminate this tax break for taxpayers with over $400,000 of taxable income.
In general, a like-kind exchange occurs when an asset is essentially exchanged by investing proceeds into another similar asset. The real estate industry quite often uses like-kind exchanges in order to defer taxes into a future year. The budget proposal moves to eliminate this tax deferral mechanism.
The budget proposal would eliminate special tax preferences for the oil and gas industry. This would include the immediate write-off of intangible drilling costs, accelerated depreciation for tangible drilling costs and the depletion allowance, among others.
The White House proposed a number of rules to modernize U.S. taxation of digital assets such as cryptocurrency. Digital assets would be subject to the wash sale rules. Those rules defer losses realized on the sale of assets such as securities for taxpayers who have purchased substantially similar assets within 30 days (before or after the sale). The proposal would also extend the scope of Tax Code’s securities loan rules to cover digital assets.
Enacted as part of the Inflation Reduction Act of 2022, the 1% tax on stock buybacks applies to transactions taking place after Dec. 31, 2022. This is a nondeductible corporate excise tax on the fair market value of repurchased stock and generally applies to domestic corporations whose stock is traded on an established securities exchange. The White House proposes to quadruple this tax to 4%.
The maximum child tax credit would increase to $3,000 (from $2,000) per child over 6 years old and would amount to $3,600 for children under 6 under the budget proposal. At the same time, the credit would become fully refundable. Eligibility for portions of the credit generally would phase out for taxpayers with modified adjusted gross income in excess of (i) $150,000 for married joint filers or surviving spouses, (ii) $112,500 for head of household filers, and (iii) $75,000 for others.
The president has called for Republicans to release their own budget plan. While none has yet been published, the party unveiled certain tax policy goals in the fall of 2022. Republican budget proposals are primarily focused on extending income tax provisions expiring under the TCJA (20% section 199A qualified business income deduction, the top individual tax rate of 37%, among others). Updated proposals may become available in April likely in conjunction with the debt ceiling negotiations.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.