President Obama’s Fiscal Year 2016 Revenue Proposals: Proposals Relating to Individual, Estate and Gift and Retirement Plan Taxation

Sullivan & Cromwell LLP - February 11, 2015

On February 2, 2015, the Obama Administration released the General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (commonly known as the “Green Book”).  Although the Green Book does not include proposed statutory language, the Green Book contains significant detail about the fiscal year 2016 revenue proposals.  Many of these proposals were made previously by the Administration but were not enacted.
This memorandum discusses key aspects of the Green Book relating to individual income taxation, estate and gift taxation and the taxation of qualified retirement arrangements.  We will be distributing separate memoranda addressing Green Book proposals relating to (1) domestic business taxation, (2) taxation of offshore profits of U.S. corporations, and (3) other international taxation issues, all of which may be obtained by following the instructions at the end of this memorandum.

The Green Book proposals affecting the U.S. Federal income taxation of individuals include:

  • increasing the top tax rate on long-term capital gains and qualified dividends from 23.8 percent to 28 percent;
  • reducing the value of exclusions and deductions for higher-income taxpayers to 28 percent;
  • implementing the “Buffett Rule,” or new minimum tax, on high-income taxpayers;
  • requiring taxpayers to take accrued market discount into income currently, in the same manner as applicable for original issue discount; and
  • requiring the use of an average basis method in determining the basis of stock sold.
The Green Book proposals affecting the U.S. Federal taxation of estates and gifts include:
  • eliminating the basis step-up upon death by imposing capital gains tax on certain transfers of appreciated assets by gift or inheritance;
  • restoring the estate, gift and generation-skipping transfer (“GST”) tax rates and exclusion amounts to 2009 levels, beginning in 2016;
  • requiring a minimum term of 10 years for a grantor retained annuity trust (“GRAT”), imposing a minimum initial value of the remainder interest in a GRAT, prohibiting any decrease in the stated annuity amount payable during the GRAT term, and prohibiting the grantor from engaging in a tax-free exchange of any asset held in the trust;
  • imposing certain transfer taxes on grantor trusts receiving property in a sale, exchange or comparable transaction;
  • limiting the duration of the GST tax exemption allocated to a trust to 90 years;
  • requiring consistency in valuations for transfer tax and income tax purposes;
  • providing that distributions from health and education exclusion trusts are not exempt as medical care and tuition expenses;
  • replacing the present interest requirement of the annual gift tax exclusion; and
  • modifying deductions for certain contributions of conservation easements.
The Green Book proposals affecting the U.S. Federal taxation of qualified retirement arrangements include:
  • limiting the total benefits in tax-favored retirement accounts;
  • imposing new time limits on distributions to non-spouse beneficiaries of tax-favored retirement plans;
  • requiring Roth IRA holders to be subject to the minimum required distribution rules; and
  • requiring small employers to offer an automatic IRA option to employees, and expanding the small employer tax credit for employers required to do so.