White House budget plan proposes tax increases

Introduction

On Thursday, March 7, 2023, President Biden released a $6.8 trillion budget proposal for the 2024 fiscal year (which begins Oct. 1, 2023). This Alert summarizes some proposed tax changes included in the budget.

Key takeaways

• The budget proposal is essentially the president’s request for government funding; it reflects Democrats’ policy priorities.
• With the current divided U.S. Congress, it is essentially certain that the budget proposal will not be enacted in its proposed form.
• Some of the budget proposal’s tax provisions may work their way into tax legislation that would be enacted at a later date.
• Tax increases proposed include an increase to the corporate tax rate as well as an increase in the Medicare tax rate for taxpayers with income over $400,000.

Corporate tax rate

The Tax Cuts and Jobs Act (TCJA) lowered the corporate tax rate to 21%. The president proposes to increase this to 28% in the budget plan.

Medicare tax rate

The current Medicare tax rate is 2.9% assessed on earned income, half of which is paid for by the employee and half by the employer. There is also a 0.9% additional Medicare tax on earned income over $250,000 (for joint return filers) as well as a 3.8% net investment income tax on unearned income over $250,000 (for joint return filers). The president’s budget proposal would increase the rate of both additional taxes to 5% for annual income over $400,000. The filing status to which the threshold applies is unspecified.

The budget also calls for removing certain exceptions to the self-employment tax and the net investment income tax, effectively subjecting most taxable income to one of these two additional taxes once these dollar amount thresholds are met. Essentially, the budget proposal would subject all pass-through business income to either the additional Medicare tax or the net investment income tax.

There is currently no proposal to adjust these income thresholds for inflation.

High-income taxpayers

The White House proposes to increase the top individual tax rate to 39.6%, from 37%, for taxpayers making more than $400,000 (single filers) and $450,000 (joint filers). For those making more than $1 million, the capital gains tax rate would increase to 39.6%. Taxpayers making over $1 million could ultimately be subject to a federal tax rate of 44.6% (including the proposed increased Medicare and net investment income taxes). In addition, taxpayers with income over $400,000 (single filers) or $450,000 (joint filers) would be limited as to how much could be contributed to tax-deferred retirement accounts. Those taxpayers with vested account balances exceeding $10 million would also be required to distribute 50% of the excess.