Biden's Tax Agenda

(Image Source: The New York Times)

During his State of the Union Address before Congress on March 7, 2024, President Biden presented an overview of his tax agenda proposed for the 2025 fiscal year budget. The White House also released a fact sheet highlighting the President's tax proposals and an analysis of the needs and benefits of the proposed changes. Here is a general overview of the proposed tax changes:

Capital Gains—The president's proposal centers on increasing the capital gains tax for higher-income taxpayers. Long-term capital gains and qualified dividends have been taxed at preferential rates of 0%, 15%, or 20%, depending on the taxpayer's taxable income for several years.  

The budget proposal would increase the capital gains tax rate to equalize investment and wage income taxation. That would mean capital gains for those with taxable incomes of at least $1 million would be taxed at a base rate of 39.6%, up from the previous maximum of 20%. The 39.6% rate is an increase from the current top rate of 37% (see more below).

Medicare Tax – Currently, there is a Medicare surtax of 3.8% of the lesser of the taxpayer's net investment income or the excess of the taxpayer's modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). Note: These amounts are not indexed for inflation. 

The budget proposal would increase the 3.8% Medicare tax to 5% for those with earnings over $400,000. This increase is proposed to shore up the Medicare trust fund. This would result in a 44.6% (39.6% plus 5%) federal rate for the wealthiest taxpayers.

Under current law, some business owners can avoid Medicare taxes on some of the profits from pass-through businesses, such as S corporations. The President's Budget proposal closes this loophole. It is interesting to note that President Biden benefited from the current law in the past, as he set up an S corporation to receive the income from his lectures and book royalties, thus avoiding Medicare taxes on some of that income.

High Wealth Minimum Tax – The budget proposal includes a 25% minimum tax rate on the income of families worth $100 million or more. This would require an annual determination of a taxpayer's net worth, which would be complicated for families near the $100 million threshold. 

Top Marginal Tax Rate - Currently, the top personal marginal tax rate is 37%. The budget proposal would increase the top individual income tax rate to 39.6% for those making more than $400,000 ($450,000 for joint filers). This higher rate would reverse a tax cut that was part of the Tax Cuts and Jobs Act (TCJA) and is set to expire after 2025. 

Corporate Tax Rate - The federal corporate tax rate is currently 21%, set by the TCJA, and scheduled to expire after 2025. The budget proposal would increase it to 28%.  

Corporate Minimum Tax – The President also proposes increasing the current 15% corporate minimum tax on domestic companies to 21%.

Global Minimum Tax - Also proposed is adopting the under-taxed profits rule included in the Organization for Economic Cooperation and Development's global minimum tax, which would allow the U.S. to tax a company if it is paying below a 15% rate and the country where the business is headquartered also isn't applying the 15% minimum rules.

Basis Step-Up – Currently, when someone (termed an heir or beneficiary) inherits property, the basis in the hands of the beneficiary will be the fair market value (FMV) at the date of death of the property's owner, also referred to as basis step-up (although it can be a step-down). This generally allows the decedent and the beneficiaries to escape taxation on accumulated gains. The budget proposal would limit the basis step up to $5 million per person and $10 million per married couple. However, the proposal includes that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.

Carried Interest - Carried interest refers to compensation (management fee) earned by investment managers on the performance of their funds. It is currently taxed at capital gain rates, generally 20%, as opposed to ordinary income, subject to the current 37% top individual income tax rate. The budget proposal would tax carried interest at ordinary income tax rates for individuals earning over $400,000. 

Stock Buyback Tax—The Inflation Reduction Act (IRA), signed into law in August 2022, imposed a 1% excise tax on net share repurchases in a tax year that certain publicly traded corporations make. The budget proposal would increase the rate to 4% and urge companies to spend that money on wages or equipment instead of stock buybacks.

Executive Compensation – The budget proposal would limit a corporation's deduction for compensation to any employee to $1 million, thus denying corporate tax breaks for compensation paid to any employee that exceeds $1 million. Currently, the deduction limit applies only to payments made to certain executives.

Private Jets – The President's proposal continues the recent IRS crackdown on personal use of corporate jets as a business expense by ending a tax break to deduct corporate jet use.  

Like-Kind Exchanges – Currently, Code Sec 1031 allows investors to avoid paying taxes on profits from a real estate property sale if they reinvest those profits into other real estate. The budget proposal would limit the deferral of earnings to $500,000. 

Cryptocurrency Losses –A loss from a sale of stock or securities is disallowed by Section 1091 of the Internal Revenue Code if the same or substantially identical stock or securities are purchased within 30 days before or after the sale (a "wash sale"). On the other hand, a taxpayer may sell a digital asset that is currently not considered a stock or security for wash sale purposes at a loss on one day and repurchase the same digital asset the next day and would be able to claim the loss on their tax return. Under Biden's proposal, the wash sale rules would be amended to add digital assets to the list of assets subject to the wash sale rules.

Cryptocurrency Mining - Mining is the activity or process of searching through large amounts of information for specific data or patterns. A miner solves a transaction puzzle and publishes a block containing proof-of-work, and other miners verify the solution. This process requires substantial computer power and uses enormous amounts of electricity. The budget proposal would impose a 30 percent excise tax on electricity costs associated with digital asset mining.

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Estate and Gift Taxes – Although not currently included in Biden's legislative proposals, it is notable that the current TCJA estate and gift tax lifetime exemptions will expire after 2025. Thus, the current higher TCJA estate tax exemption ($13.61Millon in 2024) will revert to 2009 levels of about $5.49 Million.  

Oil and Gas Tax Incentives - Biden calls for Congress to end the oil and gas industry's tax incentives, including certain drilling costs and depletion write-offs.   

Child Tax Credit - Biden's goal is to reestablish the child tax credit that was in effect in 2021 during the COVID-19 pandemic. The credit was $3,600 for children under six and $3,000 for older children. 

Earned Income Tax Credit – The proposed budget would expand the Earned Income Tax Credit for low-paid workers who don't have a child in their home and would make older workers aged 65 and older and young adults aged 18 to 24 eligible for the credit.

Premium Tax Credit – Biden wants to make permanent the Inflation Reduction Act's expansion of the premium tax credit for those who acquire their health insurance through a government Marketplace.

High-Income Taxpayers Retirement Account Contributions - The proposal would impose special distribution rules on high-income taxpayers with large retirement account balances. Those with tax-favored retirement arrangements that exceeded $10 million in a preceding calendar year would be required to distribute a minimum of 50% of that excess. Would apply to IRAs, 401(a), 403(b), and 457(b) plans. 

For this purpose, a taxpayer is a high-income taxpayer if their modified adjusted gross income is over $450,000 if they are married and filing jointly (or filing as a surviving spouse), over $425,000 if they file as head-of-household, or over $400,000 for taxpayers using other filing statuses.

Be aware that these are all tax proposals, and there is no assurance that they will be passed or will not be modified.