Biden’s Budget Proposal Gives Glimpse into Potential Second Term Tax Legislation

President Biden released his proposed budget for FY 2025 on March 11, 2024, which included several tax-related provisions. The same day, the Treasury released its “Greenbook,” which provides an in-depth analysis of the tax-related proposals. While the budget is just proposed changes, it does offer insight into what legislative priorities could be expected in a second Biden administration, particularly as pertains to tax changes. 

The tax proposals would have a major impact on all taxpayers. Many of the provisions have been previously proposed without becoming law. Below is a brief overview of the major provisions in the proposed budget. 

Business Provisions

As in previous years, there are multiple provisions focused on increasing corporate taxation. Among other things, the proposals would:

• Raise the corporate income tax rate to 28% from 21%;
• Increase the corporate alternative minimum tax (“CAMT”) rate to 21% from 15%;
• Increase the corporate stock buyback excise tax to 4% from 1%;
• Increase the dividend treatment of certain corporate transactions such as:
  • leveraged distributions between related corporations,
  • subsidiary purchases of owner corporation’s stock, and
  • the distribution of high-basis stock to eliminate earnings and profits;
• Expand the application of the net investment income tax (“NIIT”) to include non-passive income allocated from partnerships and S corporations and raise the top rate to 5% from 3.8%;
• Make the excess business loss limitation permanent (presently, $578,000 for taxpayers filing jointly, as indexed for inflation);
• Eliminate deductions for compensation in excess of $1 million (per employee); and
• Tax carried interests as ordinary income, for taxpayers with taxable income over $400,000 who perform services for an “investment partnership.”

Individual Provisions

Increasing taxes on the wealthiest taxpayers would include:

• Increase the top tax rate to 39.6% (currently, 37%) for taxpayers in the top brackets,
• Eliminate preferential treatment of capital gains and qualified dividends for taxpayers with taxable income over $1 million,
• Create a new 25% minimum tax on unrealized capital gains for taxpayers whose net wealth exceeds $100 million, and
• Require taxpayers with over $10 million vested in a tax-deferred retirement account to distribute at least 50% of the excess over $10 million. 

The budget also contains provisions intended to help low-income taxpayers through increased tax breaks and credits, such as:

• A refundable credit for homebuyers and home sellers of up to 10% of the home’s price, not to exceed $10,000, and
• Reinstatement of the enhanced Child Tax Credit with full refundability. 

International Provisions

The international proposals are generally focused on increasing the taxation of foreign earnings and disincentivizing offshoring corporate activity by: 

• Eliminating the foreign-derived intangible income (“FDII”) deduction,
• Increasing the global low-taxed income (“GILTI”) rate to 21% (currently an effective 10.5%),
• Bringing U.S. international taxation into further alignment with the OECD Pillar Two proposals, and
• Replacing the base erosion and anti-abuse tax (“BEAT”) with the undertaxed payment regime (“UTPR”).

Real Property and Housing Provisions

While the budget only contains two provisions specific to real property, both would be significant changes. The budget proposals would:

• Cap the deferral amount for IRC Sec. 1031 like-kind exchanges to $500,000 per year ($1 million if married filed jointly), and
• Require 100% recapture of depreciation deductions for noncorporate taxpayers, which is taxed as ordinary income. 

The budget also contains several proposals regarding housing developments, including provisions to:

• Make significant changes to the New Markets Tax Credit by:
  • Making it a permanent provision,
  • Setting an annual credit allocation amount of $5 billion (adjusted annually for inflation), and
  • Giving allocation priority to community development entities that invest in significantly economically distress communities,
• Create a new Neighborhood Homes Credit to be allocated to the states, limited to no more of the lesser of 35% of development costs and 28% of median sales prices for new homes, and
• Make significant changes to the existing Low-Income Housing Tax Credit, including:
  • Increasing annual credit allocations to the states,
  • Reducing the 50% Private Activity Bonds amount to 25%,
  • Repealing the qualified contract provision, and
  • Repealing and replacing the right of first refusal safe harbor with an option safe harbor.

Trust, Estate, and Gift Tax Provisions

Continuing the focus on taxing wealthy taxpayers, many proposals would target trust, estate, and gift tax planning techniques that are used by the ultra-wealthy to protect their assets from taxation, including:

• Requiring grantor retained annuity trusts (“GRATs”) to have a minimum remainder value of the greater of 25% of the GRAT assets or $500,000,
• Requiring GRAT terms to be between ten years and the annuitant’s life expectancy plus ten years,
• Modifying the rules for generation-skipping tax (“GST”) transfers,
• Treating sales between a grantor and an irrevocable trust as taxable transactions,
• Treating the payment of income taxes by the grantor as an additional gift for gift tax purposes,
• Limiting valuation discounts for lack of liquidity for intrafamily transfers of partial interests in non-publicly traded property,
• Eliminating the present interest requirement for gifts, and
• Capping the total annual exclusion gifting amount to $50,000 per donor.

Digital Asset Provisions

Digital assets continue to be a fertile area for legislative proposals. Many provisions would extend existing rules to encompass digital assets, including:

• Applying the “wash sale” rules to digital asset transactions,
• Affirmatively including digital assets under securities loan nonrecognition rules,
• Adding digital assets to IRC Sec. 6038D reporting,
• Information-sharing provisions under FATCA, and
• Allowing the use of mark-to-market rules to digital assets under IRC Sec. 475.

Additionally, the budget contains a proposal that would levy a 30% excise tax on energy costs from mining digital assets.

Observations: While it is unlikely all these proposals would become law; it is certainly possible that a few may eventually be enacted. Taxpayers who wish to be proactive should engage a trusted tax adviser to keep them informed of any changes that could impact their tax situation.