With new tax proposals coming, what can you expect?
President Joe Biden’s FY 2024 budget, released on March 9, is designed to address several critical issues, including reducing federal budget deficits by $2.858 trillion over the next 10 years. Among its provisions are significant changes to taxes for both corporations and high-income individuals, aiming to generate additional revenue to support budgetary goals and address pressing challenges, such as Medicare’s projected insolvency. Let’s examine the key tax proposals in President Biden’s budget and explore their implications for businesses and individuals.
Tax Proposals to Reduce Deficits
President Biden’s FY 2024 budget includes a range of tax proposals aimed at reducing federal deficits significantly. These proposals encompass both business and individual taxes, and their impact is substantial.
Business Tax Proposals
1. Corporate Income Tax Rate Increase: One of the most notable business tax proposals is the plan to raise the US corporate income tax rate from its current 21% to 28%.
2. International Tax Reforms: The budget introduces reforms to US international tax rules, including raising the tax rate on the foreign earnings of US multinational corporations from 10.5% to 21%. It also incorporates an undertaxed profits rule.
3. Support for Research and Experimentation: The budget provides “additional support” for research and experimentation expenditures. This support will be financed by repealing the deduction for foreign-derived intangible income (FDII).
4. Corporate Stock Repurchase Excise Tax: As previously announced, the budget suggests increasing the corporate stock repurchase excise tax from 1% to 4%.
5. Other Business Tax Proposals: The budget includes various other tax proposals affecting corporate and pass-through businesses.
Individual Tax Increase Provisions
1. Top Individual Tax Rate: President Biden’s budget proposes increasing the top individual ordinary income tax rate from 37% to 39.6%.
2. Taxation of Capital Gains: The budget suggests taxing capital gains income for high earners at ordinary income tax rates.
3. Minimum Income Tax: A 25% “minimum income tax on the wealthiest taxpayers” is proposed, with a focus on those with net wealth exceeding $100 million.
4. Medicare and Net Investment Tax: Proposals include an increase from 3.8% to 5% in the net investment tax rate and an additional Medicare tax rate for high-income taxpayers. The net investment income tax is also extended to pass-through business income of high-income taxpayers.
Implications and Observations
The implications of these tax proposals are significant. They impact businesses, high-income individuals, and the broader economy. The budget aims to repeal certain tax provisions enacted as part of the 2017 Tax Cuts and Jobs Act and addresses the 2025 expirations of these provisions. The President’s commitment is to reward work, particularly for individuals earning less than $400,000.
Business Tax Reforms in Detail
Let’s take a closer look at the proposed reforms to US international tax rules:
Revising Global Intangible Low-Taxed Income (GILTI) Rules
One key reform is the revision of global intangible low-taxed income (GILTI) rules, which are designed to prevent US companies from shifting profits to low-tax jurisdictions.
Adopting an Undertaxed Profits Rule
Another significant change is the adoption of an undertaxed profits rule. This rule targets profits that have been subject to low foreign taxes.
Repealing the Deduction for Foreign-Derived Intangible Income (FDII)
The budget proposes the repeal of the deduction for foreign-derived intangible income (FDII), a tax incentive for US corporations to export goods and services.
Restricting Deductions and Other Reforms
The budget also suggests changes related to interest deductions, Subpart F income, earnings and profits of controlled foreign corporations, and taxation of foreign fossil fuel income, among other reforms.
Individual Tax Reforms in Detail
Increase in Top Individual Tax Rate
The proposal to increase the top individual tax rate would affect high-income individuals, potentially leading to higher tax liability for this group.
Taxation of Capital Gains at Ordinary Rates
High earners could see their capital gains taxed at ordinary income tax rates, which might impact investment strategies.
Minimum Income Tax on Wealthiest Taxpayers
The budget introduces a minimum income tax for individuals with significant wealth, targeting net wealth exceeding $100 million.
Implications of Net Investment Tax and Medicare Tax Changes
The increase in the net investment tax rate and the expansion of the tax to pass-through business income can have implications for high-income individuals’ investment income.
Upcoming Hearings and Political Outlook
The release of the President’s FY 2024 budget coincides with ongoing debates in Congress, particularly concerning the federal statutory debt limit. The ultimate fate of these tax proposals will depend on bipartisan support, as action on tax legislation, FY 2024 appropriations, and debt limit increase legislation requires approval from both the Republican-controlled House and the Democratic-led Senate.
President Biden’s FY 2024 budget introduces substantial tax proposals aimed at addressing federal deficits and promoting fairness in the tax system. These proposals encompass corporate tax reforms, international tax changes, and significant adjustments to individual taxation. As discussions continue in Congress, stakeholders should actively engage with policymakers to voice their perspectives on the potential effects of these tax proposals on employees, job creation, and investments in the United States. Learn more by chatting with one of our accountants, start by contacting us today!