Highlights from 2023 Proposed Federal Budget
This week, proposed increases to corporate taxes and wealth taxes were announced by the White House.
On Monday, the White House released the proposed budget of the U.S. Government for Fiscal Year 2023. While the proposed tax increases are targeted at billionaires and corporations, at this moment, keep in mind the budget items need to be approved by Congress.
2023 Proposed Federal Budget Highlights
Higher Corporate Tax
- 28 percent from 21 percent
Billionaire Minimum Income Tax
- Applies to the top one-hundredth of 1 percent of American households
- American households worth more than $100 million pay a rate of at least 20 percent including unrealized gains in the value of their liquid assets, such as stocks and bonds
High Income Earners
- Raise the top individual income tax rate to 39.6 percent from 37 percent
- Reverse the 2017 tax cut ushered in by former President Donald J. Trump
Proposed Changes Explained
The US Treasury has provided the following general explanations to the proposed changes:
Below are portions of the General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals prepared by the US Treasury Department for the above highlighted topics.
C Corporate Tax Rates: Current Law
Income of a business entity can be subject to Federal income tax in a manner that varies depending upon the classification of the entity for Federal income tax purposes. Most small businesses are owned by individuals and taxed as “pass-through” entities, meaning that their income is passed through to their owners who are taxed under the individual income tax system.
Most large businesses, including substantially all publicly traded businesses, are classified as “C corporations” because these corporations are subject to the rules of subchapter C of chapter 1 of the Internal Revenue Code (Code), and accordingly pay an entity-level income tax. Additionally, taxable shareholders of such corporations generally pay Federal income tax on most distributions attributable to their ownership in the corporation. Some mid-sized businesses choose a passthrough form of entity classification (under subchapter K or subchapter S of chapter 1 of the Code) while others choose the C corporation form of entity classification.
C corporations determine their taxable income, credits, and tax liability according to the Code and regulations promulgated thereunder. The Tax Cuts and Jobs Act of 2017 replaced a graduated tax schedule (with most corporate income taxed at a marginal and average rate of 35 percent) with a flat tax of 21 percent applied to all C corporations.
Reasons for Change
Raising the corporate income tax rate is an administratively simple way to raise revenue to pay for the Administration’s infrastructure proposals and other longstanding fiscal priorities. A corporate tax rate increase can expand the progressivity of the tax system and help reduce income inequality. Additionally, a significant share of the effects of the corporate tax increase would be borne by foreign investors. Therefore, some of the revenue raised by this proposal would result in no additional Federal income tax burden on U.S. persons. Also, the majority of income from capital investments in domestic C corporations is untaxed by the U.S. government at the shareholder level, so the corporate tax is a primary mechanism for taxing such capital income.
Furthermore, many multinational corporations pay effective tax rates that are far below the statutory rate, due in part to low-taxed foreign income. The proposal would keep the global intangible low-taxed income (GILTI) deduction constant, raising the GILTI rate in proportion to the increase in the corporate rate. This avoids increasing the incentive to shift profits and activity offshore as the domestic rate is increased.
Impose a Minimum Income Tax on the Wealthiest Taxpayers: Current Law
Most realized long-term capital gains and qualified dividends are taxed at graduated rates under the individual income tax, with 20 percent generally being the highest rate (23.8 percent including the net investment income tax, if applicable, based on the taxpayer’s modified adjusted gross income). Moreover, capital gains are taxable only upon a realization event, such as the sale or other disposition of an appreciated asset.
As a result, the Federal income taxation of the appreciation of an asset that accrues during the asset’s holding period is deferred. In the case of unrealized appreciation at death, the basis adjustment (usually, a step-up) for a decedent’s assets may cause Federal income taxation of that gain to be eliminated entirely.
Reasons for Change:
Preferential treatment for unrealized gains disproportionately benefits high-wealth taxpayers and provides many high-wealth taxpayers with a lower effective tax rate than many low- and middleincome taxpayers. Under current law, the preferential treatment for unrealized gains produces an incentive for taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more economically productive investments.
Reforms to the taxation of capital gains will reduce economic disparities among Americans and raise needed revenue.
Proposal
The proposal would impose a minimum tax of 20 percent on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) of an amount greater than $100 million. Under this proposal, taxpayers could choose to pay the first year of minimum tax liability in nine equal, annual installments. For subsequent years, taxpayers could choose to pay the minimum tax imposed for those years (not including installment payments due in that year) in five equal, annual installments. A taxpayer’s minimum tax liability would equal the minimum tax rate (that is, 20 percent) times the sum of taxable income and unrealized gains (including on ordinary assets) of the taxpayer, less the sum of the taxpayer’s unrefunded, uncredited prepayments and regular tax.
Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once. The amount of a taxpayer’s “uncredited prepayments” would equal the cumulative minimum tax liability assessed (including installment payments not yet due) for prior years, less any amount credited against realized capital gains in prior years. Uncredited prepayments would be available to be credited against capital gains taxes due upon realization of gains, to the extent that the amount of uncredited prepayments, reduced by the cumulative amount of unpaid installments of the minimum tax (net uncredited prepayments), exceeds 20 percent of unrealized gains.
Refunds would be provided to the extent that net uncredited prepayments exceed the long-term capital gains rate (inclusive of applicable surtaxes) times the taxpayer’s unrealized gains – such as after unrealized loss or charitable gift. However, refunds would first offset any remaining installment payments of minimum tax before being refundable in cash. Minimum tax liability would be reduced to the extent that the sum of minimum tax liability and uncredited prepayments exceeds two times the minimum tax rate times the amount by which the taxpayer’s wealth exceeds $100 million. As a result, the minimum tax would be fully phased in for all taxpayers with wealth greater than $200 million.
For single decedents, net uncredited prepayments in excess of tax liability from gains at death would be refunded to the decedent’s estate and would be included in the decedent’s gross estate for Federal estate tax purposes. For married decedents, net uncredited prepayments that are unused would be transferred to the spouse or as otherwise provided by the Secretary or her delegates through regulations or other guidance.
Taxpayers with wealth greater than the threshold would be required to report to the IRS on an annual basis, separately by asset class, the total basis and total estimated value (as of December 31 of the taxable year) of their assets in each specified asset class, and the total amount of their liabilities. Tradable assets (for example, publicly traded stock) would be valued using end-ofyear market prices. Taxpayers would not have to obtain annual, market valuations of nontradable assets. Instead, non-tradable assets would be valued using the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statements, or other methods approved by the Secretary or her delegates (Secretary). Valuations of nontradable assets would not be required annually and would instead increase by a conservative floating annual return (the five-year Treasury rate plus two percentage points) in between valuations.
The IRS may offer avenues for taxpayers to appeal valuations, such as through appraisal. This reporting also would be used to determine if the taxpayer is eligible to be treated as “illiquid.” Taxpayers would be treated as illiquid if tradeable assets held directly or indirectly by the taxpayer make up less than 20 percent of the taxpayer’s wealth. Taxpayers who are treated as illiquid may elect to include only unrealized gain in tradeable assets in the calculation of their minimum tax liability. However, taxpayers making this election would be subject to a deferral charge upon, and to the extent of, the realization of gains on any non-tradeable assets. The deferral charge would not exceed ten percent of unrealized gains.
Estimated tax payments would not be required for minimum tax liability. The minimum tax payment amount would be excluded from the prior year’s tax liability for purposes of computing estimated tax required to be paid to avoid the penalty for the underpayment of estimated taxes.
The proposal would provide the Secretary with the authority to prescribe such regulations or other guidance determined to be necessary or appropriate to carry out the purposes of the proposal, including rules to prevent taxpayers from inappropriately converting tradeable assets to non-tradeable assets.
The proposal would be effective for taxable years beginning after December 31, 2022.
Increase the Top Marginal Income Tax Rate for High Earners: Current Law
For taxable years beginning after December 31, 2017, and before January 1, 2026, the top marginal tax rate in the tax rate tables is 37 percent. For taxable years beginning after December 31, 2025, the top marginal tax rate for individual income tax is 39.6 percent.
For taxable years beginning after December 31, 2021, and before January 1, 2023, the top marginal tax rate applies to taxable income over $647,850 for married individuals filing a joint return and surviving spouses, $539,900 for unmarried individuals (other than surviving spouses) and head of household filers, and $323,925 for married individuals filing a separate return. The tax bracket thresholds are indexed for inflation.
Reasons for Change
The proposal would raise tax rates for the highest income taxpayers. It would raise revenue while increasing the progressivity of the tax system.
Proposal
The proposal would increase the top marginal tax rate to 39.6 percent. The top marginal tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for head of household filers, and $225,000 for married individuals filing a separate return. After 2023, the thresholds would be indexed for inflation using the C-CPI-U, which is used for all current thresholds in the tax rate tables.
The proposal would be effective for taxable years beginning after December 31, 2022.
For More Information or Questions
As stated earlier, the above explanations of the proposed changes are from the US Treasury.
To read the entire document, General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals by the US Treasury, please click here.
To review the Budget of the US Government Fiscal Year 2023, please click here.
Should you have questions about this topic, or any other topics related to your personal or business situation, please contact us at any time.
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