Bruce Steiner provides a first look at the Obama Administration’s Revenue Proposals for several years and the Biden Administration’s Revenue Proposals for fiscal year 2022, and now returns to provide a first look at the Revenue Proposals for fiscal year 2023. Tuesday, President Biden released his fiscal 2023 revenue proposal, the key provisions that affect individual taxpayers are as follows…
- Increase the Top Marginal Tax Rate for High-Income Taxpayers
- The top income tax rate is presently 37% and is scheduled to revert to 39.6% in 2026. This rate presently applies to taxable income over $539,900 (single) or $647,850 (joint). The Administration proposes to increase the top rate to 39.6% beginning in 2023. The top rate would apply to taxable income over $400,000 (single) or $450,000 (joint) in 2023 and would be indexed after 2023.
- Tax treatment on Qualified Dividends and Long-Term Capital Gains
- The top income tax rate on qualified dividends and long-term capital gains is presently 20%. The Administration proposes to tax-qualified dividends and long-term capital gains at ordinary income rates, with a top rate of 37% (or 39.6% if the top rate is increased), for taxpayers with income over $1 million, but only to the extent, the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed after 2023. This proposal would be effective after the date of enactment.
- Minimum Tax on “Billionaires”
- At present, the growth of investments are not taxable until realized and recognized (sold). The Administration proposes to impose a minimum tax of 20% on total income, including unrealized capital gains, on taxpayers with wealth of over $100 million. The tax for the first year could be paid in nine equal annual installments, and the tax for subsequent years could be paid in five equal annual installments. This change would be effective beginning in 2023.
- Grantor Trust Status
- The Administration proposes that if a taxpayer creates a grantor trust that is not fully revocable, sales between the grantor and the trust would be taxable, effective for sales on or after the date of enactment. In addition, the grantor’s payment of the income tax on the trust’s income and gains would be treated as a taxable gift, effective for trusts created on or after the date of enactment.
- Repeal Section 1031 Exchanges
- The Administration proposes to treat the exchange of such property like sales of real property. However, a taxpayer could continue to defer the gain up to $500,000 per taxpayer ($1 million on a joint return). This change would be effective for exchanges completed in taxable years beginning after December 31, 2022.
What Is Not Included
- The Obama Administration’s revenue proposals for the fiscal year 2017 included provisions to repeal the treatment of net unrealized appreciation in employer securities, increase the estate and gift tax and GST tax rates, reduce the estate and gift tax exclusion amounts and the GST exemption, include sales to intentionally defective grantor trusts in the grantor’s estate, limit the use of the gift tax annual exclusion and Crummey withdrawal powers, and reduce the benefit of certain tax expenditures. These provisions were not included in the Administration’s revenue proposals for fiscal year 2023.
- If Congress does nothing, the estate and gift tax exclusion amount and the GST exemption, presently $12,060,000, these amounts will revert to inflation-adjusted pre-2018 levels in 2026. Except for a change in the method of indexing, the pre-2018 levels are 50% of the current level.
- The Administration’s Revenue Proposals also do not include the repeal of the Section 199A deduction with respect to qualified business income. This provision was enacted as part of the Tax Cuts and Jobs Act of 2017 and is scheduled to expire at the end of 2025. Presumably, the Administration didn’t want to increase taxes on small businesses.
- The Administration’s Revenue Proposals do not include the repeal of the $10,000 limit on the deduction of state and local taxes (SALT). This provision was also enacted as part of the Tax Cuts and Jobs Act of 2017 and is scheduled to expire at the end of 2025. Democrats are divided on the repeal of the limit on the SALT deduction since most of the benefit of the deduction before 2018 went to high-income taxpayers.