On 28 March 2022, the US Treasury published what is known as the Green Book, which is a general explanation of the tax collection proposals from the government. This edition describes the main fiscal points of focus for the government in budget year 2023 and describes the technical details that serve as a framework to the legislator for preparing future legislation proposals.
Proposals for income tax
In this year’s Green Book, there is a whole series of proposals relating to income tax that were already set out in last year’s Green Book and in the “Build Back Better Act (BBBA)”. But so far, these have not attracted enough support in the Senate to pass into legislation. If these proposals were now to be approved by Congress and signed into law, they would have a significant effect on the income tax situation of individuals, those on international secondments and US investors.
The proposals in detail
The following proposals relating to income tax would apply in principle for the tax years after 31 December 2022.
- The top tax rate for income tax will be raised from 37 percent back to the previous tax rate of 39.6 percent. This applies to taxable income over USD 450,000 for married couples and jointly taxed individuals. For single people, the threshold is USD 400,000; for those who are taxed as “head of household”, it is USD 425,000; and for married persons who are taxed individually, it is USD 225,000.
- For taxpayers with taxable income of over USD 1,000,000, gains on long-term sales and qualified dividends will be taxed at their individual tax rate. However, this only applies if the inflation-adjusted income exceeds USD 1,000,000 for married persons or USD 500,000 for those who are taxed individually after 2023. This would include realised gains and dividends received on or after the date the law was passed.
- The plan is to treat the transfer of assets of increased value by way of a gift or after death in the same way as a sale. The person making the gift or the deceased would be realising a gain on a sale at the time of the transfer. The proposal would apply to gains on property that are transferred as a gift, and gains on property owned by people who die after 31 December 2022. This would also apply to assets existing on 1 January 2023 that are held by trusts, partnerships and other non-corporate legal entities.
- It is also planned to introduce a minimum tax of 20 percent on total income, including unrealised gains on sales, for all taxpayers with assets worth over USD 100 million.
- Carried interest will be treated as normal income for business partners with taxable income (from all sources) of more than USD 400,000.
- The tax deferral for “Internal Revenue Code Section 1031 like-kind exchanges” for taxpayers with gains over USD 500,000 (or USD 1,000,000 for married couples who are taxed jointly) will be scrapped.
- Another proposal brings an amendment to the recapture rules. Gains from sales of certain types of real estate will be taxed at the personal tax rate at the level of the depreciation expenses, instead of at a special tax rate which has applied to date. The new rule does not apply to individuals who have an adjusted gross income below USD 400,000 (for jointly taxed spouses) or below USD 200,000 (when taxed separately).
- The rules on currency gains and losses for individuals will be simplified by allowing the use of an annual average exchange rate to calculate income in a foreign currency. The proposal would also mean an increase in the personal tax exemption from USD 200 to USD 500 (after adjustment for inflation). Individuals would be allowed to deduct realised foreign currency losses relating to a mortgage debt secured against their personal main residence. These losses could only be offset up to the point where they start to exceed the gain from currency fluctuations on the sale of the real estate.
- For foreign digital asset accounts, a mandatory duty to report will exist.
- The plan is to extend the tax assessment period to three years following the date on which Form 8854 is filed.
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