President Joe Biden released his budget proposal for fiscal year 2023 on March 28th that includes many of the same tax increases he proposed last year but were not enacted into law.
Shortly after the budget was revealed, the Treasury Department released its “Green Book,” which details the tax provisions in the president’s budget.
Many of the budget tax proposals were originally included in Democrats’ Build Back Better bill, but later struck from the legislation because Senator Kyrsten Sinema (D-Nev.) opposed them. That bill has yet to become law, but congressional Democratic leaders are expected to attempt passage of a scaled-down version of the legislation in April.
President Biden’s budget proposal also seeks to grant authority to the IRS to oversee of all paid tax preparers. It also increases the amount of the tax penalties that apply to paid tax return preparers for willful, reckless, or unreasonable understatements, as well as for forms of noncompliance that do not involve an understatement of tax,” according to the Green Book.
The President also said that no one earning less than $400,000 in annual taxable income will not incur a tax increase.
Here is quick list of the proposed tax changes as described in the Green Book (FYI: ‘date of enactment’ effective dates refers to future legislation, and not the budget. Budgets are not enacted into law):
- Increase the top marginal tax rate to 39.6%, from 37%. The top marginal tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for head of household filers, and $225,000 for married individuals filing a separate return. After 2023, the thresholds would be indexed for inflation. The proposal would be effective for taxable years beginning after December 31, 2022.
- Tax capital income for high-income earners at ordinary rates. The proposal would apply to long-term capital gains and qualified dividends of taxpayers with taxable income of more than $1 million ($500,000 for married filing separately) and indexed for inflation after 2023. The proposal would be effective for gains required to be recognized and for dividends received on or after the date of enactment.
- Impose a minimum tax of 20% on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (the difference obtained by subtracting liabilities from assets) of an amount greater than $100 million. The proposal would be effective for taxable years beginning after December 31, 2022.
- Treat transfers of appreciated property by gift or on death as realization events. The proposal would be effective for gains on property transferred by gift, and on property owned at death by decedents dying, after December 31, 2022, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2023.
- Raise the corporate income tax rate to 28 percent, effective for taxable years beginning after December 31, 2022.
- Permanently extend the New Market Tax Credit, with a new allocation for each year after 2025, which would be effective after the date of enactment.
- Repeal tax provisions benefiting the fossil fuel industry, like the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project; the credit for oil and gas produced from marginal wells; the percentage depletion deduction for oil and natural gas wells and hard mineral fossil fuels; and the expensing of intangible drilling costs. In most cases the effective date for these changes would be for taxable years beginning after December 31, 2022 (unless otherwise specified).
- Extend the Superfund excise tax on crude oil and imported petroleum products, which would be effective after December 31, 2022.
- Modify income, estate and gift tax rules for certain Grantor Trusts, effective dates vary, but include taxable years ending after the date of enactment.
Other provisions include:
- Grant authority to the IRS for oversight of all paid preparers, which would be effective on the date of enactment. (A summary of the fines is on page 86 of the Green Book.)
- Increase the amount of the tax penalties that apply to paid tax return preparers for willful, reckless, or unreasonable understatements, as well as for forms of noncompliance that do not involve an understatement of tax. The proposal would be effective for returns filed after the date of enactment.
- Expand the Treasury Secretary’s authority to require electronic filing for forms and returns, and treat all information returns subject to backup withholding similarly. The proposal would be effective for payments made after December 31, 2022.
- Extend statute of limitations for listed transactions, which would be effective on the date of enactment.
- Require a six-year statute of limitations if a taxpayer omits from gross income more than $100 million on a return, which would be effective for returns required to be filed after the date of enactment.
The budget also increases the IRS budget $14.1 billion, an 18% increase over last year’s total. This amount includes $800 million for improving taxpayer service. Once again, this amount must be approved by Congress to be enacted into law.
The Odds that Any of This becomes Law:
Tax increases proposed by Biden are not expected to become law unless congressional Democrats create another budget reconciliation bill that can pass the Senate with only Democratic support. So far, they have had little success in using this process to pass legislation.
Democratic lawmakers spent most of last year trying to pass a budget reconciliation bill that failed to pass because Senator Joe Manchin (D-W.Va.) could not support it. The lack of that one vote meant the legislation could not pass the Senate.
Senate Democratic leaders will try to pass a slimmed-down version of the budget reconciliation bill (commonly known as the Build Back Better bill) next month. The legislation is expected to include fewer spending provisions, but it could include the tax increases that the House passed last year.
However, winning Manchin’s support for the legislation could force Senator Sinema to oppose it. She does not support tax rate increases and Manchin does. He has recently called for tax rate increases to be included in the legislation. If he succeeds in this endeavor, it is not clear how Sinema will respond. If she opposes the bill, it will not pass the Senate.