On March 9, President Biden released his administration’s fiscal year 2024 budget. The President’s annual budget request traditionally kicks off the annual budget process.
While Congress has the final say on spending and taxation needed to pay for the spending, the budget signals the administration’s spending priorities and includes details on the revenue needed to pay for those priorities along with the sources generating that revenue.
OMB Circular A-11 - Preparation, Submission, and Execution of the Budget notes that the federal budget primarily focuses on the upcoming fiscal year for which Congress needs to make appropriations. However, it also includes data for the most recently completed year, the current year and nine years following the budget year (outyears) to reflect the effect of budget decisions over the longer term. In addition to proposed appropriations for the budget year, the budget may include proposed changes to appropriations for the current year and legislative proposals that would affect the current year, the budget year and the outyears.
With that brief background, the current budget proposes numerous changes in federal tax law (which likely would have impact on many states’ tax law for those states basing their tax law on federal tax law), including the following:
Increase corporate tax rate from 21% to 28%;
Increase the excise tax on corporate stock buybacks from 1% to 4%;
Increase individual top marginal income tax rate from 37% to 39.6% for single filers earning more than $400,000 and joint filers earning more than $450,000;
Increase the net investment income tax (additional Medicare tax) on high-income households from 3.8% to 5%;
Increase the number of taxpayers subject to the net investment income tax by including taxpayers with income earned while actively participating in trade or business conducted by passthrough entities;
Impose a “billionaire” wealth minimum 25% tax on citizens with wealth exceeding $100 million;
Eliminate the like-kind exchange gain deferral from the sale of real estate;
Require 100% ordinary income recapture of depreciation for certain depreciable real property;
Tax capital gain income at ordinary income tax rates when income exceeds $1,000,000;
Tax carried interests as ordinary income if taxable income exceeds $400,000;
Apply the wash sale rules to digital assets and address related-party digital transactions;
Modify estate and gift taxation;
Permanently expand the earned income tax credit program;
Enhance and expand the adoption credit;
Permanently exclude from income the forgiveness of student debt; and
Make permanent recent changes to the premium tax credit.
The above list identifies just some of the numerous tax items included in the budget proposal. Buried in the line-item details of Table S-6 Mandatory and Receipt Proposals are numerous other proposals including:
Prevent excess accumulations by high-income taxpayers in tax-favored retirement accounts;
Eliminate fossil fuel tax preferences, including repeal of expensing of intangible drilling costs and repeal of percentage depletion;
Reform international tax provisions, including the restriction of interest deductions of members of financial reporting groups and adopt the undertaxed profits rule;
Increase the limitation on losses of non-corporate taxpayers;
Increase compliance obligations to improve tax administration such as modifying information reporting for payments subject to back-up withholding; and
Increase compliance obligations to improve tax compliance such as a proposal to impose liability on shareholders for the collection of unpaid corporate income tax obligations and the withholding of tax on failed non-qualified deferred compensation plans.
The budget also seeks an additional $28.6 billion and a two-year extension to the $80 billion the IRS received over 10 years as part of the Inflation Reduction Act to modernize its technology and expand enforcement.
It’s important to remember that the above items are only proposals; many of these items have been floated in the past and did not make it into final legislation. As many others have already observed, it’s likely no secret that many of President Biden’s proposals are already dead upon arrival in the current divided Congress. However, the proposed budget effectively represents an opening salvo in the budget battle between the administration and Democratic legislators with Republicans on funding and spending for the next fiscal year beginning October 1, 2023, and directionally for the next decade. For their part, Republicans are preparing their version of what the budget might look like. For example, the Republican Study Committee (a Republican caucus) has recently released its vision of a 2023 budget.
It’s much too early to act on these proposals, but it’s important to remain informed about the progress on the budget and the possible implications on your tax situation. If you have any questions, please don’t hesitate to reach out to your Schneider Downs tax consultant.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.