5 Things to Know About the Recent 2022 Tax Proposal
If you have been following the news lately, you may be aware that the House Ways and Means Committee is proposing changes to the federal tax code designed to raise roughly $2.9 trillion over the next 10 years. Today I will be highlighting 5 of the potential tax changes that may influence your tax planning, now and into the future.
1. Higher Top tax Rates
The new bill would reinstate a top ordinary income tax rate of 39.6% in 2022 for individuals with taxable income over $400,000 or $450,000 for married couples filing jointly so not only is the top rate increasing but the income threshold to fall into the top bracket has significantly decreased.
As you can see, the current top income tax bracket of 37% doesn’t kick in until a married couple filing jointly has more than $628,300 of taxable income. Under the new proposal, the top income tax bracket of 39.6% will take effect on taxable income above $450,000 starting in 2022. For single filers, in 2021 they will need taxable income above $523,600 to land in the top tax bracket but in 2022 a taxable income of above $400,000 will get them there. You may have noticed that with the income threshold being so close for single vs. married filers, the so-called marriage penalty is back meaning it could cost you tens of thousands of dollars per year just to be married.
2. 25% Tax on Long Term Gains and Dividends
If the new proposal becomes the law of the land, long term gains incurred after September 13th, 2021 will be taxed at 25% vs. the current rate of 20% assuming you meet the income thresholds which this new proposal aligns with the top income brackets of $400,000 for single filers and $450,000 for married couples filing jointly. Unfortunately, because of the date being retroactive there is not much planning you can do now to help soften the blow. I know some of you reading this think “I (we) don’t make that much so this doesn’t affect me (us)” however the new 25% tax rate on long-term capital gains also applies to dividend income and windfalls such as selling a home with a large taxable gain.
3. No More Backdoor ROTH Conversions
A popular strategy in the past for investors who made too much to contribute to a ROTH IRA is what is known as the “Backdoor ROTH IRA”. Using this strategy, one could contribute non-deductible contributions to their IRA or employee sponsored retirement plan, pay income taxes on those contributions, and then convert that money into a ROTH account. This strategy allows them to receive tax-free benefits on the growth in the account and any future distributions are not subject to income taxation. As of 2022, regardless of your income level, these are no longer valid strategies.
4. No ROTH Conversions After 2031
For individuals with over $400,000 or $450,000 married filing jointly in adjusted taxable income the new tax rule will eliminate ROTH conversions. A ROTH conversion is when someone takes a portion of or all their existing tax-deferred IRA and converts it into a ROTH IRA. In doing so, they will pay income tax on the conversion amount in the year it was converted and then receive the tax-free benefits on the growth in the account and in addition any future distributions are not subject to income taxation. This strategy is typically used to take advantage of a low tax rate environment or used strategically in a year where household taxable income is low.
5. Lifetime Gift and Estate Tax Exemption Cut in Half
Currently, the unified estate and gift tax exemption was set at $10 million (indexed for inflation) in 2018. Under the new tax proposal, it will be brought down to $5 million meaning anyone with estates larger than this exemption (or projected to be in the future) should be having conversations now about how to strategically plan around this before the end of the year. This may not affect you, but could it have an effect on your inheritance?
I hope you have found this information useful and please pass it along to anyone you think may be adversely affected by the proposed tax law changes. As always it is a pleasure and an honor to serve you and if you would like to discuss any of these topics further, please do not hesitate to give me a call. Please remember I do not give tax advice but am always happy to work in conjunction with your tax professional.
David R Henderson
This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. DCH Wealth Management, nor any of its members are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates.