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Biden’s 2025 Budget Proposals

By: Atty. Curt Ferguson

Each year the sitting president releases what is generally known as the “Green Book” announcing his budget proposals for the next tax year. For our estate planning clients, here are some income tax, capital gain and estate tax items to consider when you vote.

Currently the top marginal individual income tax rate is 37% for a single taxpayer and only applies to income over $609,350. The proposal would increase that rate to 39.6% and apply to income above $400,000.

Many small businesses operate as subchapter S corporations. After paying themselves a reasonable salary, any remaining corporate profits can be distributed to the business owner without the 12.4% social security tax (on up to $168,600 in 2024), the 2.9% Medicare tax, or the additional 0.9% Net Investment Income Tax (NIIT under the Affordable Care Act, or “ObamaCare”) that is added if your income exceeds $200,000 for single or $250,000 married. If adopted, President Biden’s proposals would cause all S-corporation profits to be subject to those three taxes.

For any taxpayer with more than $400,000 of earnings, the NIIT rate would be increased from the current 3.8% maximum rate to 5%.

Corporate income tax rates that apply to a “C-corporation” would be increased by one-third, from the current flat rate of 21% to a new 28%.

Qualified dividends and capital gains which are generally taxed now at a maximum rate of 23.8%. The Green Book includes several proposals, including taxing qualified dividends and long term capital gains for high income taxpayers as ordinary income, at a rate of 44.6%.

Farmers often find the opportunity to trade one piece of real estate for another, perhaps closer to home, and use what is known as a 1031 exchange to defer any capital gain taxation. The general premise of capital gain taxes is that when you convert an investment asset to spendable cash, you pay tax on your net gain. A 1031 exchange defers tax since the property was not converted to cash. However, one Green Book proposal would limit the deferral of capital gain to not more than $500,000 in any given year, not nearly enough to protect a rather modest real estate transaction from incurring tax. Given the previous proposal, the excess capital gain could be taxed at 44.6%.

Gift and estate transfers are currently subject to gift or estate tax if they exceed certain exemption amounts. Currently there is no capital gain tax on those transfers, since no asset was converted to cash. Gifted assets carry over their basis to the donee, who would still pay capital gain taxes on the gain if and when they sell, while assets that pass on death get a new “step up” in basis. President Biden proposes to treat transfers of appreciated property by gift or on death as if the assets were converted to cash. In other words, after some exemption limits, capital gain tax would be due on the gift or on death as if the property was sold to the person receiving it.

Estate plans are our firm are often designed so that assets such as family farms (but not limited to that: the estate assets could be investment accounts, homes, cash, business interests, etc.) can remain in trust for multiple generations rather than being estate-taxed at every death. The Administration’s proposal would limit this to two generations: your grandchildren may get it without tax, but not their children.

The Green Book proposals include one on the positive side for estate and gift tax. When farm property is staying in the family it can often be reported at a discounted value in the estate, called a 2032A special use valuation. Biden’s proposal would increase the maximum amount of discount that can be applied (which has not been adjusted even for inflation in about two decades).

Currently you can give up to $18,000 per year each to any number of people you want without reporting it for gift taxes. For example, currently you can give $18,000 to each of your 10 grandchildren to move $180,000 out of your estate each year. The proposal includes an overall annual cap of $50,000 on such gifts in a given year.

Reading through a Green Book gives a good deal of insight into the publicly stated objectives of the governing administration. For example, current law provides numerous credits, deductions, and other special provisions aimed at encouraging fossil fuel production. The Biden-Harris administration would repeal thirteen of those to discourage investment in the fossil fuel sector in pursuit of the “Administration’s policy of supporting a clean energy economy, reducing our reliance on oil and reducing greenhouse gas emissions.”

If these concern you, don’t panic. They are only proposals. None will be enacted unless both houses of Congress go along, which seems highly unlikely at least until after the election.