By Tom Ochsenschlager, J.D., CPA
President Joe Biden submitted his 2023 budget to Congress on March 28. The proposed budget includes several significant tax increases with the stated intent of reducing the federal deficit by $1 trillion over 10 years.
It does not appear likely that this ambitious budget proposal will pass in the Senate. It is not expected that any Republicans will support the proposal and Senator Joe Manchin, a pivotal Democrat from West Virginia, has announced that he will not vote in favor of the budget. Given that the Senate is evenly split, efforts to pass the president’s fiscal wish list will face challenges to gain traction. However, that said, it is often the case that one or more of the specific proposals in an unpopular bill are introduced in the future to pay for more popular legislation.
The documents supporting the proposed legislation are several hundred pages long. The following are some of the more important proposals.
Individual Tax Matters
The budget would impose a 20% minimum tax on taxpayers with a net wealth of more than $100 million total income. For this purpose, net wealth would include unrealized appreciation on capital assets held by the taxpayer. The portion of the minimum tax paid on the unrealized appreciation of capital assets would be available as a tax credit when the capital asset gain is realized. Critics say implementation would be complex and raise concerns about the proposed provision, including legal challenges and an overburdened IRS to enforce such a law.
The top rate for individuals would be increased to 39.6% for those married filing a joint return with more than $450,000 in income and singles with income more than $400,000.
Limitations on Capital Gains
Capital gains would be taxed at ordinary rates for individuals filing joint returns with income more than $1 million and $500,000 for individuals filing single.
The proposal would also limit the ability to avoid recognizing gain in like-kind exchanges.
Where depreciable property is sold, the portion of the gain recognized as capital gain is reduced by the depreciation taken on the property, which would be reported as ordinary income.
Carried interest profits would be taxed as ordinary income.
Corporate Tax Issues
The corporate income tax rate, currently 21%, would be increased to 28%, a partial rollback of the corporate tax cut in the 2017 law.
For corporations shifting profits to low tax countries, the budget proposal would implement an “under taxed profit rule” (UTPR) that would impose an incremental tax on the domestic U.S. operations of multinational businesses where the “parent” operation is located in a low tax country. The UTPR provision would only apply to multinational businesses with total revenues of $850 million or more for two of the last four years.
Measures to Increase Taxation of Oil and Gas Industries
The budget proposal would repeal the current ability to expense intangible drilling costs. It would also repeal the percentage depletion currently available to oil and gas wells.
The proposal would also increase the geological and geophysical amortization period for independent producers.
Changes to Taxation of Estates and Trusts
The proposal would:
- modify income, estate and gift tax rules for grantor trusts,
- improve the tax administration for trusts and decedents’ estates,
- limit the duration of generation-skipping transfer tax exemption, and
- expand the disallowance of deductions for business-owned life insurance.
How much of the president’s priorities can Congress fully vet? There is not much time before the focus shifts to midterm election campaigns.