Tax and Retirement Consequences of Biden’s 2023 Budget Proposal

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As part of the Biden administration’s fiscal year 2023 budget proposal, aka the Green Book, for the Treasury Department, Janet Yellen testified before the Senate Finance Committee and the House Ways and Means Committee in early June 2022.

Her first stop was the Senate Finance Committee, where she testified on Tuesday, June 7, at a hearing on‌ ‌“The‌ ‌President’s Fiscal‌ ‌Year‌ ‌2023 Budget.” That hearing was about inflation, food and energy prices, international tax agreements, and rewriting tax law‌ ‌to‌ ‌better‌ ‌support‌ ‌low-‌ ‌and‌ ‌middle-income‌ ‌families. ‌For the full transcript of the Senate Finance Committee hearing, click here.

On Wednesday, June 8, she testified before the House Ways and Means Committee in a hearing called‌ ‌“Proposed‌ ‌Fiscal‌ ‌Year‌ ‌2023‌ ‌Budget‌ ‌with‌ ‌Treasury Secretary‌ ‌Janet‌ ‌Yellen.” ‌This hearing focused on tax reforms, food and energy prices, rising prices, and controlling inflationary pressures in the president’s ‌budget‌ ‌request. ‌See the full text of the House Ways and Means Committee hearing by clicking here.

Additionally, if the Build Back Better Act (BBBA) passes, President Biden would raise revenue‌ ‌by‌ ‌$4‌ ‌trillion on‌ ‌a‌ ‌gross‌ ‌basis‌ ‌over‌ ‌the‌ ‌next‌ ‌decade. ‌Therefore, the proposed Biden tax increases in the budget and the BBBA could have affected the economy significantly. And, this is primarily in terms of tax and retirement implications.

Among the significant tax proposals are:

  • Income, business, and capital gain taxes at higher rates;
  • Terminating step-up in basis by making death taxable;
  • Making the active pass-through business loss limitation permanent and expanding the base of the Net Investment Income Tax (NIIT);
  • International tax changes; and
  • New minimum taxes for individuals, corporations, and businesses.

All of that is a lot to process. So, let’s take a closer look at the potential tax and retirement consequences.

Tax‌ ‌Policy‌ ‌Changes‌ ‌Aimed At High-Income‌ ‌Taxpayers

A major focus of the proposal is on three significant changes in tax policy for high-income earners‌ ‌in‌ ‌the‌ ‌U.S.

“First, the treasury wants the highest marginal income tax rate to increase from 37% to 39.6% effective December 31, 2022,” writes Shehan Chandrasekera, CPA, Head of Tax Strategy at CoinTracker.i, for Forbes. “This increased marginal rate would apply to taxable income over $450,00 for married filers and $400,000 for individual filers.”

Moreover, if your total taxable income is above these thresholds, any short-term cryptocurrency gains (coins & NFTs sold after holding them for less than 12 months) as well as other forms of cryptocurrency income, such as mining, staking, and interest, would be subject to the‌ ‌higher‌ ‌rate, he adds.

A second proposal would subject long-term capital gains (which are generally taxed at a lower rate than ordinary income) to a higher rate for taxpayers earning over 1 million per year in‌ ‌taxable‌ ‌income. “For example, if your overall taxable income is over 1 million, long-term gains in excess of 1 million would be subject to a much higher ordinary income tax rate vs. the maximum 20% rate under the current law,” Chandrasekera explains. ‌Additionally, the proposal seeks to make gifts of appreciated property and transfers at death ‌taxable‌ ‌events‌ ‌for‌ ‌wealthy individuals.

“Third and arguably the most aggressive tax proposal included in the document is the 20% minimum tax on ‘Total income’ for taxpayers worth over 100 million.” ‌This would include regular taxable income such as wages and investment income and surprising unrealized gains from assets owned by the taxpayer.

More Money to Social Security and Retirement Accounts

Biden‌ ‌proposes boosting discretionary funding for the Social Security Administration by $1.8 billion in his proposed budget for 2023,‌ ‌for‌ ‌a‌ ‌total‌ ‌of‌ ‌$14.8 billion. ‌About 70 million Americans will receive retirement, disability, and survivor benefits from the agency, which receives funding increasing by about 14% from the levels enacted in 2021.

Within the proposed $14.8 billion budget, $1.6 billion more (an additional 14% increase over 2021) would be allocated to improving agency services, while $224 million would be allocated to safeguarding the integrity of the program.

Additionally, Biden proposed an increase to Social Security of 9.7%, or $14.2 billion total, for 2022 to help with‌ ‌the‌ ‌ongoing‌ ‌Covid-19‌ ‌pandemic.

$1.6 billion will go to field offices, disability determination centers, and teleservice centers. ‌‌Moreover, the money would help speed up disability processing and reduce waiting‌ ‌times. Additionally, the agency would be able to make changes so that everyone could get the services they need. ‌Additionally, $224 million will be added to track spending and support the investigation and prosecution‌‌ ‌‌of‌‌ ‌‌fraud.

Rep. John Larson, D-Conn., reintroduced a bill in October 2021 that would give beneficiaries a benefits boost of about 2%. ‌Also, low-income workers would receive a higher minimum benefit.

As part of the legislation, payroll taxes for those earning $400,000 and over would be reapplied to higher-wage earners. ‌As of 2022, 6.2% of those payroll taxes are applied only to wages up to $147,000 for both employees and employers.

As of 2034, Social Security’s trust funds will run out, making Biden’s new budget proposal even more timely. ‌By then, 78% of promised benefits will be paid out.

Surtax on Estate Transfers and Gifting

By the end of 2025, the current exemption of $12.06 million per person (in 2022) will expire. ‌Approximately half of the current exemption amount will be reduced at that time. According to earlier proposals under consideration, the higher exemption amount would have expired in‌ ‌2022. ‌Despite this, the Green Book does not address the broad issue of gift and estate taxation. ‌It does contain a few other provisions, however.

Proposed changes.

Gifts of appreciated assets resulting in unrealized gains that are received during life and held at death will be treated for tax purposes as “realization events.” ‌These gains will be taxed the same way as if they were sold. ‌A single taxpayer may exclude $5 million from their lifetime tax liability for unrealized gains from the property transferred by gift during life or held at death. ‌The unrealized gain on property owned at death can be offset by any unused exclusion during life.

A surviving spouse could also utilize the proposed exclusion if it is portable. ‌As a result, married couples filing joint returns can exclude $10 million of unrealized gains from their taxable income.

There would be no requirement to recognize gains on gifts or bequests to charities. ‌If you give or bequeath to a spouse, you won’t gain until either of you‌ ‌dies‌ ‌or‌ ‌disposes‌ ‌of‌ ‌the‌ ‌asset. ‌The cost basis, however, will carry over in either case.

The tax would be imposed on the transfer of property ‌after‌ ‌December‌ ‌31,‌ ‌2022. ‌Or‌ ‌on the transfer of property owned by an individual who passed away‌ ‌after‌ ‌December‌ ‌31,‌ ‌2022.

A gift-like transfer of appreciated assets to or from an irrevocable trust, partnership, or other non-corporate entity would also be taxable if the gain is unrealized.

An irrevocable trust, partnership, or other non-corporate entity would also be subject to tax on unrealized gains in appreciated assets if they were not previously recognized as taxable income.

After December 31, 2022, the rules would apply to transfers and property owned by people who die after that date.

Changes to Grantor Retained Annuity Trusts

Currently, grantor retained annuity trusts don’t have term ‌restrictions. ‌However, all GRATs would be subject to a minimum 10-year term and a maximum equal to the annuitant’s life expectancy plus 10 years.

Additionally, the remainder interest of a GRAT must‌ ‌have‌ ‌a‌ ‌minimum‌ ‌value. ‌Typically, the value of the assets transferred to the GRAT would be equal to 25% of their value for gift tax purposes. Alternatively, it would be $500,000. But‌ ‌not‌ ‌more‌ ‌than‌ ‌the‌ ‌value‌ ‌of‌ ‌the‌ ‌assets‌ ‌transferred. ‌During the GRAT term, the GRAT annuity cannot decrease. ‌Furthermore, the grantor can’t exchange assets held in the GRAT tax-free.

A trust formed after the enactment date would be subject to the new provisions.

By eliminating short-term GRATs, the risk of a grantor dying in the middle of the GRAT term would be reduced. ‌Therefore, the grantor’s estate would include the GRAT’s assets. ‌A zeroed-out GRAT would also be prohibited by this provision.

Modernize Rules for Digital Assets

Also in the budget is a plan to modernize digital asset rules. ‌According to the budget documentation, such a move would generate $4.9 billion in revenue in 2023.

As part of the new rules, certain financial institutions, such as brokers of digital assets, would also be required to report information. Certain taxpayers with foreign digital asset accounts would also be required to report, and the mark-to-market rules would be amended ‌to‌ ‌include‌ ‌digital‌ ‌assets. ‌In total, the administration predicts these rules will‌ ‌generate‌ ‌$10.9‌ ‌billion‌ ‌by‌ ‌2032.

According to a Treasury Department explanation, “tax evasion using digital assets is a rapidly growing problem. Since the industry is entirely digital, taxpayers can transact with offshore digital asset exchanges and wallet providers without leaving the United States.”

“In order to ensure that the United States is able to benefit from a global automatic exchange of information framework with respect to offshore digital assets and receive information about U.S. beneficial owners it is essential that the United States reciprocally provide information on foreign beneficial owners of certain entities transacting in digital assets with U.S. brokers,” the Treasury added.

Additionally, the budget seeks to enhance the Department of Justice’s (DOJ) ability to pursue cyber threats through investments that support a multi-year effort to enhance cyber investigative capabilities at FBI field offices.

“These investments include an additional $52 million for more agents, enhanced response capabilities, and strengthened intelligence collection and analysis capabilities. These investments are in line with the Administration’s counter-ransomware strategy that emphasizes disruptive activity and combats the misuse of cryptocurrency,” ‌the‌ ‌document stated.

Frequently Asked Questions

1. How much did the president propose?

A $5.8 trillion budget was proposed by President Biden. ‌With billions earmarked for police departments and the military, along with new taxes on the rich, this plan reflected growing concerns about security and the economy at home and abroad.

White House budgets aren’t really budgeting at all. They’re just requests to Congress to control the government’s ‌spending. But they’re snapshots of where the president wants to go with his priorities.

According to President Biden’s second budget request, domestic investments will amount to about $1.6 trillion for the fiscal year 2023. That’s a 7 percent increase over current levels. ‌Among the initiatives that are receiving additional funding are projects to prevent gun violence, improve the supply chain, and address the excessive inflation that has contributed to cost overruns.

One of the biggest increases was Mr. Biden’s $773 billion military proposals, an increase of 10 percent for the Pentagon following concerns like the Ukraine war.

The‌ ‌budget‌ ‌also‌ ‌includes‌ ‌nearly $70 billion for fighting violent crime through the F.B.I. and cracking down on gun trafficking. ‌There is a total of $45 billion allocated to combat climate change across the federal government, an increase of $16.7 billion over the level enacted in 2021.

2. ‌How will this be paid for?

Among the tax increases proposed by the president was a ‌minimum‌ ‌tax‌ ‌on billionaires.

Under the proposal, which must be approved by Congress, households worth more than $100 million would have to pay 20 percent of both their incomes and unrealized gains in ‌their‌ ‌liquid‌ ‌assets. ‌They include stocks and bonds, which are taxed only when they are sold after accumulating value for years. ‌Using the $360 billion raised by taxation that the White House is hoping to generate, the president could fund a broader agenda as well.

The‌ ‌White‌ ‌House‌ ‌budget‌ ‌also‌ ‌calls‌ ‌for‌ ‌higher taxes‌ ‌on‌ ‌the‌ ‌rich. ‌The top individual income tax rate would increase from 37 percent to 39.6 percent under this proposal. ‌As for the corporate tax rate, Biden wants to raise it‌ ‌to‌ ‌28‌ ‌percent‌ ‌from‌ ‌21‌ ‌percent.

3. What are the possible effects of‌ ‌these‌ ‌proposed‌ ‌changes?

Although the Green Book proposes changes to a wide range of tax laws, these changes will mostly affect a ‌specific segment‌ ‌of‌ ‌taxpayers. ‌You may be concerned about the changes, though, if you fall into any of these categories:

  • If you’re single and filing a return, you need to have an adjusted gross income of at least $400,000, or $450,000 if you are married and filing jointly
  • You can itemize deductions on your ‌tax‌ ‌return
  • Currently or in the future have‌ ‌trusts
  • You own a limited partnership, limited liability company, “S” corporation or C corporation

Various changes to the law have been proposed, but their effective dates do not line up. ‌Some could take effect sooner than December 31, 2022. However, most would be implemented after that date.

4. How Biden is Impacting Social Security?

SSA, which distributes benefits to 70 million Americans, will receive an additional $1.8 billion in discretionary funding in Biden’s proposed budget for 2023. ‌That‌ ‌would‌ ‌be‌ ‌an increase of 14% over the funding levels enacted in 2021, so $14.8 billion altogether.

In addition to the new funding, the SSA will increase its current funding by 14%, from $1.8 billion to $1.6 billion. This will improve the quality of retirement, survivor, and Medicare claims it processes each year, as well as ‌disability‌ ‌and‌ ‌SSI‌ ‌claims.

Among the things that the money would fund are field offices, teleservice centers for retirees, and state disability determination services, as well as:

  • Cutting‌ ‌customer‌ ‌wait‌ ‌times
  • Improved outreach to hard-to-find people
  • Streamlining the application process
  • Improved‌ ‌access to 800-numbers and online services

The‌ ‌other $224 million goes to program integrity, responsible spending, and investigating and prosecuting‌ ‌fraud.

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Image Credit: by Nataliya Vaitkevich; Pexels; Thank you!

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