Biden Budget Plan Offers Preview of Potential Tax Policy Changes in Second Term

Biden’s $6.9 Trillion budget blueprint previews potential tax agenda for the second term.

On March 11, 2024, President Biden unveiled his proposed federal budget for fiscal year 2025, which included a range of tax-related provisions. Concurrently, the Treasury Department released an in-depth “Greenbook” analysis of these tax plan details.

While the budget proposals still require congressional approval to become law, the package offers a glimpse into the tax policy priorities that could be pursued in a hypothetical second Biden administration. The Associated Press reported on this, explaining that it was “aimed at getting voters’ attention: It would offer tax breaks for families, lower health care costs, smaller deficits and higher taxes on the wealthy and corporations.”

If enacted, The wide-ranging tax measures would significantly impact individuals, businesses, and high-net-worth taxpayers. Many of the proposed changes echo prior unsuccessful legislative attempts, signaling the administration’s intent to revive these initiatives.   

Business Tax Provisions 

The budget proposal includes several measures aimed at increasing the tax burden on corporations, including:

• Raising the corporate income tax rate from 21% to 28%
• Increasing the corporate alternative minimum tax rate from 15% to 21%
• Expanding the 1% corporate stock buyback excise tax to 4%
• Broadening the application of the net investment income tax to certain partnership and S-corporation income and raising the top rate from 3.8% to 5%
• Making the excess business loss limitation for pass-through entities permanent
• Eliminating deductions for executive compensation over $1 million per employee
• Taxing carried interest as ordinary income for taxpayers with over $400,000 in income  

Individual Tax Provisions  

The budget also proposes several changes targeted at high-net-worth individuals, such as:

• Increasing the top marginal tax rate from 37% to 39.6% for taxpayers in the highest income brackets
• Eliminating preferential capital gains and qualified dividend treatment for taxpayers with over $1 million in taxable income
• Creating a new 25% minimum tax on unrealized capital gains for individuals with over $100 million in net worth
• Requiring taxpayers with over $10 million in tax-deferred retirement accounts to distribute at least 50% of the excess   

Conversely, the proposal includes provisions aimed at assisting lower-income taxpayers, including:  

• A new refundable tax credit of up to 10% (capped at $10,000) for home purchases and sales
• Reinstating the enhanced, fully refundable Child Tax Credit

Real Estate Tax Provisions

The budget includes two significant changes to real estate tax rules: 

1. Capping the deferral amount for Section 1031 like-kind exchanges at $500,000 per year ($1 million for married couples filing jointly).
2. Requiring 100% recapture of depreciation deductions as ordinary income for noncorporate taxpayers.

Housing Development Incentives

The proposal also contains several provisions aimed at encouraging housing construction and investment in economically distressed communities:  

• Making the New Markets Tax Credit a permanent program with a $5 billion annual credit allocation (adjusted for inflation), prioritizing allocations to community development entities investing in high-distress areas.
• Creating a new Neighborhood Homes Credit capped at 35% of development costs or 28% of median home sale prices.
• Expanding the Low-Income Housing Tax Credit by:
  • Increasing state credit allocations
  • Reducing the private activity bond requirement from 50% to 25%
  • Repealing the qualified contract provision
  • Replacing the right of first refusal safe harbor with an option safe harbor

These real estate and housing-focused tax reforms seek to incentivize investment in underserved communities while limiting certain tax benefits for higher-income individuals and businesses.

Trust, Estate, and Gift Tax Reforms

Continuing its focus on increasing taxes on the wealthiest Americans, the budget proposal includes several measures targeting trust, estate, and gift planning techniques commonly used by the ultra-high-net-worth to minimize their tax liabilities: 

• Requiring grantor-retained annuity trusts (GRATs) to have a minimum remainder value of greater of 25% of the GRAT assets or $500,000
• Mandating GRAT terms between 10 years and the annuitant’s life expectancy plus 10 years
• Modifying the rules for generation-skipping transfer (GST) tax
• Treating sales between a grantor and an irrevocable trust as taxable transactions
• Classifying a grantor’s payment of trust income taxes as additional taxable gifts
• Limiting valuation discounts for lack of liquidity on intra-family transfers of partial interests in non-public assets
• Eliminating the present interest requirement for tax-free gifts
• Capping the total annual gift tax exclusion amount at $50,000 per donor

These proposals aim to curtail the use of sophisticated estate planning strategies, which are often employed by the wealthiest individuals to shield their assets from taxation.   

Digital Asset Tax Reforms  

The budget plan includes several provisions aimed at extending existing tax rules to encompass digital assets and cryptocurrency:

• Applying “wash sale” rules to digital asset transactions
• Explicitly including digital assets under tax-exempt securities lending regulations
• Adding digital assets to the reporting requirements under the Foreign Account Tax Compliance Act (FATCA)
• Allowing mark-to-market accounting treatment for digital assets under Section 475

Additionally, the proposal includes a new 30% excise tax on the energy costs associated with mining digital assets.

Conclusion

While it is unlikely that all these digital asset tax measures will be enacted as proposed, some versions of these reforms may eventually become law. Taxpayers should consult with tax professionals to stay apprised of changes that could impact their digital asset holdings and transactions.

The administration appears intent on bringing greater transparency and tax compliance to the rapidly evolving digital asset space. Proactive planning will be crucial for individuals and businesses navigating this changing regulatory landscape.