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  • Writer's pictureDr. Mark Lee Levine, Professor

Billionaire Tax and New Framework

More Tax Proposals!

Update on Proposals:

In Prior Tips, I have provided a summary of some of the Federal Income Tax and Estate/Gift Tax Proposals that the Biden Administration (BA) has put forth over the last few weeks.

Most of these proposals continue to be discussed; however, given the huge costs of these possible changes, the current inflationary status of the economy, questions as to the size of the deficit and debt that recent spending proposals will generate, other negative press, and ongoing conflicts between the Democrats and the Republicans, these proposals continue to languish in the “proposal” box, waiting to see if Congress and the President resolve some of their differences.

Below, there is a discussion of two new Proposals: The Billionaires Income Tax and the new BA Framework for a new Tax Package. Some of these items overlap with prior proposals that have emerged in the last 3 months.

Billionaires Income Tax Proposal

Billionaires—New Additional Tax Proposal on the "Very Wealthy"

Senator Ron Wyden proposed a special additional tax on Billionaires. This proposal, made at the end of October, by Senator Wyden, creates the following tax obligations on this special set of wealthy taxpayers.

1. Tradeable Assets: For assets that are often traded and where the market value is known for the same, such as for stock on a major securities exchange, the value of the stock will be determined at the year-end. That is, the stock will be marked to market. A tax would then be assessed on any gain, as though the stock had been sold. Thus, for example, if a taxpayer had stock that appreciated by 10 million dollars, the 10 million would be taxed, even if the taxpayer, the billionaire, did not sell the stock.

Yes, of course, the stock could, subsequently, go down in value. In such an instance, a loss deduction would be allowed for the taxpayer. (The loss carryback might be limited to 3 years. This issue, among others, must be addressed, per the proposal.)

2. If an asset is not listed on an exchange, and the asset value is not well established, such as with real estate, the billionaire will not be required to pay tax on such possible gain, without a disposition. However, when the billionaire does dispose of the real estate asset or other non-tradeable assets, paying tax on the gain, the billionaire will also have to pay an additional amount of “deferral recapture” for the delay in not having paid the tax. (The proposal suggests that there would be a factor or rate that would be charged on the deferred gain. This is much akin to an interest charge, because the taxpayer did not have to pay the billionaire tax earlier than the year of disposition.)

There are other parts of the proposal to allow for other exceptions as to paying this mark to market income tax on holdings that are not sold. However, the essence of the tax is as outlined, above.

The argument for this Billionaire Tax is to be “certain” that the billionaire pays his or her “fair share” of income tax—whatever that number might be!

The good news (for now) for most people: The Billionaire Tax only applies if:

1. The taxpayer in question has more than $100,000 million in annual income or

2. More than 1 billion in assets for three consecutive years.

Yes, of course, there are many additional questions that will be raised. For example: How does one determine the income? Is it gross income, adjusted gross income, etc.? How are the total assets to be determined? Is this per person or per couple? How are entities, owned by the wealthy, treated to determine the total assets for the taxpayer? Is there a discounting factor when owing with others? Obviously, there are many other questions.

Biden Administration Tax Proposal Package

Toward the end of October 2021, the Biden Administration (BA), realizing some changes needed to be made to the prior BA proposals for tax increases, presented a “Framework” for a modified tax proposal.

Because of the difficulty in trying to move forward the prior BA proposals that exceed 3.5 trillion, the Framework proposal eliminated a number of prior tax proposals impacting income and estate tax, among other areas.

For example, the framework eliminated provisions that would support community colleges, paid family leave, some energy proposals, et al. Important for the real estate area, the framework does include provisions limiting loss deductions for some areas impacting wealthy taxpayers, adds a 5% additional tax for incomes in excess of $10 million, and adds an additional surtax for incomes exceeding 25 million.

Another major change contained within the framework is to provide for a 15% minimum tax on corporations that have a gain of over one billion dollars. Importantly, the framework does not include some items, proposed months ago by the BA, that were of great concern to many taxpayers

1. No step-up in basis for assets held by a decedent.

2. Tax the appreciation on assets held by the taxpayer on the death of the taxpayer.

3. Drop the estate/gift exemption to somewhere in the 5 to 6.5 million range.

4. Eliminate the Section 1031 tax deferral rule.

Once again, the above items are not within the framework; thus, absence other changes, these areas will not be addressed in new legislation, if any, for tax changes in 2021.

Will New Tax Legislation Be Passed Before Year End?

Clearly, I do not know the answer to this question. More importantly, Congress and the President do not even know what will happen on these proposals!

Nevertheless, it appears that some planning can take place, given the changes by the BA and the new Framework issued by the President.

The end of the year is fast approaching; thus, for 2021, we will know, soon, as to whether we will have new legislation in this last quarter of 2021.

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