On March 28th 2022, President Biden released his “FY2023 Budget”, and the U.S. Treasury released the “Green Book,” which provides details related to the revenue provisions in the FY2023 Budget. The revenue proposals in the FY2023 Budget rely on a baseline that generally presumes the enactment of the revenue provisions in the Build Back Better Act (the “BBBA”) as passed by the House of Representatives on November 19, 2021. As a result, the revenue proposals described in the Green Book are intended to be in addition to the provisions included in the BBBA. It should be noted that the BBBA has been stalled in the Senate since late 2021.
The FY2023 Budget includes several proposals that were first proposed in the Administration’s FY2022 budget and some, that were included in the BBBA. Notably, the FY2023 Budget once again proposes:
- an increase in the tax rate for C corporations from 21% to 28%
- an increase in the top marginal tax rate from 37% to 39.6% for taxable income over $450,000 for married individuals filing a joint return ($400,000 for unmarried individuals);
- a limitation on gain deferred under section 1031 to $500,000 ($1 million in the case of married individuals filing a joint return) per taxpayer per year;
- subjecting long-term capital gains and qualified dividends to ordinary income rates for taxpayers with taxable income exceeding $1 million;
- for partners with taxable income (from all sources) exceeding $400,000, subjecting a partner’s allocable share of income from profits interests in investment partnerships (i.e., carried interest) to tax as ordinary income and self-employment tax regardless of the character of the income at the partnership level (aka: “the carried interest loophole”);
- treating transfers of appreciated assets by gift or death as realization events subject to capital gains tax, subject to a $5 million per donor lifetime exclusion.
- A 15% minimum tax on corporate profits for firms with earnings over $1 billion reported to shareholders, and a 1% surtax on stock buybacks
- A 5% surtax on “modified adjusted income” above $10 million, as well as an additional 3% on “modified adjusted income” above $25 million (for taxable years beginning after 12/31/21)
- A Global Minimum Tax, consistent with OECD, The Organization for Economic Co-operation and Development, of 15%
- The Net Investment Income Tax would be extended to cover net investment income derived in the ordinary course of a trade or business for individuals with taxable income of greater than $400,000 for individuals filing single, $500,000 for joint return filers as well as for trusts and estates. (for taxable years beginning after 12/31/21)
- Continue the limitation on excess business losses
The Green Book also includes proposals that were not in last year’s budget proposals or in the House Build Back Better bill and includes some modifications to prior proposals. Listed below are some of the new proposals
- A minimum tax of 20% on total income (generally including unrealized capital gains) on taxpayers with “wealth” of more than $100 million
- Taxing unrecaptured section 1250 gain as ordinary income
- Various procedural changes, including extending the statute of limitations for unreported gain related to inclusion events for qualified opportunity fund investors
- Treating a grantor’s payment of income tax attributable to income earned by a grantor trust as a gift to the trust
- Requiring trusts to report the nature and estimated value of their assets on an annual basis (as well as information about the trust’s grantor)
- Requiring employers to withhold tax on “failed” nonqualified deferred compensation plans
- Limiting the use of donor advised funds to avoid private foundation payout requirements
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