The $7.3 trillion Fiscal Year (FY) 2025 Biden budget proposal, released March 11, includes $4.9 trillion in new taxes—mostly in corporate and “tax the rich” proposals—with $3 trillion of that allocated to deficit reduction. The budget spending proposals for FY 2025 are in line with the spending targets set in last year’s Fiscal Responsibility Act (FRA). According to the budget documents, it would reduce the deficit by some $3 trillion over ten years.
Most of the tax proposals are retreads from previous Biden budget proposals, but there are some new ones. One is a provision targeted at private placement life insurance (PPLI). Reproposed are a series of proposals that would “tax the rich” or improve income and wealth equality, as the Administration characterizes them—including a 25% minimum tax that would include unrealized gains (i.e., increases in asset values before those assets are sold) in the tax base. That would be applicable to wealthy taxpayers who hold net assets of more than $100 million. The budget also reiterates the President’s oft-stated promise not to impose new taxes on people earning less than $400,000/year.
Among the proposals applicable to individuals are:
- Private Placement Life Insurance (PPLI): A $6.897 billion revenue raiser, the PPLI proposal designates and defines certain PPLI and similar policies as “covered contracts” (CCs). Any funds—including loans—from CCs would be treated as taxable distributions at ordinary income tax rates. Death benefits would be taxable as ordinary income to the extent the beneficiary’s share of the CC’s investment value exceeds the beneficiary’s share of the CC’s investment. In addition, there would be an additional tax of ten percent of any taxable distribution from a CC. There are also significant new reporting requirements. These rules would take effect for taxable years beginning after December 31, 2024.
- Capital Gains: The budget proposes to increase the tax on long-term capital gains and qualified dividends to ordinary income tax rates, on taxable income of more than $1 million. Together with the new tax on unrealized capital gains at death (see below), this provision is estimated to raise $28.9 billion over ten years. It would become effective as of the date of enactment.
- Retirement Savings: Per the Biden budget proposal, taxpayers with adjusted gross income (AGI) over $450,000/married would be subject to a special distribution rule on retirement savings in excess of $10 million. Impacted taxpayers would have to withdraw (and pay tax on) 50 percent of any amounts in excess of $10 million. The proposal also includes limits on rollovers to Roth retirement savings. The effective date would be taxable years beginning after December 31, 2024, and it would raise $21.65 billion over ten years.
- Tax on Inherited Assets: Part of the capital gains tax proposal is a provision that would tax capital assets transferred at death. This would also apply to trusts. It includes a $5 million exemption, and exceptions for assets transferred to a surviving spouse, transfers to charity, and transfers of tangible personal property. It also includes special rules for family-owned-and-operated businesses. These rules would take effect on January 1, 2025. They would raise $28.9 billion over ten years.
- Individual Minimum Tax: The budget calls for a 25 percent minimum tax on individuals with wealth greater than $100 million. The tax would also apply to unrealized gains from capital assets. The proposal would raise $503 billion over ten years and would be effective for taxable years beginning after December 31, 2024.
- Increase in the Top Individual Tax Rate: Included in the budget is a proposal that would hike the top individual tax rate to 39.6 percent. That rate would apply to taxable income over $450,000 (married). The threshold is indexed for inflation. It would be effective for taxable years beginning after December 31, 2023, and would raise $246 billion over ten years.
- A Hike in the NIIT: The Biden budget proposes hiking the net investment income tax (NIIT), currently at 3.8 percent, to five percent. This would also apply to Medicare taxes and would impact taxpayers with incomes over $400,000. This is a 1.2 percent increase in the NIIT. The income threshold would be indexed. It would take effect for this year’s income (after 12/31/23), and would raise $404 billion for the NIIT, and $797 billion for Medicare.
- NIIT Applied to Pass-Through Income: The 3.8 percent NIIT would be applied to pass-through business income for taxpayers with adjusted gross income (AGI) of $400,000/married and above. This proposal specifies that there would be no indexing. It would apply to this year’s (2024) income—its effective date would be taxable years beginning after December 31, 2023. It would raise $393.22 billion over ten years.
- ACA Premium Tax Credits: The Biden budget would make permanent the enhanced Affordable Care Act (ACA) premium tax credits, at a cost of $88 billion over ten years.
Biden’s budget tax proposals applicable to corporations and businesses include:
- An increase in the corporate tax rate from 21 percent to 28 percent, effective for tax years after December 31, 2023. This provision would raise $1.350 trillion over ten years.
- Impose a cap on the deductibility of compensation—all compensation in excess of $1 million would no longer be deductible. Effective for tax years beginning after December 31, 2024, this proposal would raise $272 billion over ten years.
- Up the corporate alternative minimum tax (applicable to corporations valued at $1 billion or more) from 15 percent to 21 percent—effective for taxable years beginning after December 31, 2023. This provision would raise $137 billion over ten years.
- Expand COLI business interest non-deductibility—As has been proposed for multiple years now, this budget would allow full deductibility of company-owned life insurance (COLI) policy loan interest only for policies on 20 percent or greater owners. The COLI provision would raise $7.14 billion and would apply to policies issued or materially changed after December 31, 2024.
Other tax provisions included in the FY 2025 Biden budget include a variety of small-scale estate, gift, and generation-skipping tax rules, a rule that would require employers to either guarantee post-retirement benefits for at least ten years, or fund them over the longer of the working lives of covered employees or ten years; a provision cutting off employee retention tax credit (ERTC) claims along with ERTC provisions adverse to promoters of the ERTC (these provisions are in the House-passed H.R.7024 which is currently stalled in the Senate); a technical correction to the DAC (deferred acquisition cost) rules; new limits on donor advised funds (DAFs); and elimination of the favorable tax treatment for carried interest.
Non-Tax Proposals: Also included is a federal paid family, sick and safe leave program, to be administered by the Social Security Administration, that would provide up to 12 weeks of paid leave for workers; and a proposal to reform the unemployment insurance (UI) program. And while there were no new proposals on the Administration’s effort to crack down on junk fees, there was a discussion of the issue included in the budget proposal. And that discussion listed investment advice as among the junk fees the Administration is targeting.
Prospects: Rarely (quite possibly, never) has a president’s budget proposal been anything other than dead on arrival, especially when either the House or the Senate is controlled by the other political party. There is virtually no chance that Congress will enact all or even most of these budget proposals. But the budget does tee up the issues that will dominate on the campaign trail ahead of the November elections. And, depending on the outcome of the elections, they could be very much in play in the tax debate that is coming in 2025.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org, or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.