Review of President Biden's Green Book
We review the Green Book on Tax Proposals that was released today.
President Biden and the White House released their 2023 budget today. Along with the budget is a Green Book that recaps their various tax proposals. Since the House is controlled by the Republicans, there is little chance that much of this may pass. However, it is good to understand what is in the budget and how it may affect you.
We will primarily review proposals that will affect farmers. There are many proposals on foreign income and very large corporations that we will not review.
Be forewarned, this is a very long blog post. Here is the review:
Raise the corporate tax rate from 21% to 28%. For most farmers this would be almost an 100% tax increase from 2017 when most farmers only paid 15%.
Increase the corporate stock excise tax from 1% to 4%. This only applies to large publicly traded companies.
The Excess Business Loss rules would be made permanent. Also, any excess loss carried forward would be made part of the current year excess business loss. This effectively means a farmer could only deduct up to about $600,000 (indexed to inflation) for married couples against non-business income each year. As an example, assume a farmer lost $2 million in 2022 and had to carryforward $1.5 million to 2023. Under current rules, you could offset up to 80% of taxable income with the carryforward. If your income was $2 million, you could deduct all $1.5 million. The proposal would limit this to about $600,000 each year until used up.
Several proposals to eliminate or reduce tax deductions and credits related to oil and natural gas operations. Many farmers have ground that enjoys oil and gas revenues. This could indirectly reduce those revenues.
Impose up to a 30% excise tax on electricity consumed by crypto miners.
For farmers with adjusted gross income over $400,000, it would now impose the Net Investment Income tax (NIIT) on that excess income and would also raise the tax rate from the current 3.8% rate to 5%. It would also subject all earned income of the farmer to either the NIIT or the Medicare tax on income over $400,000. It would increase the Medicare tax rate to 5% on wages and SE income over $400,000 (with a phase-in of the first $100,000 on the NIIT). The bottom line is almost all income of a farmer will be taxed at an extra 5% on income over $400,000. This is not taxable income but rather adjusted gross income (AGI).
It would eliminate the 37% tax rate and replace it with the old 39.6% rate; however, effectively it will be at least 44.6% due to the NIIT and Medicare tax proposals.
It would treat all capital gains and dividend income for taxpayers with more than $1 million of taxable income as being taxed at ordinary rates. As example, assume a farmer had $500,000 of capital gains and $1 million of other net taxable income. All of the capital gains would be taxed at 44.6% (39.6% plus 5% NIIT).
They want to make farmers and their heirs pay capital gains taxes on any transfers of appreciated property either via gift or at death. We have blogged on this subject many times. They have increased the exemption amount to $5 million per person or $10 million for a married couple and allow portability of any unused amount at the first death.
Also, any trusts or other entities with assets that have not had a realization event in at least 90 years would be subject to tax on that appreciation every 90 years. This would be retroactive to 1942 which means in 2023 this would then apply.
The Green Book as vague wording about transfers out of a partnership of appreciated property being a taxable event if it is considered a gift to the transferee. Not exactly sure what they mean by that provision.
Any farmer with a net worth greater than $100 million would be subject to a minimum tax rate of 25% on all income included unrealized gains not yet tax. As an example, assume a farmer is worth $125 million and they have $25 million on unrealized gains not yet taxed. They would owe $5 million that can be paid over 9 years in the first year of this proposal or 5 years thereafter. Plus, if the asset is illiquid, they could make an election to defer the tax until the asset is sold but would owe an “interest charge”. There appears to be no refund if your net worth decreases.
High income farmers (over $450,000) with high retirement account balances (over $10 million) would be required to distribute 50% of the excess.
It would eliminate the “back door” ROTH and Mega back door ROTH for those same high income farmers.
IRAs would be prohibited from owning DISC and FSC entities acquired or purchased after 2023.
Statute of Limitations would be increased from 3 years to 6 years for prohibited transactions and material misstatement of assets in a retirement plan.
Bring back the higher child tax credit and make it fully refundable and bring back the higher earned income tax credit changes that applied for 2021 tax years.
Make permanent the ACA changes that currently apply but will expire after 2025.
Increase special use valuation to $13 million per taxpayer. It does not say if this is indexed to inflation. This would allow up to an extra $26 million of farmland value to be exempt from estate taxes, however, the offset is that no step-up in basis for the exempted amount is allowed and many rules apply to the process. If the top rate increases to 44.6%, the value of this exemption would be actually a tax increase other than time value of money since the current estate tax rate is 40%, plus state income taxes would apply too. This means heirs might save 40% and owe 60% when they sell the land later.
Require trusts to provide information on asset values if their total assets exceed $300,000 or gross income is greater than $10,000. This would allow them to track and determine how much money they can extract from trusts later on and will allow them to keep track of the 90-year rule too.
Curtail the use of defined value clauses in estate documents.
Limit total gifts of pass-through entities, gifts to trusts, etc. to $50,000 per donor per year before having to reduce your lifetime exemption amount. Gifts of cash, etc. could still fall under the current $17,000 per donee exclusion.
Limit dynasty trusts to at most two generations of estate tax exemption and then apply an estate tax.
Severely curtail the benefit of a Grantor Retained Annuity Trust. Most GRATs are structured to show no taxable gift. The proposal would require at least 25% of the value put into the trust be a gift. The minimum term would increase to ten years.
Almost all grantor trusts would no longer be allowed to “sell” assets to the trust and have it be tax-free. Plus any swapping of assets in or out of the trust would now be a taxable event in most cases.
Any payment of income taxes related to a grantor trust would now be considered a gift.
Loans to a beneficiary would now be treated as a distribution which could create an income tax liability to the beneficiary. Currently no tax is owed.
Promissory notes included in a taxpayer’s estate may be more difficult to obtain a discount on the value especially if the note was originally structured with the applicable federal rate. Also, long-term notes would be more difficult to discount in most situations.
Gifts of a partial interest in a closely held entity to a family member would not have a discount on passive assets and may still have a discount on business assets. At least we think that is what it is saying. It is not worded the best.
Allow a maximum deferral on like-kind exchanges of $500,000 or $1 million for a married couple.
When buildings are sold, the maximum tax rate on depreciation is 25% (assuming it has been depreciated on a straight-line basis). The proposal would make all depreciation incurred after the effective date ordinary income for high income taxpayers. Therefore, it appears if you can keep your other income under $400,000 for the year of sale, this does not apply. Flow-through entities would need to report these items to their owners on Schedule K-1s.
Small Insurance Company election would now require more diversification and provide more anti-abuse rules.
Expand mandatory electronic filing to almost all farmers.
Any partnership adjustments that potentially reduce the taxpayer’s tax “below” zero would now be allowed to be carried forward. This is a benefit to farmers and other taxpayers.
Impose a liability to a corporate shareholder for any corporate tax not paid in many situations.
Extend the statute of limitations for Employer Retention Credit audits to five years.
Wash sale rules would apply to digital currencies and would also add in related parties to prevent them from repurchasing the asset within 30 days, etc.
As we mentioned at the beginning, very little of this will actually get enacted, but it is good to know what the administration would like to implement.
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