2023 Biden-Budget Proposals

Take-Away: Like last March, President Biden’s 2023 proposed Budget includes many tax increases. Given the state of gridlock in Washington these days, it is highly unlikely much (if anything) will come of these proposed tax changes, at least until after a new Congress is seated in 2023.

[Disclosure: I feel almost guilty clogging your ‘in box’ with yet another missive on tax proposals that seem to appear each month, when nothing ever comes of them. With this disclosure in mind, feel free to delete this missive, as you have probably already heard of all of the proposals before, going back to last fall.]

Summary of Key Tax and Estate Planning Provisions of the Proposed 2023 Budget:

1. Top Marginal Income Tax Rate: The proposal accelerates the top income tax rate to 39.6% starting in 2023, down from its scheduled 2026. This top tax rate would apply to individuals with income of $400,000 (single) and $450,000 (joint filers.)
2. Minimum tax on the Wealthy: A minimum 20% tax would be imposed on total income, including unrealized capital gains, for individuals whose income is over $100 million. The tax for the first year could be paid in 9 equal annual installments. The tax for subsequent years could be paid in 5 equal annual installments.
3. Qualified Dividends and Long-term Capital Gains: The top income tax rate (37% to 39.6%) would apply to qualified dividends and long-term capital gains for individuals who report income above $1.0 million, but only to the extent that the individual’s income exceeds $1.0 million (or $500,000, if filing separately.)
4. Transfers of Appreciated Property: Death of an individual would be treated as a realization event.  In addition, marking assets held in a trust or partnership to market periodically would also be treated as a realization event. Excluded, however, would be transfers between spouses, and exemption for transfers to charities, and a limited exclusion for gain on the sale of a principal residence. The small business stock tax exemption [IRC 1202] would be reduced from $10 million per individual to $5.0 million per individual.
5. Repeal Like-Kind Exchanges: The 2017 Act limited like-kind exchanges under IRC 1031 to real estate. Under the proposal all exchanges would be treated similar to the sale of property; however, an individual could continue to defer up to $500,000 (or $1.0 million for a married couple.)
6. Recapture of Depreciation of Real Estate: There currently is a recapture of depreciation on the sale of depreciable assets [IRC 1245], but there is generally no depreciation recapture with regard to the sale of depreciable real estate [IRC 1250.] The proposal would require depreciation recapture on the sale of depreciable real estate, but the recapture would not apply if the individual reported adjust gross income under $400,000 ($200,000 if married, filing separately.)
7. Carried Interests Taxed: The proposal would tax as ordinary income a partner’s share of income on an investment services partnership interest (ISPI) in an investment partnership, regardless of the character of the income at the partnership level.
8. Grantor Retained Annuity Trusts: Under the proposal annuity payments could not decrease during the fixed annuity term, and the grantor would be prohibited from engaging in a tax-free exchange of any assets held in the GRAT. In addition, a GRAT would require a maximum fixed annuity term equal to the annuitant’s life expectancy plus 10 years, in effect preventing the use of long-term GRATs.
9. Grantor Trusts: The proposal would require that if an individual creates a grantor trust that is not fully revocable, sales between the grantor and the trust would be taxable (effective on or after the date of enactment of the tax act.) In addition, the grantor’s payment of the income tax on the grantor trust’s income and gains would be treated as a taxable gift by the grantor.

Valuation of Promissory Notes: The proposal would require that the discount rate of a promissory note for estate and gift tax purposes be limited to the greater of the interest rate of the note, or the applicable federal rate (AFR) for the remaining term of the promissory note, in an effort to provide some consistency in the valuation of the note for tax purposes. This proposal would be effective on the date the legislation is proposed.

GST Exemption Duration: The proposal is that the generation skipping transfer tax (GST) exemption would only apply to (i) direct skips and taxable distributions to beneficiaries who are no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust, and (ii) taxable terminations that occur while any person described above is a beneficiary. Existing provisions that reset the transferor upon the payment of the GST tax would no longer apply, and existing trusts would be treated as having been created on the date of enactment of the legislation.

Special Use Valuation: Currently a decedent’s estate may elect to use special valuation to reduce the value of the taxable estate by up to $1,230,000. The proposal would increase this election reduce the value of the estate up to $11.7 million.

Estate Tax Liens: Currently there is a special estate tax lien for 10 years from the date of the gift or from the date of the transferor’s death. The proposal would extend this lien during any deferral or installment period for unpaid estate or gift taxes.

Annual Reporting of Value: The proposal would require annual reports by trusts of the value of their assets if the trust has an estimated value over $300,000, or gross income over $10,000.

Not Included: Despite the flurry of proposed tax law changes we saw in 2021, there are a few of those proposals that were omitted from the 2023 Biden Budget. Those omissions include:

1. Gift and Estate Tax Rate Increases:
2. Reduction in Gift, Estate, and GST Tax Exclusion Amounts;
3. Sales to Intentionally Defective Grantor Trusts (IDGTs) included in the grantor’s taxable estate;
4. Limits on the use and number of Annual Exclusion Gifts, and Crummey withdrawal powers;
5. Repeal of the IRC 199A deduction with regard to qualified business income;
6. Repeal of the $10,000 limit on the deduction of state and local taxes (SALT); and
7. Expansion of the net investment income tax (NIIT) and self-employment tax.

Conclusion: Congress is currently preoccupied with the January 6 Inquiry, the Ukraine, Inflation, Ginny Thomas, and our incessant ‘culture wars’ to give much thought or attention to the 2023 budget. Not to mention gearing up their summer campaigns for the mid-term elections this fall. Consequently, I strongly suspect that not much will be done with regard to these proposals until late fall, if even then.