Summary and background. On March 28, 2022, the Biden administration proposed a minimum tax of 20% on people with more than $100 million in assets. The minimum tax would be based on all economic income (which the proposal calls “total income”), including unrealized capital gain. The tax would be in effect for tax years beginning after December 31, 2022. The minimum tax would be fully phased in for taxpayers with assets of $200 million or more.
Under the proposal, an individual’s minimum tax payable for 2023 would be payable in nine equal annual installments (for example, in 2024-2032). For 2024 and subsequent years, the minimum tax liability would be payable in five annual installments. The tax can be avoided by donating assets to Section 501(c)(3) organizations (including private foundations or donor-advised funds) or 501(c)(4) organizations before the due date. coming into force of legislation to avoid the $100 million threshold.
The Biden proposal is an attempt to appeal to Sen. Joe Manchin (DW.Va.) and address some criticism of Sen. Ron Wyden’s (D-Or.) put-to-market proposal. Senator Manchin has expressed support for a minimum personal tax of 15%, and this support apparently gave impetus to the proposal. Senator Manchin, however, has not expressed support for a market-priced minimum tax, and the Biden administration does not appear to have received support from Senator Manchin before releasing its proposal.
The five-year payment period is an attempt to address concerns that Wyden’s proposal could overtax volatile assets and “smooth” taxpayer cash flows without the IRS needing to issue refunds. Under the Biden administration’s proposal, minimum tax installments can be reduced to the extent of unrealized losses.
Minimum tax is described as an “advance payment” that can be deducted from subsequent taxes on realized income. This description provides a saving argument on constitutionality: the minimum tax is not a tax on unrealized income but simply a prepayment of tax on realized income.
Operation of the minimum tax. The minimum tax would apply to taxpayers whose wealth (assets minus liabilities) exceeds $100 million. The proposal does not define liabilities and does not indicate whether a taxpayer would be deemed to own the assets of his children or of trusts. Therefore, it is unclear whether a taxpayer who is close to the $100 million threshold can avoid tax by giving assets to children. As mentioned above, a taxpayer can donate assets to Section 501(c)(3) or 501(c)(4) organizations to avoid the threshold, and therefore, if the minimum tax is enacted, donations to charities are expected to increase significantly. increase.
The proposal is phased in to taxpayers with wealth between $100 million and $200 million. Phase-in is achieved mechanically by reducing tax payable to the extent that the sum of (w) minimum tax payable and (x) uncredited prepayments exceeds twice (y) the tax rate minimum, multiplied by (z) the amount by which the taxpayer’s wealth exceeds $100 million. Thus, for a taxpayer with $150 million in wealth and a zero base and no prepayment, the $30 million minimum tax payable would be reduced by $10 million to $20 million. ($10 million is the amount by which (x) $30 million exceeds (y) $20 million, or 40% [two times the minimum tax rate] times $50 million [the amount by which the taxpayer’s wealth exceeds $100 million].)
A taxpayer subject to minimum tax would make two calculations: their “normal” tax payable under our current realization system and the “minimum” tax under the proposal. Tax would be paid on the higher of the two.
For purposes of the 20% minimum tax, the taxpayer would include all unrealized gains on “marketable assets”. The proposal does not define marketable assets. Marketable assets would be valued using year-end market prices. The taxpayer would also include any unrealized gains on “non-tradable assets”. Non-marketable assets would be valued using the greater of (i) the initial or adjusted cost basis, (ii) the last valuation event related to the investment (i.e. a round of financing by stocks), (iii) borrowing (i.e. a lender’s valuation), (iv) financial statements, or (v) other methods approved by the IRS. The initial or adjusted base cost would be deemed to increase at a rate equal to the five-year Treasury rate plus two percentage points. The five-year Treasury rate is currently 2.76% and therefore at current rates non-traded assets without a valuation event would be deemed to increase in value at an annual rate of 4.76%. The proposal would not require valuations of non-marketable assets.
While a taxpayer would be subject to minimum tax if he exceeds normal tax, as mentioned above, payment of minimum tax would be made in equal annual installments (nine for the first year of liability for minimum tax and five thereafter).
So suppose a taxpayer buys a stake in an unlisted C corporation on January 1, 2023 for $200 million. The taxpayer has no realized income and no other assets. The taxpayer would have no “normal” tax. Assume the five-year Treasury rate is 2.76%. The investment would be deemed to have increased in value by 4.76% (to $209.5 million). The minimum tax would be 20% of $9.5 million, or $1.9 million. If this were the taxpayer’s first year subject to minimum tax, the minimum tax payable would be $211,111 for each of the years 2024 through 2032, subject to the “illiquid exception” described below. below. If the taxpayer subsequently sells Corporation C, he would credit the minimum tax prepayments against his income tax payable.
Minimum tax payments would be treated as an advance payment available to be deducted from future taxes on realized gains.
The Biden administration has separately proposed that the death will result in a realization event. If a taxpayer’s prepayments in excess of tax payable exceed the gains at death, the taxpayer would be entitled to a refund. The refund would be included in the gross estate of a single deceased for estate tax purposes. Net uncredited prepayments of a married deceased would be transferred to the surviving spouse (or as required by regulation).
Unlike Senator Wyden’s proposal, which does not require tax to be paid on the unrealized gain for untraded assets, and instead imposes a deferral charge upon realization, the administration’s proposal Biden generally requires minimum tax to be computed in respect of any unrealized gain, including deemed appreciation on non-traded assets, subject to an “illiquid exception.” If the marketable assets held directly or indirectly represent less than 20% of a taxpayer’s wealth, the taxpayer may elect to include only the unrealized gain on the marketable assets in calculating their minimum tax liability. A taxpayer making this election would be subject to a deferral charge upon realizing the extent of the gain, but the deferral charge would not exceed 10% of the unrealized gain. The proposal does not indicate the rate of deferral costs.
This aspect of the Biden administration’s proposal provides a significant benefit to “illiquid” taxpayers and encourages taxpayers to become “illiquid” to benefit from the exception. The proposal provides that marketable assets held “indirectly” are treated as belonging to the taxpayer for this purpose and therefore it is unclear whether and to what extent taxpayers can bring marketable assets into non-marketable vehicles to benefit from the illiquid exception. The proposal would give the IRS specific authority to issue rules to prevent taxpayers from improperly converting marketable assets into nonmarketable assets.
Estimated tax payments would not be required for minimum tax liability, and minimum tax payments would be excluded from prior year tax liability for tax calculation purposes. estimated required to avoid penalty for underpayment of estimated taxes.
The tax is expected to affect 20,000 taxpayers (compared to about 700 under Wyden’s plan) but generate roughly the same amount of revenue as Wyden’s proposal: $360 billion over ten years, according to Treasury Department estimates. (which should be around $550 billion over 10 years according to the Joint Committee on Taxation’s scoring methodology).