President Biden’s 2024 Fiscal Year Budget – Issues of Interest to International Families

On 9 March 2024, the US Treasury issued General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals, also known as the 2024 Greenbook.

While certain provisions of President Biden’s 2024 Budget may garner bipartisan support, the majority of this year’s Greenbook describes a “wish list” confirming policy priorities and provisions the President hopes Congress will approve if Democrats regain control of the House of Representatives in 2024.

The Greenbook proposals would significantly reform the US international tax regime and the taxation of business entities. The corporate tax rate would increase from 21% to 28%. A full discussion of the international corporate tax proposals is outside of the scope of this article. Very broadly, the availability of foreign tax credits in connection with the sale of certain foreign hybrid entities would be limited, the effective rate of tax under the US Global Intangible Low Tax Income (GILTI) rules would increase to 14% (21% in certain cases). The controlled foreign corporation (CFC) rules would be aligned with the OECD global minimum tax-rules, meaning in part that tax would be imposed on a jurisdiction-by-jurisdiction basis and the Base Erosion Anti-Abuse Tax would be replaced by an “undertaxed profits tax”. The proposed expansion of the definition of earnings and profits (E&P) for subpart F purposes could impact families with trust/investment holding company structures, who might otherwise not be impacted by the CFC proposals.

Many of the proposals impacting international families would fundamentally change the taxation of capital gains (both realised and unrealised). These proposals, if enacted, could impact family members (eg, individuals who become resident or domiciled in the United States while overseeing the US operations of a family business) and the individuals and entities, both foreign and domestic, holding US situs assets, in particular US real property. 

Headline proposals include the following.

Taxpayers with wealth in excess of USD100 million would be required to pay a minimum tax of 25% on “total income” (including realised income and realised and unrealised gains).

Taxpayers with wealth in excess of the threshold would need to report total cost basis and total estimated fair market values of each class of assets and liabilities.  

Individuals with taxable income in excess of USD400,000 would be taxed at ordinary income tax rates to the extent their income exceeds the threshold amount. Capital gains and dividends would not be taxed at preferential rates.  

If the NIIT and marginal rate increases are enacted, then capital gains and qualified dividends recognised by taxpayers with income in excess of USD400,000 could be taxed at a rate of 44.6% (rather than the 23.8% tax imposed under current law).  

Under current law, subject to certain limited exceptions, donors do not recognise capital gains when they make lifetime gifts of appreciated property and donees receive the gifted property with a “carry-over basis”. Gains are realised when the gifted property is sold.

Bequests, including certain property held in trust, often qualify for a step up in basis to fair market value as of the decedent’s (or settlor’s) date of death. In January 2023, the IRS reaffirmed the limits on the step up in Revenue Ruling 2023-2. 

The proposal follows earlier attempts to remove the tax advantages available to individuals who create grantor trusts if the trust assets are not subject to US estate tax upon the grantor’s death.

The proposal broadly denies a step in basis to assets that pass upon death. It requires gain recognition when property is disposed of by gift or bequest, unless the property passes to:

Under current law, gains are not taxed until property is sold, transferred, exchanged or otherwise disposed of in a gain recognition transaction. 

The proposal would tax appreciation property held by trusts, partnerships and other non-corporate entities on or after 1 January 1942 that has not been recognised for US income tax purposes during the prior 90 years. The first recognition event would be deemed to occur on 31 December 2032, giving families time to plan if this rule is enacted in earlier years.

Contributions of property to and distributions in kind from trusts would be subject to capital gains tax unless the entire trust was a revocable grantor trust, owned and revocable by the settlor. The settlor of a revocable grantor trust would recognise gain if appreciated assets were distributed from revocable grantor trusts to anyone other than the settlor or the settlor’s spouse (or to discharge the settlor’s obligations).

Gifts of appreciated US situs property made via partnerships and other non-corporate entities would be subject to similar rules.

Similarly, gifts of appreciated property made via partnerships and other non-corporate entities would be subject to capital gains tax. 

Certain family-owned and operated businesses may elect to defer recognition of gains on unrealised appreciation until it is no longer family owned and operated.

A 15-year fixed payment plan would be available to pay tax on certain unrealised appreciation due at death other than liquid assets, such as publicly traded securities, and assets subject to the family business deferral.

The Greenbook does not address how these provisions would apply to non-US taxpayers, for example, would they apply to assets other than US real property and collectibles and how much exclusion would be available to offset the tax on unrealised gains. 

Exclusions are available for certain gains on:

This would be available to the extent an individual’s gifts exceed the applicable US gift tax exemption (currently USD12.92 million).

Any portion of the USD5 million exclusion not used during an individual’s lifetime could be utilised by the individual’s estate.    

Currently, US citizens and domiciliaries may make an unlimited number of gifts of “present interests” of the annual exclusion amount (USD17,000 in 2023) and those gifts are not taxable gifts for US gift tax purposes.

The proposal would limit these gifts to an aggregate amount of USD50,000 each year, regardless of whether the gift is of a present interest.