Prepare for the New 2022 Tax Plan

If you are in a higher income bracket, have been taking advantage of qualified business income deductions, or investing in real estate, it is important to stay informed about the 2022 tax plan and it’s possible impact on your bottom line.

In May, the Biden administration submitted its Fiscal Year 2022 Budget to Congress and what is known as the “Green Book” – the U.S. Treasury’s evaluation of Biden’s tax proposals. While the complete details of these proposals still require drafting legislative language by the congressional tax-writing committees, here are some of the new proposals and when they would become effective.

First, we know that the proposal is to increase the top marginal individual income tax rate to 39.6 percent. In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals (other than surviving spouses), $481,000 for head of household filers, and $254,650 for married individuals filing a separate return. After 2022, the thresholds would be indexed for inflation using the C-CPI-U, which is used for all current tax rate thresholds for the individual income tax.

Furthermore, Biden has also suggested expanding the Child Tax Credit, impacting additional individual tax provisions under the Tax Cuts and Jobs Act. Under his proposal, this would raise the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and raise the maximum reimbursement percentage from 35 to 50 percent.
In addition, the plan also includes higher taxes for capital gains, payroll taxes, and corporations by raising the corporate income tax rate (from 21 percent to 28 percent), including a corporate minimum book tax.
What is the timeframe?

It was initially expected that tax legislation would happen before August. However, it is more probable that there will be one larger, collective tax bill passed under budget reconciliation and enacted sometime in October 2021.

Although in the past there have been exceptions, Congress usually does not enact tax increases retroactively. Thus, for the most part, the 2022 budget designates that tax increases for individual income would be on January 1, 2022, and corporation changes would take effect on or after January 1, 2022, with plans to prorate the tax increase to the portion of the tax year.
However, in the case of capital gains, this budget currently recommends a retroactive active date back to the day the proposed increase was announced, which is thought to be when the American Families Plan was announced (April 28, 2021).
How will capital gains be impacted?
To the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), long-term capital gains and qualified dividends of taxpayers would be taxed at ordinary income tax rates, with 37 percent generally being the highest rate (40.8 percent including the net investment income tax).
Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) during a taxable year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.
The American Families Plan also proposed removing the step-up in the cost basis of property at the death of a taxpayer, causing some confusion. Currently, an asset’s appreciation isn’t taxed at death but adheres to a step-up in basis, meaning it transfers to heirs at its market value at the time of transfer and not its original purchase price.
The Green Book proposes taxation of capital gains at death, including a $1 million-per-person exclusion. The threshold will be adjusted for inflation after 2022. This tax would not be due for some family-owned businesses until the business is sold or ceases to be family-owned. For illiquid assets, the proposal allows 15 years to pay taxes on any appreciated assets. According to the Green Book, recognition events could include transferring assets to or from a trust, partnership, or other non-corporate entity.
How will qualifying business income be impacted?
Biden has proposed phasing out the 20 percent Qualified Business Income Deduction for pass-through businesses under Code Sec. 199A. The provision was not addressed in the American Jobs Plan or the American Families Plan. Many tax breaks included in the 2017 Tax Cuts and Jobs Act will expire after 2025, and the 2022 budget furthers the assumption that these provisions will expire unless Democrats seek to make changes in future legislation.

The Biden administration has also proposed several other tax changes, including:

  • The elimination of tax loopholes, including subjecting certain income of pass-through entities to employment taxes and taxing carried interests at ordinary income tax rates all subject to certain thresholds.
  • Energy-related provisions, primarily in the American Jobs Plan, including details about the repeal of the tax breaks related to fossil fuels and proposed clean energy provisions.

  • Changes in international corporate taxation in the Made in America Tax Plan, including additional details on these international tax proposals in the Green Book.

  • Support for housing and infrastructure through provisions related to housing and bonds for infrastructure improvements under the American Jobs Plan.

  • Increased funding for the IRS, adding additional third-party reporting, and regulate tax return preparers to improve compliance, which is designed to raise revenue by helping to reduce the tax gap — the amount of uncollected revenue due to the government.

This new proposal aims to raise $1.5 trillion over a decade via higher taxes for the top 1 percent, with plans to expand education, childcare, paid leave, and other reforms. While adjusting to tax changes is never easy, Taxperts is here to help. Our team can prepare federal and state tax returns in every state and help you reduce your tax liability with thoughtful planning for now, and the future. Our job is to keep up with the various changes in federal and state tax laws, so you don’t have to. Check out our websiteFacebook page, or LinkedIn page for the latest updates.