Tax Changes Are Likely Coming in 2022: Here’s What High Earners Need to Know

In November 2021, House Democrats passed the Build Back Better Act (BBBA), which contained numerous tax provisions. However, the bill’s progress has come to a halt as the Senate debates its contents. Though its fate remains in the balance, the package will likely require modifications for the Senate to endorse it.

The BBBA has already gone through multiple iterations. And many proposed tax changes have already been thrown out of the bill. For example, there won’t be a significant increase to the capital gains tax as originally proposed. But there’s still a chance we may see significant changes to the tax code in 2022. As we wait for Congress to negotiate a deal, here’s what we know so far—and how it may affect your bottom line this tax year.

#1: 2022 Tax Changes to Brackets

The 2022 tax brackets will be adjusted for inflation based on the Chained Consumer Price Index (C-CPI). New bracket thresholds will increase by approximately 3.16% relative to the 2021 tax brackets.

This change results in the highest tax bracket of 37%, moving from a minimal AGI of $523,601 for single and heads of household to $539,900. For married households filing jointly, the highest tax bracket increases from an AGI of $628,301 to $647,850.

The standard deduction will increase by $400 for single filers and $800 for married joint filers. In total, the deduction will be $12,950 for single filers and $25,900 for married filing jointly couples in 2022. Additionally, heads of household will be able to deduct $19,400.

#2: Revised SALT Cap

One of the most highly anticipated 2022 tax changes is the adjustment of limits for the current SALT cap (State and Local Tax deduction). The House Democrats’ spending package increases the SALT deduction limit from $10,000 to $80,000 through 2030.

For filers who itemize deductions in high-tax states like California and currently can’t claim more than $10,000 for state and local taxes, this change may be significant. However, the future of the Build Back Better Act—and revised SALT cap—still depends on the Senate.

#3: Expanded NIIT For Individuals, Estates, and Trusts

The Net Investment Income Tax (NIIT) currently applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. For 2022, modified adjusted gross income (MAGI) thresholds are $200,000 for single filers and $250,000 for joint filers. Estates and trusts that have both undistributed net investment income and adjusted gross income past a certain dollar amount may also need to pay the NIIT.

Currently, the net investment income tax (NIIT) doesn’t apply to S-Corp shareholder income (if the shareholder participates materially in the business), nor does it apply to gains from the sale of a privately held business or business assets. Under the act, the expanded NIIT would apply to all S-Corp profits if the taxpayer’s MAGI exceeds $400,000 for single filers or $500,000 for joint filers.

#4: Surcharge on High-Income Individuals, Estates, and Trusts

The BBBA would also impose two new income tax “surcharges” on high-income taxpayers. Individual taxpayers would have to pay a surcharge of 5% on MAGI above $10 million. Moreover, they’d have to pay an additional 3% surcharge on MAGI above $25 million.

For trusts and estates, the surcharge thresholds are 98% lower than those for individuals. In other words, trusts and estates would have to pay a 5% surcharge on MAGI above $200,000 and another 3% on MAGI above $500,000.

Essentially, these surcharges create an “intermediate” tax bracket on capital gains. Indeed, most taxpayers won’t be impacted by this additional tax. However, in addition to highly compensated executives, professional athletes, and celebrities, entrepreneurs who are selling a business and non-grantor trusts are most likely to feel the effect of this change if it passes.

#5: Contribution Limit for Individual Retirement Accounts (IRAs)

As it stands, the act creates new rules for taxpayers with significant retirement account balances. Specifically, individuals can no longer contribute to a Roth or traditional IRA for the taxable year if additional contributions would cause the balance to exceed $10 million. If a retirement account balance exceeds $10 million, a minimum distribution requirement would apply for the following year.

In addition, this provision prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth regardless of income level. Put differently, it closes the “backdoor Roth IRA” strategy. It’s important to note that these changes would apply to single taxpayers with income over $400,000 and married couples filing jointly with income above $450,000.

Planning for Proposed 2022 Tax Changes

If these tax provisions become law, high-net-worth families and high earners may see their tax bills increase in 2022. Of course, the future of President Biden’s Build Back Better Act remains to be seen. The bill is unlikely to pass in its current form. However, it’s unclear which provisions will be in the final version.

Nevertheless, careful tax planning can help you minimize the impact of these potential changes on your bottom line. A trusted financial advisor can help you identify and implement strategies to reduce your overall tax bill and preserve more of your hard-earned wealth. If you’d like to speak with a member of our team about how these proposed changes may impact your finances, please contact us. We’d be happy to hear from you.