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On March 28, President Biden sent Congress a Fiscal Year (FY) 2023 budget that calls for $1.58 trillion in discretionary spending (a 7.4 percent increase over last year) and over $1 trillion in new taxes. The budget, the Administration says, would reduce the federal deficit by $1 trillion over ten years.

Most of the new taxes would come from the proposal to hike the corporate tax rate from the current 21 percent to 28 percent (starting in 2023) and from a new 20 percent tax on a combination of income and capital wealth held by households with $100 million or more in income from earnings and increases in the value of their capital assets. The budget also proposes raising the top individual tax rate to 39.6 percent.

The budget hits hard at capital gains, too, although the capital gains proposals would apply only to rich individual taxpayers and to trusts.

Here is a summary of the tax increases included in the Biden FY 2023 budget:

  • Income Tax Rates: The budget proposes raising the corporate tax rate from 21 percent to 28 percent and the top individual tax rate from 37 percent to 39.6 percent. The top rate would apply to income over $450,000 for married couples filing jointly, $225,000 for married persons filing separate returns, $400,000 for single taxpayers, and $425,000 for heads of household. These amounts would be indexed after 2023. The new rates would take effect for taxable years after December 31, 2022.
  • Capital Gains: Wealthy taxpayers (those whose taxable income exceeds $1 million) would pay tax on their capital gains and dividends at ordinary income tax rates (i.e., 37 percent under current law (40.8 percent with the net investment tax), 39.6 percent (43.4 percent with net investment tax) if the proposal to increase the top individual tax rate is enacted). The $1 million threshold would be indexed for inflation. This rule would take effect as of the date of enactment.
  • Capital Gains/Transfers by Gift or at Death: The Biden budget proposes imposing current tax liability on increases in the value of capital assets, even when the asset has not been sold (gain has not been realized) when the property is transferred by gift or at death. The tax would be calculated using carryover rather than step-up in basis. “Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. The amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift or on the decedent’s date of death over the decedent’s basis in that asset.”

    The proposal would apply to taxpayers with $1 million or more in taxable income. Such transfers would be “deemed recognition events.” This rule would take effect as of the date of enactment.
  • BOLI: The budget proposes an expansion of the business-owned life insurance (BOLI aka COLI) pro-rata interest disallowance rules—the proposal would eliminate the exception for disallowance of a deduction for interest on BOLI policy loans where the policies are on the lives of the business’s employees, officers and/or directors. The exemption would remain for policies on the lives of 20 percent or more owners. The proposal is retroactive—the change, if enacted, would apply to policies issued on or after December 31, 2021. A material change to a policy would be treated as creating a new policy for purposes of the grandfather rule.
  • Trusts: The budget proposes that increases in the value of trust assets would trigger capital gains tax. The proposal would deem that property placed in a grantor trust triggers a recognition (taxable) event—the tax would be calculated on the difference between the transferred asset’s value as of the date it was acquired and its fair market value on the date it is received by the trust. For assets held in existing trusts, the gain would be deemed to be realized if the gain hadn’t been recognized (and taxed) within the previous 90 years (i.e., 12/31/1939). Assets would be subject to current valuation rules.

    These rules would be effective for transfers (by gift or at death) as of January 1, 2023.

    Exceptions include to these new trust rules include:
    • Gains on assets transferred to surviving spouse. For surviving spouses, the asset will carry the decedent’s basis (i.e., carryover rather than step-up in basis).
    • Transfers to charities would be fully exempt.
    • Owners of family-owned and operated businesses could choose to exclude their family-owned and operated businesses until the business is sold or it ceases to be family-owned and operated.
    • A lifetime exemption for $5 million (indexed after 2022) in gifts.
    • Also exempted is tangible personal property (e.g., household furnishings), except for collectibles.
    • The $250,000/person ($500,000 for a married couple) exemption for tax on gains on the sale of a residence would also be exempt from these rules.
  • Reporting on Life Insurance/Annuity Account Values: The budget includes a provision that would require “certain financial institutions to report the account balance (including, in the case of a cash value insurance contract or an annuity contract, the cash value or surrender value) for all financial accounts maintained at a U.S. office and held by foreign persons.”
  • Minimum Tax on the Ultra-Wealthy: The Administration is proposing a 20 percent minimum tax on “total income,” including increases in the value of capital assets (even if the gain has not been realized), for taxpayers with total wealth (the difference between the total asset value and liabilities) of greater than $100 million. The proposal would apply to existing wealth, although there are transition rules (an impacted taxpayer could pay the first year of liability in nine equal annual installments and in subsequent years in five equal annual installments (on top of the installments due from the previous year’s liability).

    The proposal includes rules on how to calculate this new tax liability, including how to accommodate situations involving asset losses and valuation rules. The proposal also covers how to deal with “illiquidity.” The effective date is taxable years beginning after December 31, 2022.
  • Fixed Indemnity Health Insurance Policies: The budget proposes excluding fixed indemnity health insurance from the usual rule that the cost of such policies is deductible by the employer and excludible from income by the employee if the policy’s payments are not related to the actual cost of a medical expense. “The proposal would amend section 105(b) of the Code to clarify that the exclusion from gross income for payments received through an employer-provided accident or health plan applies only to the amount paid directly or indirectly for a specific medical expense. Any fixed payment (in the form of a direct payment, reimbursement, loan, or advance reimbursement) to an employee under a fixed indemnity arrangement that is paid without regard to the actual cost of the medical expenses the employee incurred would not be excluded from gross income and would be treated as wages subject to FICA and FUTA taxes.

    “Under the proposal, fixed indemnity arrangements would be defined to include certain critical disease or specified disease policies and arrangements that provide fixed payments for specific items and services according to detailed payment schedules, thus making payments from these policies subject to Federal income, FICA, and FUTA taxes. Individuals would still be able to exclude from gross income any fixed amounts paid through an accident or health policy purchased with after-tax dollars.”

    The proposal would be effective for taxable years beginning after December 31, 2022.
  • Nonqualified Deferred Compensation (NQDC): The budget proposes requiring the withholding of the 20 percent additional tax on NQDC income includible in taxable income because the NQDC arrangement does not comply with NQDC rules. The proposal would be effective after 12/31/22.
  • GRATs (Grantor Retained Annuity Trusts): “The proposal would require that the remainder interest in a GRAT at the time the interest is created have a minimum value for gift tax purposes equal to the greater of 25 percent of the value of the assets transferred to the GRAT or $500,000 (but not more than the value of the assets transferred). In addition, the proposal would prohibit any decrease in the annuity during the GRAT term. It would prohibit the grantor from acquiring in an exchange an asset held in the trust without recognizing gain or loss for income tax purposes. Finally, the proposal would require that a GRAT have a minimum term of ten years and a maximum term of the annuitant’s life expectancy plus ten years.

    “For trusts that are not fully revocable by the deemed owner, the proposal would treat the transfer of an asset for consideration between a grantor trust and its deemed owner or any other person as one that is regarded for income tax purposes, which would result in the seller recognizing gain on any appreciation in the transferred asset and the basis of the transferred asset in the hands of the buyer being the value of the asset at the time of the transfer. Such regarded transfers would include sales as well as the satisfaction of an obligation (such as an annuity or unitrust payment) with appreciated property. However, securitization transactions would not be subject to this new provision.

    “The proposal also would provide that the payment of the income tax on the income of a grantor trust is a gift. That gift occurs on December 31 of the year in which the income tax is paid (or, if earlier, immediately before the owner’s death, or on the owner’s renunciation of any reimbursement right for that year) unless the deemed owner is reimbursed by the trust during that same year. The amount of the gift is the unreimbursed amount of the income tax paid.”

    The effective date would be the date of enactment, subject to legislative language covering situations that Congress deems worthy of a delayed effective date.
  • Estate Tax Rules: The budget also contains a slew of estate tax administrative proposals, including such issues as installment payments, valuation rules, reporting requirements in connection with trust assets, etc.
  • Generation-Skipping Tax (GST) Rules: Generally, the budget proposes that GST exemptions would apply only to “direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (b) taxable terminations occurring while any person described in (a) is a beneficiary of the trust.” The proposal would be effective for all trusts subject to the GST, regardless of the trust’s inclusion ratio, as of the date of enactment.
  • Funding Post-Retirement Life/Health Insurance Benefits: Current law allows employers to fund post-retirement life and health insurance benefits for their retirees, even though the employer has no obligation to actually pay those benefits. The funding may be in the form of a lump-sum deductible contribution to a welfare benefit fund. The budget seeks to lessen what the Administration says is the potential for “abuse” of this rule by requiring post-retirement benefits to be funded over the longer of the working lives of covered employees (on a level basis), or ten years, unless the employer commits to maintaining those benefits for at least ten years. The proposal’s effective date is for taxable years beginning after 12/31/22.
  • Deferral of Gain from Like-Kind Exchanges: The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like-kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) a year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange. The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2022.

Given the emergence of retirement savings legislation, the Biden budget tax increase proposals, and the likelihood of a new reconciliation bill with a significant revenue-raising tax title, the May 23-24 Congressional Conference will be a crucial opportunity for advancing NAIFA’s federal legislative interests.

Congressional Conference participants will have a timely opportunity to educate lawmakers on the retirement savings legislation and build support. It will also be an opportunity to build support for stopping the adverse tax proposals in the Biden budget if it appears that any of them are in play in a reconciliation bill or other legislation.

If you haven’t already, please plan to join us and urge your colleagues and friends to register for this important advocacy event.

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