As we enter the new year, Congress is still deliberating on legislation that could impact the 2022 tax year. The Build Back Better plan was passed by the House in late 2021 but ultimately was not signed into law by the end of the year. The bill has gone through several revisions and could be passed in early 2022. While the act was not passed before the start of 2022, it could still have retroactive tax implications this year.
The original version of the Build Back Better plan included the following tax changes that are not in the revised versions:
• Top individual tax rate increased to 39.6% for tax years after December 31, 2021
• Top capital gains and qualified dividends rate increased to 25% for tax years after December 31, 2021
• Early sunset of the gift and estate exemption in 2022 rather than 2025, reducing the exemption from the current level of $11.6 million to approximately $6 million
The most recent revised version of the bill still includes the following tax changes:
• 3% surcharge on modified adjusted gross income (MAGI) above $10 million and 5% surcharge on MAGI above $25 million
• 3.8% Net Investment Income Tax (NIIT) to apply to active income from pass-through entities
• State and local tax deduction increased from $10,000 to $80,000
• Prohibit contributions to IRAs with account balances above $10 million for taxpayers with taxable income over $400,000
• Required minimum distributions (RMD) of 50% of the amount in excess of $10 million in an IRA or 100% of the amount in excess of $20 million for taxpayers with taxable income over $400,000
• Prohibit back-door Roth conversions
• An extension of the expansion of the Child Tax Credit and advance payments through 2022
The revisions to the Build Back Better plan have reduced the amount of tax changes but it is still important to consider the original proposals when tax planning for 2022. It is not clear if or when the bill will be signed into law and the possibility of more proposed changes still remains.
IRS Adjustments and Due Dates for 2022
The IRS has provided inflation adjustments for tax year 2022. The annual gift exclusion has been increased to $16,000 and the estate tax exemption increased to $12,060,000. The standard deduction for tax year 2022 will be $25,900 for married taxpayers filing jointly, $12,950 for single taxpayers and married individuals filing separately, and $19,400 for heads of household.
Once again, Tax Day will not be on April 15th. The deadline for filing 2021 tax returns is April 18, 2022. The slight delay is due to the Washington D.C. holiday, Emancipation Day, falling on the 15th. For Massachusetts and Maine residents, the deadline is extended further to April 19th because Patriot’s Day is on the 18th. The filing deadline was pushed back during the last two years in response to the COVID-19 pandemic. The IRS does not plan to delay the deadline past April 18th/19th this year. However, it’s unclear how the pandemic may impact the tax calendar in 2022.
Watch for 2021 Tax Information Letters
The IRS is issuing tax information letters to recipients of the Advanced Child Tax Credit and the third round of Economic Impact Payments. Be sure to hold onto these letters if you receive them as they are necessary for preparing your 2021 tax returns.
Letter 6419 will be sent to recipients of the Advanced Child Tax Credit (CTC), reporting the total amount of the credit received and the number of qualifying dependents. This information is used to reconcile the amount of credit already received with the proper amount that can be claimed on your 2021 tax return. You can also obtain this information on the CTC Update Portal (https://www.irs.gov/-credits-deductions/child-tax-credit-update-portal) through IRS.gov.
Letter 6475 will be sent to recipients of the third Economic Impact Payment (also known as a stimulus payment). This will help determine if you received the full amount of the stimulus payment you are entitled to based on your 2020 tax return.