The Biden administration has proposed a plan for the 2025 fiscal year, including numerous tax provisions impacting businesses and individual taxpayers. Notably, the plan aims to raise the highest income tax rate and introduce a 25 percent minimum tax for individuals with a net worth surpassing $100 million. This plan largely resembles what the administration proposed for 2024, targeting the wealthiest American taxpayers. The passage into law is unlikely as it faces challenges in Congress. Nevertheless, it would be wise to consider specific strategies in preparation for a potential future marked by elevated taxation.
Key Tax Provisions of the Proposed Budget
The proposed budget seeks to generate revenue by raising taxes on the wealthiest Americans to fund expansions of the Child Tax Credit, Earned Income Tax Credit, and Premium Tax Credit, among other spending priorities. Primarily targeting those with incomes exceeding $400,000 annually, the proposed income tax adjustments would affect a limited number of taxpayers if enacted.
Increase the net investment income tax rate from 3.8 percent to 5 percent for individuals earning over $400,000, which includes all pass-through business income not already covered by the Net Investment Income Tax (NIIT) or self-employment tax.
Boost the additional Medicare tax rate from 3.8 percent to 5 percent for earners exceeding $400,000.
Tax qualified dividends and long-term capital gains as ordinary income, in addition to the NIIT, for income surpassing $1 million, resulting in a rate higher than the current highest capital gains rate of 20 percent.
Impose a tax on the appreciated value of property transferred by gift or death if it exceeds the applicable exclusion. Unrealized gains at death would be taxed, subject to a $5 million exemption for individuals or $10 million for married couples.
Increase the maximum per-child credit to $3,600 for qualifying children under age six and $3,000 for all other qualifying children, increase the maximum age to 17 through 2025, extend eligibility to more families, introduce an advance monthly payment program, establish presumptive eligibility, and make the credit fully refundable.
Make permanent the expansion of health insurance subsidies for households with income above 400 percent of the federal poverty line and reduce the required household income contribution to qualify for Premium Tax Credits.
Prohibit Roth IRA conversions for high-income taxpayers, eliminate "backdoor" contributions, and impose a 25 percent minimum tax on total income, including unrealized gains, for taxpayers with a net worth exceeding $100 million.
Close several gift and estate tax loopholes benefiting the wealthy. For instance, certain transfers exceeding $50,000 in a year would be taxable, regardless of individual recipient limits.
Eliminate the ability to defer gains on the like-kind exchange of real property and set restrictions on generation-skipping trusts.
The budget proposal also outlines significant changes in business tax provisions, including:
Increase the tax rate for C-Corporations from 21 percent to 28 percent, which is still below the 2017 Tax Cuts and Jobs Act (TCJA) rate of 35 percent. Additionally, adjustments would increase the global intangible low-taxed income (GILTI) rate and the corporate alternative minimum tax rate.
Extend limitations on deductibility of executive compensation exceeding $1 million to privately held C-Corporations and introduce an aggregation rule for determining covered executives.
Make permanent the TCJA limitation on applying business losses to only offset business-related income or gain, with adjustments to the treatment of carried forward EBLs.
Quadruple the excise tax on stock buybacks from 1 percent to 4 percent and extend the tax to certain acquisitions of applicable foreign corporations.
Limit the deferral of gain on real property like-kind exchanges to an aggregate amount of $500,000 per taxpayer or $1 million for joint filers each year and recognizing excess gains in the year of transfer.
Tax Policy Debate Ahead
The probability of the proposed budget becoming law is low, as presidential budgets are often symbolic gestures that serve more as a statement of policy priorities than a realistic roadmap for legislation. While certain elements may find their way into various bills, it is uncommon for the entire budget to be enacted as law. However, even if none of these provisions are passed in their current form, new tax legislation is probable in the coming years. Many key provisions of the TCJA are set to expire after 2025. Therefore, extensive tax debates and negotiations will likely soon take center stage.
Tax Planning for the Future
While immediate changes, such as special distribution rules for Roth IRAs exceeding $10 million and limitations on in-kind transfers, are not expected for the upcoming year, it is still worth considering what strategies might make sense in a higher tax environment. Reassessing your financial situation periodically allows you to ensure your plan aligns with long-term goals and avoids reactionary decisions.
Four strategies that could potentially minimize your tax burden and facilitate wealth transfer to the next generation should income taxes increase include:
Convert a traditional IRA to a Roth IRA to take advantage of relatively low tax rates, providing tax-free growth and withdrawals in retirement.
Consider deferring large charitable gifts if itemizing deductions and expect to be in a higher tax bracket in future years.
Move high-cost-basis assets into a grantor trust and exchange for low-cost-basis assets, allowing beneficiaries to benefit from a "step-up" in basis upon inheritance, thus reducing capital gains taxes.
Implement various tax-management strategies such as tax-smart asset location and tax-loss harvesting to manage, defer, or reduce taxes regardless of income level.
Before implementing any changes, it is essential to consider your entire financial situation and seek guidance from a tax advisor.
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