By Senior Advisor Andrew Schaetzke, CFP®.
Last fall when the Build Back Better Act was introduced in Congress, we expected taxes could increase significantly for certain families as well as businesses. However, the proposed tax plan has changed often and significantly during congressional negotiations. While the legislation is not yet finalized, if passed in 2022, we do not expect that the Build Back Better tax plan will result in as many big changes as we initially anticipated.
Based on current proposed legislation, the following points summarize the provisions that could impact you and your family:
New federal income tax surcharge on higher earners: Households would have to pay an additional 5% surcharge on modified adjusted gross income (MAGI) above $10 million, as well as an additional 3% on MAGI above $25 million. For earners with greater than $25 million in MAGI, this could result in a top federal tax rate around 45%, which could not be decreased by taking large itemized deductions or the qualified business income deduction.[1]
Expansion of the 3.8% net investment income tax (NIIT) for S corporations and partnerships: The 3.8% net investment income tax on capital gains, taxable interest, dividends, passive rents, annuities, and royalties would be expanded to apply to active business income for pass-through firms.[1]
State and local tax (SALT) deduction for federal income taxes: The cap on the SALT federal income tax deduction would increase from $10,000 to $80,000 starting in 2022 through 2030.[1]
Extension of the enhanced Child Tax Credit (CTC) through 2022: The enhanced child tax credit - $3,600 for each child under age 6, as well as $3,000 for each child ages 6-17 - would extend into 2022 for joint filers with MAGI less than $150,000 ($112,500 for single filers).[1]
Limitations on Individual Retirement Accounts (IRAs) contributions for wealthier households: No longer would allow for contributions to IRAs with balances greater than $10 million. Additionally, IRAs with balances greater than $10 million may have accelerated required minimum distribution (RMD) requirements.[1]
Increased IRS funding: The IRS would receive increased funding for hiring and improving operations, which could lead to more audits for wealthier households.[1]
While the effective date for this legislation is uncertain, we expect the changes could be effective retroactively, as of January 01, 2022.
There have been some other annual cost-of-living and government-controlled changes that may affect you and your family in 2022:
5.9% cost-of-living adjustment for Social Security: For individuals currently or planning to receive Social Security payments in 2022, your benefits will be 5.9% higher than 2021 due to inflation.[2]
Lower required minimum distributions RMDs from Traditional IRAs, Traditional 401(k)s / 403(b)s / 457 plan, and Roth 401(k)s / Roth 403(b)s: If you are required to take an RMD from one of these accounts, your RMD as a percentage of your portfolio will be slightly lower in 2022 due to an increase in life expectancy.[3]
Federal student loan interest payments frozen until May 01, 2022: Due to ongoing effects from the pandemic, the Biden administration extended a freeze on federal student loan interest payments from February 01, 2022 to May 01, 2022.[4]
Changes to retirement plan contribution limits, estate tax exemption, and gift tax exemption: Various limits and exemptions have increased for 2022, primarily resulting from inflation. For example, the maximum employee contribution limit to 401(k)s / 403(b)s / 457 plans is increasing from $19,500 to $20,500. Additionally, the annual gift tax exemption is increasing from $15,000 to $16,000. You can find more information here.
As part of your financial planning process for 2022, there are a few ways that you can implement your plan while potentially lowering your federal income taxes:
Contribute to tax-advantaged investment accounts: Depending on your eligibility, you may be able to contribute to tax-advantaged investment accounts such as 401(k) / 403(b) / 457 retirement plans, IRA, Health Savings Account (HSA), and 529 plans in order to save for specific purposes while also potentially lowering your taxes. Additionally, you have until April 15, 2022 to contribute to your IRA and HSA for 2021 if eligible.
Charitable contributions and donor-advised funds: Because of the rise in many investment markets over the past few years, many people hold taxable investments with large unrealized gains. By directly gifting these taxable investments to eligible charitable organizations or creating a donor-advised fund, you can potentially lower federal income taxes for 2022 while giving to the organizations you want to support.
Tax loss harvesting: Particularly during volatile market periods, tax loss harvesting allows you to sell eligible taxable investments with losses, and use these losses to offset realized taxable capital gains. With tax rates expected to increase for certain taxpayers in 2022, tax loss harvesting could prove increasingly valuable.
As federal legislation evolves, we will continue to update you on any changes that may impact you. Additionally, you can find well-written summaries of the proposed financial changes on the Tax Foundation (taxfoundation.org) website. As always, please feel free to reach out to us if you have any questions or want clarity on how the proposed changes may affect you.
Important Disclosure Information & Sources:
[1] “House Build Back Better Act: Details & Analysis of Tax Provisions in the Budget Reconciliation Bill“. Tax Foundation, 02-Dec-2021, taxfoundation.org.
[2] “Cost-of-Living Adjustment (COLA) Information for 2022“. Social Security, ssa.gov.
[3] “Required Minimum Distribution Calculator“. U.S. Securities and Exchange Commission, investor.gov.
[4] “The White House Will Freeze Federal Student Loan Repayments Until May 1“. Katie Rogers and Tara Siegel Bernard, 22-Dec-2021, nytimes.com.
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