President Biden’s latest budget proposal calls again for higher corporate and individual tax rates, and proposes a new “Billionaire’s Minimum Tax” that would subject wealthy individuals to a minimum 20% tax rate on income that includes unrealized capital gains. These and other tax proposals were outlined in the Treasury Department’s annual Green Book on March 28. The Green Book represents the President’s “wish list” for tax policy, while Congress must draft and pass any associated legislation. Although the fate of the Build Back Better Act (BBBA) remains stalled in the Senate, the Green Book is intended to help shape ongoing and future negotiations in Congress.
The major points from this year’s Green Book and some observations follow. We begin with major business provisions, and continue with individual provisions most likely to be relevant.
Biden Tax Proposals: Domestic Business Provisions
Raise the Corporate Tax Rate to 28%, up from the Current 21%
Effective Date: Jan. 1, 2023
Additional Details: For fiscal year C corporations, there would be a blended rate in the initial year with the tax being 21% plus an additional 7% tax applied to the portion of the taxable year that begins in 2023. This rate increase would apply to all C corporations regardless of size or whether they are publicly traded or privately held.
CBIZ Observations: This proposal also appeared in last year’s Green Book. The BBBA does not currently contain this proposal.
Tax Carried Interests as Ordinary Income
Effective Date: Jan. 1, 2023
Additional Details: This proposal would increase the tax rate for hedge fund managers and other taxpayers who provide services to investment partnerships and are allocated income from a profits interest in the investment partnership. An investment partnership generally is one where substantially all of its assets consist of investment-type assets (e.g., certain securities, commodities, real estate, etc.). Such allocations would be subject to ordinary tax rates, as well as self-employment taxes, and would not be eligible for lower capital gains tax rates. The change would be applicable to all taxpayers making more than $400,000 per year.
CBIZ Observations: This proposal also appeared in last year’s Green Book. The BBBA does not currently contain this proposal.
Cap Benefits under the Like-Kind Exchange Deferral Rules
Effective Date: Exchanges “completed” beginning Jan. 1, 2023
Additional Details: Gains deferred under like-kind exchanges would be capped at $500,000 ($1,000,000 for joint filers) per taxable year. Gains in excess of these thresholds would be recognized and taxed accordingly.
CBIZ Observations: This proposal also appeared in last year’s Green Book. The BBBA does not currently contain this proposal. The $500,000 ($1,000,000) exception is determined on an aggregate basis and not a per exchange basis. The wording of the effective date suggests that in-process exchanges commenced prior to Jan. 1, 2023 would still be subject to the new cap. Also, it is unclear how these caps would integrate with exchanges completed by pass-through entities.
Curtail Basis Shifting by Related Parties Through Partnerships
Effective Date: Jan. 1, 2023
Additional Details: A partnership’s distribution of property to a partner that requires the partner to take a lower tax basis in the distributed property allows the partnership with a Section 754 election to step up the basis in other retained properties. When the partners are related, there may be a coordinated plan to intentionally do this so that the partnership’s basis step-up is made to other retained properties that are depreciable, with a benefit resulting to the other related partners. In a sense, basis in this case has “shifted” from non-depreciable property to depreciable property, by way of transactions that cannot ordinarily be coordinated between parties with adverse interests. The proposal would apply a matching rule to prohibit any partner in the distributing partnership that is related to the distributee-partner from benefitting from the partnership’s basis step-up until the distributee-partner disposes of the distributed property in a fully taxable transaction.
CBIZ Observations: This is a new proposal in this year’s Green Book. The BBBA does not currently contain this proposal.
Biden Tax Proposals: Individual Provisions
Increase the top tax rate for individuals to 39.6%, up from 37%
Effective Date: Jan. 1, 2023
Additional Details: The proposal would increase the top marginal individual income tax rate to 39.6%. This rate would be applied to taxable income in excess of $450,000 for married individuals filing a joint return, $400,000 for single individuals, and $425,000 for head of household filers.
CBIZ Observations: This proposal also appeared in last year’s Green Book. The BBBA does not currently contain this proposal. The proposed tax bracket thresholds are substantially lower than those that appeared in last year’s Green Book proposals, where the proposals now align with those developed by the House Ways and Means Committee last September.
Tax Capital Gains for High Income Taxpayers at Ordinary Income Rates
Effective Date: Effective as of the “date of enactment”
Additional Details: This proposal would tax long-term capital gains and qualified dividends at ordinary income tax rates for taxpayers with adjusted gross income that exceeds $1 million ($500,000 for married taxpayers who file separately).
CBIZ Observations: This proposal also appeared in last year’s Green Book. The BBBA does not currently contain this proposal. The threshold applies equally to both single filers and married individuals filing a joint return. The Green Book also clarifies that all sources of income (including capital gains) are used to measure the $1 million threshold, and that only income in excess of the threshold is subject to the higher ordinary income tax rates.
Establish a 20% “Billionaire’s Minimum Tax” on Income and Unrealized Gains
Effective Date: Jan. 1, 2023
Additional Details: The new minimum tax would begin to apply to taxpayers with “wealth” (measured by assets net of liabilities) greater than $100 million, and would fully apply when wealth is greater than $200 million. The new minimum tax would apply to all sources of income, and for purposes of the minimum tax, income would now include unrealized capital gains. The value of non-tradable assets would be eligible for determination by reference to the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statements, or other IRS-approved methods. The 20% gross minimum tax would be offset by any regular tax liability and any un-refunded, uncredited tax prepayments, to yield the net minimum tax liability. Minimum tax payments would be creditable against future taxes on realized capital gains in order to avoid double taxation. Taxpayer who are “illiquid” can elect to include only the unrealized gain on “tradeable assets” in the calculation of the minimum tax liability, with a deferral charge then applicable with respect to non-tradeable assets.
CBIZ Observations: This is a new proposal in this year’s Green Book. The BBBA does not currently contain this proposal. Although a taxpayer’s wealth determines whether the taxpayer is subject to the minimum tax, the minimum tax is based on income, which includes unrealized capital gains. This apparently means that the annual increase in unrealized capital gains is what gets included in income, whereas the total unrealized capital gains is what gets included in the determination of wealth. Senator Joe Manchin (D-WV) indicated to reporters on March 28 that he does not support the new minimum tax because he does not believe taxpayers should be taxed “on things you don’t have.”
Treat Transfers of Appreciated Property by Gift or on Death as Realization Events
Effective Date: Jan. 1, 2023
Additional Details: Transfers of property by gift or on death would no longer be sheltered from taxation at the time of the transfer. Under the proposal, the excess of the property’s fair market value on the transfer date over the transferor’s basis in the property would be deemed realized as capital gains by the transferor. Additionally (effective Dec. 31, 2030), gains on property that have not been the subject of a recognition event in the past 90 years would be deemed realized when transferred to or from a trust (other than a grantor trust), partnership, or other non-corporate entity. There is an option to pay the tax over a 15-year period in certain instances.
Transfers to a U.S. spouse or to a charity would not be treated as a realization event, but would be subject to carryover basis rules. The gift tax in its present-law form continues to apply, but the exclusion would be reduced. Specifically, there would also be a $5 million per-person (indexed for inflation) exclusion for gifts and transfers during life, with the unused exclusion available at death. This exclusion would be per spouse and any unused portion is transferrable from one spouse to the other upon the death of a spouse.
Family owned and operated businesses can elect to not be subject to this deemed realization rule until the interest in the business is sold or the business is no longer family owned and operated. The $250,000 ($500,000 MFJ) exclusion from capital gains on a principal residence would be maintained. Gains from transfers of tangible personal property, such as household furniture and personal effects (excluding collectibles), would be exempt.
CBIZ Observations: This proposal also appeared in last year’s Green Book. The BBBA does not currently contain this proposal. When gains are triggered under the deemed realization rule, the recipient obtains a basis in inherited/gifted property equal to its fair market value on the transfer date. However, the deemed realization of gains on transfer would cause “phantom” income to the transferor, meaning transferors may not have cash to pay the resulting tax. Furthermore, it is not clear whether a threshold for de minimis gifts (currently $16,000) would continue to be excluded. Regarding the gain exclusion on a principal residence, it is unclear whether the exclusions will be applied only to actual sales or exchanges, or if they will be applied to a deemed transfer of the principal residence when the other deemed transfer rules are triggered.
Modify Tax Rules for Certain Grantor Trusts
Effective Date: Effective as of the “date of enactment”
Additional Details: Sales of property between a grantor and a grantor trust would be treated as taxable transactions, and the payment of income tax by a grantor on the income of a grantor trust would be treated as an additional gift. Additionally, the proposal would require that the remainder interest in a Grantor Retained Annuity Trust (GRAT) at the time the interest is created have a minimum value for gift tax purposes equal to the greater of 25% of the GRAT assets or $500,000 (or the full amount of the transfer, if less). Additionally, the proposal would prohibit decreases in the annuity during the GRAT term and would prohibit the grantor from acquiring in an exchange an asset held in the trust without recognizing gain or loss for income tax purposes. Finally, the proposal would require that a GRAT have a minimum term of ten years and a maximum term equal to the life expectancy of the annuitant plus ten years.
CBIZ Observations: This is a new proposal in this year’s Green Book. The BBBA does not currently contain this proposal. The proposal to make sales of property to a grantor trust taxable now aligns with the proposal developed by the House Ways and Means Committee last September.
Limit Duration of Generation-Skipping Transfer Tax Exemption
Effective Date: Effective as of the “date of enactment”
Additional Details: The Generation-Skipping Transfer (GST) tax exemption would apply only to: (a) direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (b) taxable terminations occurring while any person described in (a) is a beneficiary of the trust. The result of these proposals is that the benefit of the GST exemption that shields property from the GST tax would not last as long as the trust. Instead, it would shield the trust assets from GST tax only as long as the life of any trust beneficiary who either is no younger than the transferor’s grandchild or is a member of a younger generation but who was alive at the creation of the trust.
CBIZ Observations: This is a new proposal in this year’s Green Book. The BBBA does not currently contain this proposal.
Concluding Thoughts
Again, the Green Book simply outlines the President’s agenda for tax policy, and it is Congress that will have to draft, and eventually pass, any tax legislation. The Senate is likely to be the chamber that creates the most difficulties for the President to be able to move forward with these tax proposals, many of which were already rejected by Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) during negotiations over the BBBA. For additional information on the Administration’s tax plan, please contact us.
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