President Biden has released his proposed budget for the 2025 fiscal year, including numerous tax provisions affecting both businesses and individual taxpayers. While most of these provisions have little chance of coming to fruition while the U.S. House of Representatives remains controlled by the Republican Party, they might gain new life depending on the outcome of the November elections. Below is an overview of the major tax proposals included in the budget.

Business tax provisions

The budget proposal includes many changes that could affect a business’ tax outlook, several of which President Biden has previously endorsed. Among the most notable:

Corporate Tax Rates
Under this proposal, the tax rate for C corporations would increase from 21% to 28%, and the corporate alternative minimum tax rate would increase from 15% to 21%.  Additionally, the global intangible low-taxed income (GILTI) that C corporations and certain other taxpayers are required to include in their annual gross incomes would substantially increase. The combination of these changes would result in the effective GILTI rate increasing from 10.5% to 21%.

Executive Compensation
Under current law, publicly traded C corporations may not deduct compensation in excess of $1 million that is paid to certain current and former employees in a taxable year. President Biden proposes expanding this current limitation to all employee compensation in excess of $1 million, regardless of the employee’s title or position, and also making this limitation, as modified, applicable to privately held C corporations. Additionally, a new aggregation rule would treat all members of a controlled group as a single employer to close a mechanism that some corporations may have been using to avoid the deduction limitation.

Excess Business Loss (EBL) Limitation
Under the TCJA (Tax Cuts and Jobs Act), business losses of noncorporate taxpayers in a tax year that are over an inflation-adjusted threshold (for 2024, $305,000 or $610,000 if filing jointly) are disallowed. These disallowed losses (EBLs) are carried forward and deducted as net operating losses (NOLs) in subsequent tax years. In contrast to EBLs, NOLs can generally be used to offset unrelated income or gain. The proposal would treat EBLs carried forward from the prior year as current-year business losses rather than as NOLs to prevent EBLs from offsetting unrelated income or gain.

Stock Buyback Excise Tax
The Inflation Reduction Act created a 1% excise tax on the fair market value of stock that is repurchased by certain corporations to reduce the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%. It also would extend the tax to the acquisition of stock of an applicable foreign corporation by certain affiliates of the corporation.

Like-Kind Exchanges
Owners of real property used in a trade or business or held for investment can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would limit the deferral of gain to an aggregate amount of $500,000 for each taxpayer ($1 million for joint filers) each year for real property like-kind exchanges. Any excess gains from like-kind exchanges would be recognized in the year the taxpayer transfers the real property.

Individual tax provisions

President Biden’s proposed individual tax provisions are consistent with his promise to not raise taxes on households earning less than $400,000 annually and with his opposition to extending tax cuts for those making more than that amount. Among other things, his budget proposal would affect:

Tax Rates
The proposal would return the top individual marginal income tax rate for single filers earning more than $400,000 ($450,000 for joint filers and $425,000 for head of household filers) to the pre-TCJA rate of 39.6%.

Net Investment Income Tax (NIIT) and Medicare Tax Rate
The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment tax. The budget also would increase both the additional Medicare tax rate (on earnings above $400,000) and the NIIT rate (for taxpayers with income of more than $400,000) to 5%.

Tax on Capital Gains and Dividends
Individuals with taxable income exceeding $1 million would see long-term capital gains and qualified dividends taxed at the higher ordinary income rates, with 37% generally being the highest rate, rather than the preferential tax rates that would otherwise be applicable to long-term capital gains and qualified dividends, with 20% generally being the highest preferential tax rate. Also, unrealized gains on appreciated assets that are either gifted or held at death would generally be taxed, subject to a $5 million per-donor lifetime exemption.

Child Tax Credit (CTC)
The proposal would boost the maximum per-child credit — to $3,600 for qualifying children under age six and $3,000 for all other qualifying children — and increase the maximum age to 17, through 2025. It also would implement an advance monthly payment program, establish a “presumptive eligibility” concept, and permanently make the CTC fully refundable, regardless of earned income.

Premium Tax Credits (PTCs)
President Biden would make permanent the Inflation Reduction Act’s expansion of health insurance subsidies to taxpayers with household income above 400% of the federal poverty line, as well as the reduction in the amount of household income that must be contributed to qualify for PTCs.

Gift and Estate Taxes
The proposal would close some gift and estate tax loopholes. For example, certain transfers would be subject to a new annual gift limit of $50,000, whereby a donor’s transfers that exceed this limit in a year would be taxable even if no individual recipient received gifts in excess of the annual gift exclusion amount ($18,000 per recipient in 2024).

Tax changes are coming one way or another

Even if none of these provisions are enacted as proposed, new legislation addressing taxes is likely in the next year or two. Indeed, absent congressional action, many significant TCJA provisions are scheduled to expire after 2025. Extensive tax debates and negotiations will likely soon take center stage. Turn to us for the latest developments.

Contact Michael Loesevitz at [email protected] or 312.670.7444 or your ORBA advisor for more information.