Summary of Tax Provisions in 2023 Federal Budget Proposal
Tax Proposal Update: Summary of Tax Provisions in 2023 Federal Budget Proposal
During the last week of March, the Biden administration released its fiscal 2023 budget proposal. While the proposed budget is a request to Congress and does not represent actual legislation, it does provide insight to the administration’s priorities.
Significant tax provisions included in the budget proposal
Changes in tax rates – corporate and individual
- Raise the corporate income tax rate from 21 percent to 28 percent.
- Increase the top marginal individual income tax rate from 37 percent to 39.6 percent.
- Increase the highest capital gains rate from 20 percent to 39.6 percent for taxpayers with taxable income of more than $1 million for joint returns ($500,000 for other returns).
- New 20 percent rate on households worth more than $100 million – the 20% rate would be applied, over a period of years, to standard taxable income and unrealized income.
- Carried interests, generally a partnership profits interest received in exchange for services, would be taxed as ordinary income.
- Changes in the centralized audits of partnership tax returns that will require a decrease in tax liability due to an audit to reduce a partner’s current year tax liability to zero with any excess being not refundable.
Trust and estate changes
- Grantor Retained Annuity Trusts (GRATs) would be required to have a minimum term of 10 years. Essentially eliminates the zero-gift tax GRAT. Annuity payments could not decrease during the term and no tax-free exchange of assets would be allowed.
- Grantor trusts would now make any sale to the trust become taxable, and any payment of the tax of the trust income would be treated as a gift,
- Limited discounts on the valuation of promissory notes between related parties.
- Trust reporting of assets would be required if value over $300,000 or $10,000 of income.
- Make changes to the Generation Skipping Trust exemptions to eliminate the use of dynasty trusts to skip more than two generations. Existing trusts would be assumed to be created on the date of enactment
Other pertinent tax changes
- Limit tax deferral on like kind exchanges - Taxpayers would only be allowed to defer $500,000 of gain ($1 million for married joint filers) per year for like-kind exchanges of real property. Any gains more than that amount would be recognized by the taxpayer in the tax year including the transaction date.
- Real property recapture as ordinary income – increase the tax rate on the portion of gain from the sale of real property held for more than one year related to depreciation from the favorable 25% rate to the applicable ordinary tax rate, which could be as high as 39.6%. This provision would only impact depreciation taken in 2023 and subsequent years and would only apply to taxpayers with adjusted gross income more than $400,000.
- Digital asset changes – numerous provisions to update the tax treatment and reporting of digital assets
- Mark to market treatment would be available for actively traded digital assets.
- Form 8938, Statement of Specified Foreign Financial Assets, would be required for taxpayers holding more than $50,000 in certain foreign digital assets.
- Requirement for U.S. brokers to report information regarding “substantial” foreign owners of passive entities holding digital assets.
Prospects for passage - and final thoughts
It is important to note that this budget proposal is just that – a proposal – and only Congress, not the administration, can write tax legislation.
Under current Senate rules, the proposals could be passed by a simple majority under the budget reconciliation process. However, since it seems unlikely that any Republican senator would vote for these proposals, and it appears that some Democrats, including West Virginia Sen. Joe Manchin, will not support all the proposals, a simple majority is not that simple. Therefore, it seems very unlikely that these proposed tax changes will be enacted.
As always, we will continue to monitor the federal budget process and will provide pertinent updates as they become available.
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