President Barack Obama released his proposed budget for the government’s fiscal year 2014 on April 10, 2013, and, not surprisingly, the budget contains a number of revenue-raising tax provisions. It is far too early to know whether Congress will enact any of these proposed provisions.
Income Taxes. The media has focused on a few proposals that would affect high-income taxpayers, including proposals to:
- Impose a limit so that itemized deductions cannot reduce a taxpayer’s income tax to an amount less than an overall effective tax rate of 28 percent. The proposal, effective in 2014, would apply to taxpayers in the three highest rate brackets and would also impose a tax on otherwisetax- exempt interest for these taxpayers.
- Adopt the “Buffett rule” by imposing an effective tax rate of not less than 30 percent of adjusted gross income for those taxpayers whose adjusted gross income exceeds $1 million. Certain special consideration would be given for charitable contributions. This proposal would become effective in 2014.
- Prohibit further contributions to retirement plans such as IRAs, 401(k) plans, and profit-sharing plans when the taxpayer’s account balance reaches the actuarial equivalent of the maximum benefit then permitted in a defined-benefit pension plan. At present, that amount would be about $3.4 million and would be subject to annual change as the defined-benefit limit fluctuates with cost-of-living adjustments.
- Adopt the partnership “carried interest” provision. A proposal that has been floating around for years, this would subject partners who hold noncapital income interests in partnerships to tax at ordinary income rates, rather than at capital gains rates, when the partnership recognizes what would otherwise be capital gains income or when the partner sells his partnership interest. The provision would also apply to income interests in a limited liability company if the company is treated as a partnership for income tax purposes.
Estate and Gift Taxes. The president’s proposals in the estate and gift tax area include:
- Beginning in 2018, the tax rates and lifetime exemption amounts would revert to their 2009 levels. The maximum tax rate would be 45 percent. For estate tax purposes, the exemption amount would revert to $3.5 million, and for gift tax purposes, only $1 million of that exemption could be used to offset lifetime taxable gifts. The proposal would ensure that no estate or gift tax would result from the decrease in the exemption amount for those taxpayers who made gifts under the current higher exemption amount before 2018. In essence, the “permanent” estate and gift tax provisions enacted last year are permanent only until Congress changes them again.
- The long-discussed consistency rule would be adopted, requiring taxpayers to use the value reported on the Form 706 estate tax return as the income-tax basis of assets received from a decedent.
- Grantor Retained Annuity Trusts (GRATs) would become subject to a minimum term of 10 years and a maximum term of the grantor’s life expectancy plus 10 years, and the remainder interest would have to have a value greater than zero. This proposal would apply to GRATs created after the date of the proposal’s enactment.
- Dynasty (long-lasting) trusts, which are exempt from the generation-skipping transfer (GST) tax, would be limited to a term of 90 years. After 90 years, the GST tax exemption allocated to the trust would terminate. This proposal would apply to trusts created after the date of the proposal’s enactment and to transfers made after that date to pre-existing trusts.
- Sales to so-called defective grantor trusts would be eliminated by providing that the property sold to these trusts would, upon the grantor’s death, be included in the estate of the grantor for estate tax purposes. This rule would apply to sales occurring after the date of the proposal’s enactment, regardless of when the trust was created.