September 22, 2021

Income Tax Rates 2022

The original version of this post on September 22, 2021 has been updated to reflect changes to the proposed bill as of November 2, 2021.  The bill is still in draft mode and could have further changes. 

On October 28, 2021, the House of Congress Rules Committee released an updated draft bill, which the updates in red and strike-through text are relied on. 

Text in black color and not crossed out remains from the original post. 

We are much closer to understanding what big tax law changes will be in effect for 2022.  Until now, all we had to go on was Biden’s wish list of tax increases. 

On September 15, the House Ways and Means Committee (the chief tax-writing committee in the House of Representatives) released details of the Democrat tax increase proposals
There are still many hurdles for the $3.5 trillion “Build Back Better” tax and spend bill to navigate, but once the Ways and Means Committee has defined the details the way they have already, chances of the bill passing are much higher.  

My initial take is that the 2022 tax increases are much less oppressive than Biden’s original plans.

Here’s a summary of the key tax rate increases affecting small business owners:
**Except where noted, all of the changes will be effective for the 2022 tax year**
  1. Individual Tax Brackets (no change to individual income tax brackets in the updated bill!)
    1. The top tax bracket is increased from 37% to 39.6%.  Furthermore, the income levels to get into the top tax bracket were lowered.

  2. Capital Gains Tax Rate  (no cap gain rate increase with the updated bill)
    1. The top rate for long-term capital gains will increase from 20% to 25%
    2. If this proposal is enacted, the 25% rate will be effective for any sales after September 12, 2021! 
    3. Imagine the headache this interim date cutoff is going to cause when reporting brokerage account stock sales.
    4. Under current law, the top rate is applicable to those with income over $496,600 for joint filers and $441,450 for individual filers.  It’s likely that the new income thresholds will mirror the top brackets for income tax rates ($450,000 and $400,000).
  3. Net Investment Income Tax on Active Business Income  
    1. The 3.8% Net Investment Income Tax (NIIT) will now be applicable to ALL business profits from a passthrough entity. 
    2. Currently, business profits from an S Corporation in which you actively participate in, are exempt from NIIT.  But now, this will be subject to an additional 3.8% tax.
    3. This only applies to individuals with taxable income over $400,000 and joint filers with income over $500,000
  4. Limitation on Qualified Business Income Deduction (QBID) (no new limitation on QBID in the updated bill)
    1. The QBID is a deduction that you get on passthrough business income (from S Corps, Partnerships, Sole Proprietorships) taxed on your individual tax return.
    2. Currently there is no maximum QBI deduction…it is generally computed as 20% of business income.  In the proposal, the deduction will be limited to $500,000 for joint filers, and $400,000 for individuals.  This will not affect anyone with business income less than $2,000,000.
  5. C Corporation Income Tax Rate  (no changes with the updated bill)
    1. The Corporate tax rate will increase from a flat 21% to a tax bracket with a top rate of 26%
    2. The details on this are actually better than the headline.  the 26% rate only applies to income over $5,000,000
    3. Income up to $400,000 is taxed at 18%, which is a tax cut from the current law!
    4. The current 21% rate applies for income between $400,000 and $5,000,000
  6. A new 3% 5% Surcharge on High Income  
    1. Additional tax on income in excess of $5,000,000. $10,000,000 (or in excess of $20,000,000 for married filing joint).
    2. The tax appears to only apply to the portion of income over $5MM.  For example, someone with income of $6MM will pay the 3% tax on $1MM ($6MM – $5MM).
    3. The 5% tax applies to income above the $10MM threshold.  Income over $25MM is subject to an additional 3% tax, so an overall 8% tax on income over $25MM
  7. Death Taxes (No reduction or changes to the estate and gift tax exclusion in the new bill.  The reduction is set to automatically occur in 2026.)
    1. Some of the initial, controversial,  Biden proposals have been thrown out, but the lifetime gift tax exemption is getting reduced.
    2. The lifetime gift tax exemption is currently $11.7MM per person (double to $23.4MM for a married couple’s estate).  The proposal would limit the exemption to $6,020,000 per person (still can double it if married).
    3. If enacted, the new limit would only apply to gifts made after December 31, 2021….so there’s still time to plan for this
    4. Scrapped Plan:  The House Bill excludes the initial Biden plan to disallow a step up in basis of assets upon death.
  8. Retirement Accounts (All retirement account provisions were removed from the new draft bill)
    1. Various new restrictions aimed at limiting tax deferrals and closing loopholes
    2. Closing the “Back Door Roth” loophole:  No taxable conversions to a Roth IRA are allowed for single taxpayers with income over $400,000 or joint filers over $450,000. No conversions are allowed for any income levels when there is already basis in a retirement account that you want to convert to a Roth IRA.
    3. “Stop Hoarding” provision (I made this name up):  People with a balance over $10MM in their retirement accounts that make over the $400,000/$450,000 income levels will be prohibited from making any contributions to a Traditional or Roth IRA.
    4. RMD Increases:  People with a balance over $10MM in their retirement accounts that make over the $400,000/$450,000 income levels will be required to take increased required minimum distributions. This will even apply to individuals under the age limit for RMDs. Those under age 59.5 that have to take distributions under this provision will not have to pay the 10% penalty on early distributions from a retirement account.
What should you be doing to plan for 2022 tax increases?
                  • You don’t want to rush out and make specific changes today until these new tax laws get more solidified.  There are many cracks in the proposals that need to be filled in.   
                  • But you do want to have a general understanding of how your finances will be impacted and start drafting tax plan scenarios.
  • Look at accelerating income into 2021 if your tax rates are likely to go up in 2022
    • Normally, business owners look to make big purchases before year-end or delay recognition of revenue to reduce taxable profit for the upcoming tax return.  
    • Many people will be better off doing the opposite for 2021!  Pull some of that profit that would be taxed in 2022 at higher rates into 2021 where it’s taxed at lower rates.
  • Reach out to one of Wayfinder CPAs strategic tax planners if you want to actively control your tax expense, rather than pay the default tax bill. 
Chris Naquin
Wayfinder CPA

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