Manchin Opposes Billionaire Levy In Biden’s Proposal To Tax The Wealthy

President Joe Biden’s federal budget, released on March 28, revives earlier plans to end tax-free wealth transfers to heirs and collect tax on investors’ paper profits. The budget for the government’s next year also calls for closing a longstanding loophole in which people who inherit stocks, property, or businesses, do not owe tax on the paper profits piled up since the original owner acquired the assets. The Biden administration suggested $2.5 trillion in tax hikes on top of $1.5 trillion in tax increases embedded in a stalled version of the Build Back Better bill. Below are some changes that wealthy investors and financial advisors should note. 

Billionaire Minimum Income Tax: The proposed Billionaire Minimum Income Tax would require ultra-rich people, centi-millionaires, and billionaires, to pay at least 20% in taxes on their income and unrealized gains. This tax would hit about 20,000 affluent American households and raise $361 billion over ten years, which lays out the administration’s proposed spending and tax increases. Top earners who pay less would owe the difference up to 20%. Taxing profits that exist on paper, not as cash in a bank account, first appeared last year in various proposals from Biden and lawmakers in both chambers. The calls failed. Under current Step-up in Basis rules, an individual who inherits an asset that swelled in value in prior years does not have to pay income tax on the increase, which is unfair, according to the Treasury. This is due to less-wealthy people who have to spend their savings during retirement to pay income tax on their realized capital gains. 

Increased Income Tax Rate: Biden proposes a new top ordinary income tax rate of 39.6%, up from 37%. The new top rate would start in 2023 and apply to married couples earning more than $450,000 and single filers making more than $400,000. As of 2022, the current top 37% rate is paid by married couples making more than $647,850 and individuals making more than $539,900. The 2.6% increase would raise about $187 billion over a decade.

Increased Capital Gains Tax: Currently, capital gains are taxed at 23.8%, including the Obamacare levy. However, the proposal outlines that long-term capital gains and qualified dividends for people earning more than $1 million would be taxed at a new top ordinary rate of 39.3%, with an additional plus 3.8% for the Affordable Care Act. Any unrealized gains would be taxed when an owner dies.

Estate and Gift Taxes and Trusts:

Grantor trusts, the engine of wealth transfers to heirs, were on the chopping block last fall. This is due to an early adaptation of the Build Back Better bill, which treated future sales between trusts and their owners as a taxable sale. Biden’s budget proposes to modify income, estate, and gift tax rules for certain grantor trusts and would be effective starting January 2023. The changes would raise about $42 billion. Under the budget:

  • Donors would recognize a capital gain when transferring an asset to an heir. The paper profit would consist of the amount of appreciation in the asset since it was originally acquired.
  • A donor could exclude, or not owe tax on, $5 million of unrealized capital gains on property transferred by gift or owned at death. Portions of the $5 million exclusion that are not used during a donor’s lifetime would carry over to a surviving spouse.
  • The $5 million exclusion is in addition to the lifetime exclusion, now just over $12 million; $24 million for couples.
  • The rule would affect “certain property” owned by trusts, partnerships, and other non-corporate entities.
  • Taxpayers could choose not to recognize unrealized appreciation of a family-owned and -operated business until the business is sold or passes out of the family’s hands. They would have 15 years to pay tax on appreciated assets transferred at death. With a deferral, taxpayers would have to put up “security” to the IRS if asked.
  • If a trust, partnership, or other non-corporate entity has not recognized a gain on its assets since 1939, it would be forced to do so come 2030.
  • The rules for grantor retained annuity trusts, or GRATs, get tighter. They would be required to have a minimum value for gift tax purposes of at least 25 percent of the value of the assets transferred to the GRAT or $500,000, whichever is bigger. 
  • A trust would be banned from swapping assets without recognizing gain or loss. The trusts would last a minimum of 10 years and a maximum of 10 years plus the owner’s life expectancy.

Private Equity and Hedge Funds: In the proposal, carried interest profits would be taxed at ordinary rates instead of lower capital gains rates.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.