If you have been following the negotiations over the Build Back Better Act (BBBA) in Congress, you know that many of the original provisions have been dropped from the bill. While passage of the Act in its present state is unlikely, we may still see changes to the tax rates in 2022 for certain individuals and corporations. Requiring ultra-wealthy taxpayers to pay more in taxes has broader support than other provisions of the bill and may be enacted in 2022 before congressional elections in November. How much they may increase though is still in question.
Proposed Changes to Individual Tax Rates
The original BBBA proposed increasing the top individual tax rates in 2022 to 39.6 percent for single individuals earning over $400,000 and married couples filing jointly earning over $450,000. Under current law, the top rate is 37 percent for single individuals earning over $537,900 and $647,850 for married couples filing jointly. A 3 percent surcharge was also proposed for individuals with income over $5,000,000. This surcharge was to be applied on top of the 3.8 percent Net Investment Income Tax, which applies to married filers earning over $250,000 and single filers earning over $200,000.
In addition, the top capital gains rate was increased to 25 percent from 20 percent.
In the current version of the bill, the surtax on wealthy individuals is still included. If passed, It would impose a 5 percent tax on individuals with modified adjusted gross income (AGI) of over $10 million ($5 million for married taxpayers filing separately). Individuals with an AGI over $25 million ($12.5 million for married taxpayers filing separately) would pay an additional 3 percent.
The surtax on net investment income is also still part of the bill. It provides for a surtax of 3.8 percent on individuals with taxable income over $400,000 for single filers and $500,000 for married couples filing jointly, which applies to income derived in the ordinary course of a trade or business.
High-income individuals may also be losing the benefit of the Qualified Small Business Stock (QSBS) Gain Exclusion. Specifically, taxpayers with income over $400,000 would no longer be allowed to utilize the 75% and 100% QSBS gain exclusion rates.
Proposed changes to the taxation of trusts and estates will be discussed in a future post.
Proposed Changes to Corporate Tax Rates
The original BBBA introduced a graduated corporate rate structure as follows:
- 18 percent on the first $400,000 of income
- 21 percent on income $400,001 to $5 million
- 26.5 percent on income thereafter
- Phaseout for corporations making more than $10,000,000
Notably, personal services corporations were not eligible for the graduated rates and would have been required to pay the flat 26.5 percent rate.
Currently, the bill includes a 15 percent minimum tax on profits of corporations with more than $1 billion in average annual adjusted financial statement income for the three-tax-year periods ending with the tax year. This does not apply to S corporations, regulated investment companies, or real estate investment trusts. However, this provision has been heavily criticized by CPAs because it relies on financial statement income rather than taxable income.
2022 Tax Changes
It seems likely that a surtax on high-income individuals and corporations is likely in some form. However, the final numbers are in doubt, so it is important not to make any significant changes to your investment portfolio or business based solely on speculation about what specific changes may be passed in the future. Our recommendation is to speak with your legal and financial advisors to review your situation and discuss what steps to take if any right now or in the future. Your financial plan should be based on your entire financial picture rather than on a single tax change that is still speculative and may be mitigated by other provisions.
We provide clients with a comprehensive review of their tax strategies. Contact us to discuss your tax and estate planning needs.