2023 Federal Tax Update: Biden Budget Proposals

Capitol Building

Despite a campaign promise to raise taxes on higher income households, the Biden Administration has so far not been successful in doing so. The latest efforts on this are contained in the Administration’s 2023 Budget Proposal and they would, if enacted, have a significant impact on high-net-worth Americans. While these proposals are not likely to make it through a divided Congress, we are keeping a close watch per usual to assess the potential impact on our clients and whether we have strategies in place that would help to offset these increases. Here is a quick summary of what is being proposed:

  • Limit the step‐​up in basis at death, which currently wipes out decedents’ unrealized gains and allows heirs to sell assets tax-free. The change would apply to unrealized gains over $5 million for single filers ($10 million married), making death an income taxable event.
  • Increase top marginal tax rate to 39.6%. For those with adjusted gross income over $450,000 married filing jointly ($400,000 single), the top rate would rise from 37% currently. This would repeal the rate cut included in the 2017 Tax Cuts and Jobs Act, which mostly benefited higher-income Americans.
  • Increase the tax rate on long-term capital gains and qualified dividends to 39.6%. For filers with taxable income over $1 million, capital gains would be taxed at the new top marginal rate of 39.6% vs. 20% currently.
  • Increase Net Investment Income Tax (NIIT) to 5%. The NIIT would apply to more types of income, and for income over $450,000 for married filing jointly ($400,000 single), the NIIT rate would rise to 5% from 3.8% currently. The NIIT would also apply to non-passive income from pass-through entities (Sole Proprietorships, Limited Partnerships, LLCs, S Corps).
  • Reduce the tax-deferral benefit of like-kind exchange (Section 1031) to a maximum of $500,000.
  • Tax “carried interest” as ordinary income instead of capital gains. This applies to the incentive-based pay certain investment managers collect that is linked to the profitability of their investments.
  • Impose new 25% minimum tax on wealth exceeding $100 million. Wealth would include unrealized capital gains. Defining wealth and unrealized gains presents numerous practical challenges, and this is a major reason this type of tax has not ever been implemented in the US.

Even if the above proposals go nowhere, taxes on higher-income Americans are due to rise at the end of 2025. That is when certain provisions of the 2017 Tax Cuts & Jobs Act expire if not renewed by Congress. Included in this is the top tax rate going back to 39.6% and the federal estate tax exclusion, currently at close to $13 million per person, being reduced essentially by half.