Biden’s Budget and Potential 2nd Term Tax Legislation

Soon after The President’s State of the Union Address, the proposed fiscal year 2025 budget was released. This outlines how the administration would implement the President’s tax policy, indicating a gross tax hike of approximately $5.3 trillion from 2024 to 2034.

Notable Provisions:

  • Increased Taxes on High Earners: Increase income taxes for individuals earning more than $400,000 per year. This policy would increase the top marginal tax rate from 37% back to 39.6%, the rate before the Tax Cuts and Jobs Act of 2017.
  • Capital Gains and Dividends: For taxpayers earning over $1 million, the plan would tax capital gains and qualified dividends at the proposed ordinary income tax rate of 39.6% rather than the current rate of 20%.
  • Enhanced Tax Credits: Expand tax credits that benefit middle and lower-income families. This includes enhancing the Child Tax Credit, making the Child and Dependent Care Tax Credit fully refundable, and expanding the Earned Income Tax Credit for childless workers.
  • 1031 Exchanges: Limit 1031 like-kind exchanges to $500,000 in gains.
  • Net Investment Income Tax (NII): Expand the application to include non-passive income from S Corporations and partnerships. Raise the top rate to 5% from 3.8%.
  • Raise the corporate income tax rate: The Biden administration proposes to raise the corporate tax rate from 21% to 28%.
  • Estate Exemption: Reduce the exemption levels, which were doubled in the 2017 tax overhaul.
  • Annual Gifting: Cap the total annual exclusion gifting amount to $50,000 per donor.
  • Gain Recognition: Require gain recognition on transfers of appreciated property by donors and decedents.

As always, these are proposed provisions, and it’s very unlikely all would become law in their current form, but it is reasonable to assume some might be enacted. It’s always a good idea to stay informed and plan proactively.