Tax Reform on the Horizon – What the proposed 2023 US federal budget could mean for you
President Biden’s 2023 federal budget proposal includes a number of tax provisions focused specifically on the ultra-wealthy and corporations. In this article, we explore what these provisions might mean for you and your family.
- A new 20 per cent minimum tax for households that have a net asset value of at least USD100 million;
- Raising the top individual income tax rate to 39.6 per cent, along with lowering the threshold at which this rate applies;
- Taxing carried interests as ordinary income if a partner’s taxable income is in excess of USD400,000 (from all sources);
- Elimination of deferral of income taxes via like-kind exchanges under Section 1031 of the Internal Revenue Code for gains in excess of USD500,000 each year; and
- Raising the corporate tax rate from 21 per cent to 28 per cent
Of particular note is the suggested 20 per cent minimum tax for households having net assets valued of at least USD100 million. Taxpayers falling within this new tax would be subject to income tax on total income, which includes unrealized capital gains. This proposal would permit any taxes owed as a result of this measure to be paid over a period of years.
The effective date of the above items suggests tax years beginning after December 31, 2022.
As to transfer taxes and other planning items, the budget proposal includes the following:
- Implementing limitations on grantor retained annuity trusts (GRATs) by requiring (i) at least a 10-year minimum term for all new GRATs, (ii) a minimum remainder interest that produces a taxable gift for gift tax purposes of the greater of 25 per cent of the value of the assets contributed to the GRAT or USD500,000 and (iii) making the swapping of assets between a grantor and the GRAT a taxable event;
- Making sale transactions between a grantor and their grantor trust a taxable event, and the grantor’s payment of any income tax of a grantor trust as a taxable gift;
- Limiting the duration of any trust exempt from generation skipping transfer (GST) tax (including those trusts in place prior to the enactment of this new law) to a period 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; and
- Providing that a distribution by a private foundation to a donor advised fund (DAF) is not a qualifying distribution under the minimum distribution rules applicable to private foundations unless (i) the DAF funds are expended as a qualifying distribution by the end of the following taxable year and (b) the private foundation maintains adequate records or other evidence showing that the DAF has made a qualifying distribution within the required timeframe. This suggested change is also presently sitting before both the House and the Senate as part of the Accelerating Charitable Efforts (ACE) Act
Each of these items would have an effective date for any new trusts created or transactions with pre-existing trust after the date of enactment of any final legislation.
It remains to be seen whether any or all of these items are ultimately passed by Congress. At a minimum, it gives insight into the Biden administration’s desire to impose additional tax obligations on high earners and the ultra-wealthy.
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The new federal budget proposal gives insight into the Biden administration’s desire to impose additional tax obligations on high earners and the ultra-wealthy.