S. 2845 — Billionaires Income Tax Act

This section eliminates the modified adjusted gross income (MAGI) limitation on the net investment income tax (NIIT) for applicable taxpayers (as defined in new section 495), requiring such taxpayers to pay the full 3.8% NIIT rate on their entire net investment income rather than only the lesser of net investment income or the amount by which MAGI exceeds threshold amounts (e.g., $200,000 for single filers). The change applies to taxable years beginning after December 31, 2025.

This section establishes special expatriation tax rules under section 877A for covered expatriates (i.e., certain high-net-worth individuals relinquishing U.S. citizenship or lawful permanent residence) who are applicable taxpayers (as defined in section 495, generally relating to private foundations) for the taxable year including the expatriation date, effective for taxable years beginning after December 31, 2025. The rules (1) prohibit any deferral election under section 877A(b) for property deemed sold under section 877A(a); (2) treat the expatriate as having sold, on the last day of the 10-taxable-year period described in section 495(d)(2)(A), all property then held that is not otherwise treated as sold under part IV of subchapter E; and (3) subject the expatriate to section 877 taxation (i.e., the pre-877A expatriation rules) for each year of that 10-year period, notwithstanding section 877(h).

This section disallows like-kind exchange treatment under Section 1031 for applicable entities if a notice under Section 493(b)(2)(A) or (c)(2) is in effect at the time of the exchange, for exchanges completed after December 31, 2025. (Like-kind exchanges generally allow taxpayers to defer capital gains tax on the disposition of similar properties, primarily real estate.)

This section precludes nonrecognition of gain or loss under IRC §351(a) for property transfers to a corporation by an applicable entity (as defined in new IRC §493) if an applicable notice under §493(b)(2)(A) or (c)(2)—relating to an applicable taxpayer who is a 20-percent owner of the entity—is in effect at the time of the exchange. The provision applies to exchanges completed after December 31, 2025.

This section amends the in-kind distribution rules under IRC §643(e)(3) to apply automatically to distributions of property from estates described in §495(a)(1)(B)(ii) or applicable trusts (as defined in §495(c)) and, at the election of any other estate or trust, to its distributions during the taxable year (with revocation only by consent of the Secretary). It revises the treatment of loans under §643(i) to cover loans from foreign trusts or applicable trusts to any person not exempt from tax (previously, only to U.S. persons), eliminates an exception for certain loans, and changes the heading from "foreign" to "certain" trusts. It modifies the multiple trusts rule under §643(f)(2) to incorporate the rules of part IV of subchapter E (i.e., throwback rules and related provisions). It adds new IRC §686, which for beneficiaries of applicable foreign trusts (i.e., foreign trusts that would be applicable trusts if domestic) increases tax on amounts included in income from gain on an applicable transfer of a covered asset by a pro rata portion of the §492 deferral recapture amount (as if the trust were an applicable taxpayer), unless the trust pays that tax; it also requires related information reporting under §6048(c). The Secretary of the Treasury must issue regulations coordinating these changes with subpart D of part I of subchapter J (i.e., throwback rules). The amendments generally apply to taxable years beginning after December 31, 2025 (with the foreign trust provision applying to applicable transfers in such years).

This section establishes special tax rules under new IRC §409B for applicable taxpayers (as defined in §495), increasing their tax liability for the taxable year by (1) a deferral recapture amount on applicable deferred compensation included in gross income that year, and (2) 10% of any severance pay included in gross income that year. (Thus, the recapture eliminates the benefit of tax deferral by imposing interest—computed at federal short-term underpayment rates under §6621(b) plus 1 percentage point—on a deemed tax amount for each preceding year in the deferral period, determined by ratably allocating the deferred compensation over that period and applying the highest individual income tax rate for the inclusion year; the recapture is capped at 10% of the compensation amount.) Applicable deferred compensation includes nonqualified deferred compensation under §409A (expanded to cover stock appreciation rights and certain compensation includible in income in the year after substantial vesting risk ends), plus §83 property transferred for services (excluding severance pay and partnership profits interests); the deferral period begins when the taxpayer first has a legally binding right to the compensation (or on property transfer date, for §83 purposes) and ends on the income inclusion date. Severance pay encompasses any compensation contingent on employment termination, including cash, property, expense reimbursements, and insurance benefits includible in gross income.

This section modifies the tax treatment of amounts received under applicable private placement life insurance or annuity contracts held by applicable taxpayers (i.e., private foundations and disqualified persons, as defined in IRC §495), effective for amounts received in taxable years beginning after December 31, 2025. Specifically, the section (1) includes such amounts in gross income under new IRC §72(e)(12) (disregarding prior exclusions under §72(e)(5) for return of investment in the contract and treating post-annuity starting date amounts under §72(e)(2)(A) and pre-starting date or life insurance amounts under §72(e)(2)(B)(i)-(ii)); (2) subjects distributions to a 10% additional tax under amended §72(v) (previously limited to modified endowment contracts); (3) denies the general exclusion for death benefits under new §101(k) (with rules preventing double inclusion for prior-taxed amounts); and (4) requires life insurance and annuity contract issuers or reinsurers to file annual information returns under new §6050CC (describing contract holders and amounts received). (Private placement contracts are investment-oriented life insurance or annuities sold under securities law exemptions to investors meeting minimum income/asset, education, or credential thresholds.)

This section denies the exclusion from gross income for gains from the sale or exchange of qualified small business stock under IRC §1202(a) to applicable taxpayers (as defined in §495) for sales or exchanges on or after September 17, 2025, except for stock acquired before that date. (As background, §1202 generally allows noncorporate taxpayers to exclude 50% to 100% of eligible gain from qualified small business stock held more than five years, with the exclusion percentage depending on acquisition date and a cap of the greater of $10 million or 10 times the adjusted basis.)

This section modifies the tax deferral election and 10-year basis step-up rules under IRC §1400Z–2 for investments in qualified opportunity funds (QOFs)—which allow taxpayers to defer capital gains by investing in QOFs that support economic development in designated opportunity zones—for applicable taxpayers and applicable entities (terms as defined in part IV of subchapter E of the Internal Revenue Code, generally relating to certain tax-exempt organizations and disqualified persons subject to private foundation excise taxes). Specifically, for sales or exchanges after September 17, 2025, in taxable years ending after such date, the section (1) prohibits a deferral election if a prior election is in effect, or, for applicable taxpayers, if the sale or exchange occurs on or after the first day of their first taxable year as an applicable taxpayer (September 17, 2025, for those first applicable in a taxable year beginning in 2025) or, for applicable entities, while a notice under IRC §493(b)(2)(A) or (c)(2) is in effect; and (2) limits the basis step-up for investments held at least 10 years to the lesser of the investment's fair market value as of the later of the 10-year holding date or the date the taxpayer or entity first became applicable (or notice received), or its fair market value on the sale or exchange date (or earlier inclusion event). (Thus, applicable taxpayers and entities receive a partial rather than full basis step-up to fair market value after 10 years.)