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FY 2023 budget proposes changes impacting high net-worth individuals

Proposals would increase the top individual tax rate, modify estate and trust tax rules, and expand capital gain recognition, among others.

The Biden Administration's FY 2023 Budget and Treasury Greenbook, released March 28, 2022, propose changes to the rules for taxing certain individuals, estates and trusts, as well as broadening the circumstances under which capital gains become taxable. The proposed changes include.

  • Increasing the top tax rate for individuals to 39.6%
  • Imposing a minimum tax on wealthy individuals
  • Taxing some capital gain at ordinary income tax rates
  • Expanding triggering events for capital gains recognition
  • Modifying rules for certain grantor trusts
  • Modifying tax administration for trusts and estates
  • Taxing IRC Section 1250 property as ordinary income
  • Taxing carried interest as ordinary income
  • Limiting like-kind exchanges

Note that even if the proposal to increase the top rate on ordinary income does not become a reality, that rate is slated to return to 39.6% in 2026, when changes made by the Tax Cuts and Jobs Act (TCJA) expire. The President's budget proposal would lower the threshold at which the top rate takes effect.

 

The minimum tax proposal is similar in many respects to one previously pitched by Senate Finance Committee Chair Ron Wyden (D-OR). Questions remain, however, as to the constitutionality and administrability of such a proposal.

 

Private equity, private capital, and other alternative asset management funds and their professionals could face increased tax liabilities if either the carried interest proposal or the proposal to increase capital gains rates is enacted.

Summary

High-net worth individuals need to monitor these proposals and consider how they could be impacted by the changes.



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