Election year is upon us, and with it comes an added emphasis on economic proposals for 2025. Recently, President Joe Biden issued his 2025 proposed budget, the U.S. Department of the Treasury provided its “Green Book” explanations of these proposals, and House Republicans advanced a concurrent resolution for the 2025 congressional budget. The likelihood that any portion of these proposals become bills is far from certain, but they certainly provide insight into priorities and a preview of what we will see in debates this year.
The proposals within Biden’s proposed budget—and, therefore, the commentary within the related Green Book—largely align with what was laid out in his 2024 State of the Union address. While also including proposals related to international taxation, tax compliance, and tax administration, this article focuses on what could be viewed as the top 10 most high-impact federal tax proposals as explained by the Green Book.
The Green Book
1. Rate Increases
The following rate increases are included within the Green Book, with each proposed item effective for taxable years beginning after December 31, 2023.
| Rate Description | Current Rate | Increased Rate |
|---|---|---|
C corporation tax rate | 21% | 28% |
Corporate alternative minimum tax | 15% | 21% |
Top marginal individual tax rate (various income thresholds based on filing status) | 37% | 39.6% |
Additional Medicare tax, for taxpayers > $400,000 | 3.8% | 5% |
Marginal net investment income tax (NIIT), for taxpayers > $400,000 | 3.8% | 5% |
2. Expand Limitation on Deductibility of Employee Remuneration in Excess of $1 Million
For public and private C corps, the proposal would limit the deductibility of any (instead of just “covered employees”) employee’s wages to $1 million. This means that while corporations could pay more than $1 million per employee, they could not reduce their taxable income for amounts paid in excess of that amount. Further, all members of a controlled group would be considered a single employer, meaning the limitation would consider all wages across members of the group.
3. Tax Carried (Profits) Interests as Ordinary Income
Some partners may obtain an interest in the future profits of a partnership (referred to as “profits interests” or “carried interests”) in exchange for their services. Currently, capital gains and certain dividends and interest attributable to the partnership interest are not subject to self-employment for those partners with a profits interest (while other activities—like their share of ordinary income— may be) and are subject to lowered tax rates based on the character of income, as applicable. There is an existing provision under Section 1061 (if applicable) that recharacterizes certain long-term capital gains as short term if the applicable holding period is less than three years. For partners with income exceeding $400,000, the proposal changes this rule to treat all income from an “investment services partnership interest” (ISPI) in an investment partnership as ordinary income regardless of the income’s character. Further, these individuals’ ISPI would be subject to self-employment. This change especially impacts those in the private equity or hedge fund space and would be in effect for taxable years beginning after December 31, 2024.
4. Repeal Deferral of Gain From Like-Kind Exchanges
Currently, exchanging certain “like-kind” real property could defer gain that would otherwise occur if the property was sold. The proposal would implement an annual limitation—$500,000 per taxpayer or $1 million for married filing jointly—and any amount in excess of this limitation is taxed as a gain in the year of exchange. This would be effective for transactions occurring in taxable years beginning after December 31, 2024.
5. Ordinary Income Recapture – §1250 Property
Section 1250 applies to real property, such as buildings. Currently, a 25% rate applies (non-corporate taxpayers) to unrecaptured §1250 gain. The proposal would remove this preferential rate and treat unrecaptured §1250 gains as ordinary income. Note there are specific rules mentioned for how this is handled both for depreciation deductions occurring after December 31, 2024, and for dispositions occurring after the same date. This change would not apply to those with adjusted gross income (AGI) of less than $400,000 ($200,000 for married filing separate).
6. Expand & Enhance the Low-Income Housing Tax Credit
Reminiscent of the Tax Relief for American Families and Workers Act of 2024 proposal, this proposal would include increasing the annual housing credit dollar amount each state receives (with $4.37 per capital proposed for 2025) and reducing the private activity bond financing requirement from 50% to 25% for buildings placed in service in taxable years beginning after 2024. Additional proposed changes are included that would affect the current right of first refusal safe harbor and other provisions.
7. Apply NIIT to Pass-Through Business Income of High-Income Taxpayers
Under the proposal, materially participating owners of S corps or partnerships would have to pay NIIT or Self-Employed Contributions Act on the related pass-through income. This would phase in fully for most taxpayers with AGI of $500,000. This proposal would affect tax years beginning after December 31, 2023.
8. Reform the Taxation of Capital Income
Lower capital gains rates are available currently to non-corporate taxpayers on realized long-term capital gains and qualified dividends. The proposal would implement ordinary tax rates for those with income exceeding $1 million. This would likely result in a 37% or 40.8% (including NIIT) tax rate for gains incurred following enactment.
Further, certain appreciated property that is transferred at death or gift is proposed to trigger a gain recognition event. The gain would be calculated using the fair market value of the property at the date of gift or death. Several exclusions are included in the Green Book, as well as a proposed $5 million lifetime exclusion per donor, and a provision to defer gain recognition attributable to certain family owned and operated businesses until a sale event or when they cease to be family owned and operated. Other proposed rules related to this topic are included in the Green Book. This gain treatment is applicable to gifts made after December 31, 2024.
9. Impose a Minimum Income Tax
For those with “wealth” greater than $100 million, a 25% minimum income tax would be implemented under this proposal, regardless of the character of income for year. This includes unrealized gains as well as realized gains. In addition, the applicable taxpayers would have to report the basis and estimated value of their assets annually. This proposal would apply to taxable years beginning after December 31, 2024.
10. Expand the Child Tax Credit (CTC), & Make Permanent Full Refundability & Advanceability
A hotly debated item currently included in the Tax Relief for American Families and Workers Act of 2024, the CTC also has made it into Biden’s 2025 proposal. Among other changes, for 2024 and 2025 the maximum credit would increase to “$3,600 for qualifying children under age 6 and $3,000 for all other qualifying children.” The CTC is proposed to be fully refundable beginning in 2024. The Tax Cuts and Jobs Act mechanism of allowing an advance payment program also is included in the proposal, which is quite detailed and expansive with additional proposals related to the CTC.
To reiterate, the items detailed in this article and the Green Book are not bills introduced for consideration, but rather provide insight into Biden’s priorities. It is too early to begin planning with these topics in mind, but it is prudent to be aware of them as we continue with the election year.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.