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What To Know About Potential Tax Changes in 2022

Though the final price tag of the Biden administration's infrastructure plan is not absolute, it may increase federal spending by about $3.5 trillion over the next decade.1 

President Biden and his administration proposed changes to the tax laws to provide funding for The American Families Plan and The American Jobs Plan. On Sept. 13, 2021, the Congressional Ways and Means Committee that is responsible for new tax laws, released draft legislation.

Before a final bill passes, the president, Democrats in Congress and the Senate may modify some provisions under negotiation. The bill may be enacted in Nov. or Dec. 2021. Some provisions may be effective immediately upon enactment. Most provisions may take effect January 1, 2022. 4

The proposed changes to tax legislation are meant to increase taxes for only the top 1% to 2% of wealthy taxpayers who are the high earners, high-net-worth families and corporations.

Here are some of these potential changes and how you may be able to mitigate their impact on your 2022 taxes.

Higher Income Tax Rates

Under the tax proposal, the top marginal income tax rate would go from 37% to 39.6% for 2022. This top-rate would apply to:

  • Single filers who earn $452,700 or more
  • Head of household filers who earn $481,000 or more
  • Joint filers who earn $509,300 or more

Additionally, the Biden administration has suggested raising the top corporate tax rate to 26.5% on those companies that earn more than $5 million.

Higher Capital Gains Taxes

This proposal would also increase the top federal tax rate on long-term capital gains from 20% to 25% for single filers earning $400,000 or more per year and married filers earning $450,000 or more per year.

This $400,000-per-year income threshold is a common theme. Those earning more than this amount with more than $10 million in retirement accounts will not be able to make additional contributions. At the same time, $400,000-per-year earners will also be unable to make Roth conversions or contribute to a "backdoor" Roth that converts a traditional individual retirement account to a Roth.

Reducing Estate Tax Exemptions

For the 2021 tax year, the federal government exempts $11.7 million per person from federal estate taxes. But assets over this amount are taxed at 40 %, higher than even the very top marginal tax rate. If the Biden administration's proposal passes, this number will be cut by more than two-thirds, setting the federal estate tax exemption at $3.5 million and taxing all inheritances over this amount.

In summary, proposed changes for individual taxpayers are: 2 3 

  • The capital gains rate increases to 25% as its highest rate.
  • The highest individual income tax bracket goes up to 39.6%.
  • There are changes to individual retirement account (IRA) contribution limits for those with adjustable tax income greater than $400k (individuals) and $450k (married couples).
  • There are also changes to IRA purging, back-door Roth conversions and any Roth conversion.
  • The net investment income tax (NIIT) will expand to cover net income from a trade or business for taxpayers with more than $400k in taxable income if single filing or $500k if filing jointly.
  • A new 3% surtax charge based on an individual's modified adjusted gross income (AGI) that exceeds $5 million. This surcharge makes the true top tax bracket 42.6% for these high-earning people.
  • An increase from three to five years of the carried interest holding period under the Tax Cuts and Jobs Act (TCJA).
  • The TCJA-doubled estate tax exemption expires after 2021 instead of after 2025.
  • Change the methods of how grantor trusts pay gift and estate taxes.
  • Lower the lifetime exemption for estates and gifts.
  • Treat sales to grantor trusts as income-tax events.

Though none of these proposals have yet made their way into law, it may be worthwhile to schedule a chat with your financial professional to see what changes you may need to make in 2022.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

1 https://www.cnbc.com/2021/09/14/who-would-be-affected-by-house-democrats-potential-tax-changes.html

2 https://www.kitces.com/blog/biden-american-families-plan-bill-proposed-increase-tax-capital-gains-retirement-reform/

3 https://taxnews.ey.com/news/2021-1696-build-back-better-tax-proposals-would-affect-higher-income-individuals-as-well-as-trusts-and-estates

4 https://taxfoundation.org/build-back-better-plan-reconciliation-bill-tax/

This article was prepared by WriterAccess.

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