Current administration eyes tax hikes for high earners

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Each year, as part of the release of the administration’s budget proposal, the Treasury Department issues its General Explanations of the Administration’s Fiscal Year Revenue Proposals, otherwise known as the “Green Book.”

This document provides detail on various tax-related provisions favored by the current administration – a sort of “wish list” of tax law changes.

While these proposals will not likely move forward in the short-term, they do provide a glimpse of potential policy items that may be pursued in the future.

For example, one of the items included in the Green Book during the Obama administration was the elimination of the stretch option for distributions from inherited retirement accounts. Comprehensive retirement legislation passed by Congress in late 2019 and signed into law (SECURE Act of 2019) included a provision that essentially eliminated stretch distributions for most non-spouse beneficiaries inheriting retirement accounts.

Considering the potential outcome of these ideas, it can be helpful to review the Green Book to get a sense of the tax-related priorities that the administration may pursue in the future.

With the expiration of most of the tax code at the end of 2025, some of these provisions may be proposed as part of broader discussions in Congress to address expiring tax provisions.

Treasury releases Green Book for fiscal year 2025

Last week the Treasury Department released its Green Book document for FY2025. Some of the proposed tax changes were included in the Build Back Better legislation that passed the House in late 2021 but stalled in the Senate.

Key themes from the Treasury release include higher taxes for corporations and higher income taxpayers, limits on accumulating wealth inside retirement plans, increasing certain tax credits for lower/middle income taxpayers, and scaling back or eliminating advanced trust planning techniques.

Here’s a look at some of the specific provisions, including tax hikes, that could impact planning for households

• Increase the top marginal tax rate to 39.6% applied to those with taxable income greater than $400,000 ($450,000 for married couples filing a joint return)
• Expand the 3.8% net investment income tax to apply to all pass-through business income (currently the surtax only applies to business income derived from passive sources)
• Additional tax increases for those with more than $400,000 of earnings including an extra 1.2% tax for Medicare
• Tax capital gains and qualified dividends as ordinary income for those with more than $1 million in taxable income
• Eliminate stepped up cost basis at death as well as treat transfers of appreciated property while living as a taxable event (there would be a $5 million per person exclusion)
• For higher-income taxpayers (over $400,000 taxable income for individuals, $450,000 for couples), limit savings within retirement plans and IRAs to an aggregate limit of $10 million per person. Individuals would be required to make distributions to reduce the amount held in these accounts (would have to distribute a minimum of 50% of the excess over $10 million)
• Introduce new restrictions to limit the use of wealth transfer techniques including grantor trusts (including GRATs), dynasty trusts, and valuation discounts applied when assets are transferred to other family members
• Restrict tax-free exchanges of real estate under Section 1031 by limiting the amount of capital gain deferred to $500,000 per taxpayer ($1 million for couples filing a joint return)

Green Book is a wish list

It’s important to remember that this document reflects the wishes of the current administration on tax and policy without regard to whether these ideas could proceed in Congress. Higher-income taxpayers may want to be aware of these proposals, which may impact tax or estate planning in the event some gain legislative momentum in the future.

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