On March 28, 2022, the Biden administration released its fiscal year (FY) 2023 budget, along with the Treasury Department’s General Explanation of the Administration’s Fiscal Year 2023 Revenue Proposals, also referred to as the Green Book. The Green Book contains revenue proposals that reflect the administration’s policy goals for the coming year. The proposals contained in the Green Book are just that – proposals for legislative change. As such, the proposals are nothing to get too excited about until they appear in an actual bill that has an actual chance of becoming law. Nonetheless, it is interesting to compare the proposals contained in the FY 2022 and 2023 Green Books to get a glimpse into the administration’s priorities for the coming year and what might lie ahead.
Read on for an overview of select proposals contained in the Green Book that could impact wealth transfer planning if (and that is a big if) any of these proposals become law in 2022.
The proposals in these areas remained largely the same from FY 2022 to FY 2023. The administration would like to raise the highest marginal income tax bracket to 39.6 percent as it has indicated repeatedly from day one. It is worth noting that the highest rate would apply to lower income thresholds under the FY 2023 proposal (see below).
Capital gains tax
With respect to capital gains treatment, the administration is reiterating its plan to tax long-term gains and qualified dividends of taxpayers with adjusted gross income over $1 million at ordinary rates. The administration is also seeking to treat transfers of appreciated property at death or by gift as realization events as it did in the FY 2022 Green Book, but with an increase in the exemption from $1 million to $5 million in an effort to appeal to small business owners and farmers.
Minimum tax on the wealthiest taxpayers (a.k.a. the “Billionaire Minimum Income Tax”)
New to the FY 2023 Green Book is a proposal for a minimum tax of 20 percent on total income for taxpayers with wealth greater than $100 million. This new tax has been dubbed the “Billionaire Minimum Income Tax” by the White House in its March 28, 2022, press release, even though it applies to taxpayers with wealth greater than $100 million.
Under this proposed new tax, if a taxpayer is already paying income tax at a 20 percent rate on standard taxable income plus unrealized income, then no additional tax will be due. The initial tax owed would be payable over 10 years, with future tax liabilities payable over five years. If non-publicly traded assets make up 20 percent of the taxpayer’s assets, then the taxpayer can defer the tax attributable to the non-publicly traded assets subject to a deferral charge not to exceed 10 percent. Annual valuations on non-publicly traded assets would not be required, but the value would be assumed to increase annually at the five-year Treasury rate plus two percent. While the proposal attempts to ease administrative burdens, this novel approach will still be very burdensome for both the Internal Revenue Service and taxpayers.
Estate and gift tax modifications
The FY 2023 Green Book added several proposals in the area of estate and gift tax that were not contained in the FY 2022 Green Book. However, the proposals are nothing new and generally reflect proposals contained in bills introduced in 2021, as well as the Green Books released under the Obama administration. The most notable of the proposals seek to:
- Treat the payment of income tax on the income of grantor trusts as a gift;
- Treat sales to grantor trusts as a regarded transaction for tax purposes;
- Impose limitations on the use of grantor retained annuity trusts; and
- Limit the duration of the generation-skipping transfer exemption.
It is also worth noting that the FY 2023 Green Book does not contain any proposals to reduce estate tax exemptions, increase estate tax rates, eliminate the step-up in basis or eliminate valuation discounts on passive assets, all of which were changes sought by Democrats in 2021 in various bills.
Impact on planning
None of the proposals in the FY 2023 Green Book change our planning approach for 2022. We are still in a favorable environment for wealth transfer planning with high estate tax exemptions, low (but rising) interest rates and generally favorable tax laws. The administration continues to have higher net worth taxpayers in its cross-hairs, but the window for effecting legislative change is rapidly closing as the fall elections approach. Given the negotiation challenges and ultimate failure of the Build Back Better Act, it appears at the moment that the Democrats will not be successful in passing any significant tax law changes in 2022.
That said, nothing is out of the realm of possibility, and any one of the proposals contained in the Green Book, if enacted, could have a profound impact on planning. The advice for high net worth clients continues to be that now is the time to plan while favorable conditions continue to exist. Do not wait until adverse changes are imminent. Please reach out to your RKL advisor to review your planning.