President Biden’s tax plan was unveiled on March 9, 2023. In it there were some DOA proposals.
Income Taxes
The budget proposed raising the top personal-income tax rate to 39.6%, from 37%, for Americans earning $400,000 or more. That increase would reverse part of the 2017 Tax Cuts and Jobs Act. This would have the effect of having more taxpayers defer income to avoid hitting the $400,000 per year mark.
Capital gains tax
The President’s plan would raise the federal capital gains tax rate to 39.6% from 20% for households earning more than $1 million. Capital gains rates would not be indexed for inflation on this proposal, thus creating a double whammy for taxpayers in this category. So, if you sell a property that you’ve held in the family for 50 years for a Million Dollars, your rate jumps 19.6%. You’ll see a lot of price manipulation to get around this one including installment sales.
Wealthier investors are also subject to an additional 3.8% tax on long- and short-term capital gains (and other investment income including interest and dividends) that is used to fund ObamaCare. Short-term capital gains on assets sold within a year are typically taxed as ordinary income. Biden also called for increasing the 3.8% ObamaCare tax to 5% for those earning at least $400,000 in an effort to shore up Medicare.
Under the proposal, taxpayers could face a federal rate as high as 44.6% when they sell stocks, properties and other assets and it drives their incomes above $1 Million.
New minimum tax for “Billionaires” (really $100 Millionaires).
The president’s plan calls for a 25% minimum tax rate U.S. households worth more than $100 million. This would seem to call for anyone near $100 Million to have to report the value of their assets annually. A huge undertaking which will make accountants and actuaries very happy.
Corporate stock buyback tax
The President called for quadrupling the 1% levy on corporate stock buybacks that was added to the tax code last year as part of the Inflation Reduction Act. His proposal would increase the tax from 1% to 4% and would allegedly reduce the differential tax treatment between share repurchases and dividends. But given the suggested increase in the Capital gains rates, it actually doesn’t accomplish that and dividends may be more palatable which of course impacts the middle class.
Increase in Corporate tax rates
The President’s proposal would lift the corporate tax rate to 28% from 21%, rolling back a key part of the 2017 tax law changes. The measure also calls to increase taxes U.S. companies owe on their foreign earnings to 21% — nearly double the current 10.5% rate. This could cause divestment of foreign companies by US Companies or spin-offs.
Category Archives: Tax Law Changes
TEN YEAR REQUIRED MINIMUM DISTRIBUTIONS NEW GUIDANCE
As part of 2017 Tax Act, beneficiaries of inherited IRA’s no longer could take required minimum distributions (RMDs) over their life expectancies. Instead except for spouses and disabled children, they must do so within 10 years. There was a question as to how beneficiaries were to go about removing the funds. Could they wait until the 10th year and remove it all or did they have to take it out periodically. The answer as always is, “it depends”.
If prior to death, the account holder was taking required minimum distributions, then the beneficiaries have to continue taking decedent’s RMDs and close the account in the 10th year. If decedent was taking no RMDs prior to death, then the beneficiary doesn’t have to remove funds until year 10. This means that the money can grow tax deferred creating a larger return over the 10 year period. Unless you have qualified Trust provisions, Trusts must take the funds out within 5 years. So, it is not necessarily good to name your revocable trust as a beneficiary on your IRA.
Zombie Tax effect on Bernie Sanders
So, President Biden’s Tax plan has to gifts for farmers and small business owners. Reduction of the Estate tax exemption from $11.5 Million to $3.5 Million ($7 Million per couple). And capital gain recognition upon the death of an ancestor. So, let’s take Bernie Sanders. He dies owning real estate totalling about $3 Million and his basis is about $800,000. This translates into a $2.2 Million gain. This gets taxed at 45% = $990,000. So, let’s take Grandma who dies with $4 Million in a farm with a basis of $100,000. Capital gain of $3.9 Million x 45% tax = $1,755,000 to be paid over 15 years by the family or they have to sell the farm to some conglomerate probably. Same numbers if Grandma owned a gas station. Jobs will be lost, wealth will be lost, investment will be lost. If you want to raise taxes, raise it the simplest way possible, raise rates on income for everyone. Then everyone sees that their taxes are going up and that the Government is spending money.
New Virginia Filing Requirement for Certain Corporations July 1, 2021
The Virginia legislature is doing a study on unitary taxes for brother/sister or parent subsidiary corporations. https://www.tax.virginia.gov/news/corporate-unitary
This study requires corporations to file a special return by July 1, 2021 based upon their 2019 tax returns.
Corporations must be “unitary businesses”.
“”Unitary business” means a single economic enterprise made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. A “unitary business” includes that part of the business that meets the definition in this section and is conducted by a taxpayer through the taxpayer’s interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities. A “unitary business” shall not include persons subject to, or that would be subject to if doing business in the Commonwealth, the insurance premiums license tax under Chapter 25 (§ 58.1-2500 et seq.), Code of Virginia, or the bank franchise tax under Chapter 12 (§ 58.1-1200 et seq.)”
So, talk to your tax advisor if this applies to you.
Changing Step Up in Basis is a big deal
In its thirst to get more tax revenue to fund more give-aways, the Biden Administration has proposed a provision to get rid of the step-up in basis provision when a person dies. The current rule is that when a person dies the tax basis of that person’s assets are the fair market value on the date of death. This rule has been around for over 50 years. In the 1976 Tax Act, Congress repealed the rule and put a new rule into effect, it was so hard to carry out that it got deferred and ultimately repealed.
There are three main problems with the concept. (1) Much of the appreciation in property is due to inflation not real gain in wealth. So, if one adopts carry-over basis, then one should index that basis to inflation which creates even more complexity. (2) How does a survivor know the basis of grandpa’s assets after grandpa dies? Where did grandpa keep that information? Suppose he invested in a dividend reinvestment plan and didn’t keep records. For real estate that is probably easier to track, but if Grandpa made improvements, how do you track that? It becomes an accounting nightmare. (3) Lastly when combined with an estate tax (even if you get the tax added to the basis), it becomes confiscatory.
These are the reasons why the Administration provision is a difficult proposal.