As we approach year end, now is the time for individuals, business owners, and family offices to review their 2021 and 2022 tax situations and identify opportunities for reducing, deferring, or accelerating tax obligations. Areas potentially impacted by proposed tax legislation still in play should be reviewed, as well as applicable opportunities and relief granted under legislation enacted during the past year.
The information contained within this article is based on tax proposals as presented in the November 3, 2021, version of the Build Back Better Act. Our guidance is subject to change when final legislation is passed. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.
Individual Tax Planning Highlights
2021 Federal Income Tax Rate Brackets
Tax Rate | Joint/Surviving Spouse | Single | Head of Household | Married Filing Separately | Estate & Trusts |
10% | $0 – $19,900 | $0 – $9,950 | $0 – $14,200 | $0 – $9,950 | $0 – $2,650 |
12% | $19,901 – $81,050 |
$9,951 – $40,525 |
$14,201 – $54,200 |
$9,951 – $40,525 |
– |
22% | $81,051 – $172,750 |
$40,526 – $86,375 |
$54,201 – $86,350 |
$40,526 – $86,375 |
– |
24% | $172,751 $329,850 |
$86,376 – $164,925 | $86,351 – $164,900 | $86,376 – $164,925 |
$2,651 – $9,550 |
32% | $329,851 – $418,850 |
$164,926 – $209,425 | $164,901 – $209,400 | $164,926 – $209,425 |
– |
35% | $418,851 – $628,300 |
$209,426 – $523,600 | $209,401 – $523,600 | $209,426 – $314,150 |
$9,551 – $13,050 |
37% | Over $628,300 | Over $523,600 | Over $523,600 | Over $314,150 | Over $13,050 |
2022 Federal Income Tax Rate Brackets
Tax Rate | Joint/Surviving Spouse | Single | Head of Household | Married Filing Separately | Estates & Trusts |
10% | $0 – $20,550 | $0 – $10,275 | $0 – $14,650 | $0 – $10,275 | $0 – $2,750 |
12% | $20,551 – $83,550 |
$10,276 – $41,775 |
$14,651 – $55,900 | $10,276 – $41,775 |
– |
22% | $83,551 – $178,150 |
$41,776 – $89,075 | $55,901 – $89,050 | $41,776 – $89,075 |
– |
24% | $178,151 – $340,100 |
$89,076 – $170,050 | $89,051 – $170,050 | $89,076 – $170,050 |
$2,751 – $9,850 |
32% | $340,101 – $431,900 |
$170,051 – $215,950 | $170,051 – $215,950 | $170,051 – $215,950 |
– |
35% | $431,901 – $647,850 |
$215,951 – $539,900 | $215,951 – $539,900 | $215,951 – $323,925 |
$9,851 – $13,450 |
37% | Over $647,850 | Over $539,900 | Over $539,900 | Over $323,925 | Over $13,450 |
Proposed Surcharge on High-Income Individuals, Estates and Trusts
The draft Build Back Better Act released on November 3, 2021 would impose a 5% surcharge on modified adjusted gross income that exceeds $5 million for married individuals filing separately, $200,000 for estates and trusts and $10 million for all other individuals. An additional 3% surcharge would be imposed on modified adjusted gross income in excess of $12.5 million for married individuals filing separately, $500,000 for estates and trusts and $25 million for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021 (i.e., beginning in 2022).
While keeping the proposed surcharges in mind, taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2021 and 2022. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2021 to 2022 will produce a one-year tax deferral and accelerating deductions from 2022 to 2021 will lower the 2021 income tax liability.
Actions to consider that may result in a reduction or deferral of taxes include:
On the other hand, taxpayers that will be in a higher tax bracket in 2022 or that would be subject to the proposed 2022surcharges may want to consider potential ways to move taxable income from 2022 into 2021, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2022 taxes include:
Long-Term Capital Gains
The long-term capital gains rates for 2021 and 2022 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.
2021 Long-Term Capital Gains Rate Brackets
Long-Term Capital Gains Tax Rate | Joint/Surviving Spouse | Single | Head of Household | Married Filing Separately | Estates & Trusts |
0% | $0 – $80,800 | $0 – $40,400 | $0 – $54,100 | $0 – $40,400 | $0 – $2,700 |
15% | $80,801 – $501,600 | $40,401 – $445,850 | $54,101 – $473,750 | $40,401 – $250,800 | $2,701 – $13,250 |
20% | Over $501,600 | Over $445,850 | Over $473,750 | Over $250,800 | Over $13,250 |
2022 Long-Term Capital Gains Rate Brackets
Long-Term Capital Gains Tax Rate | Joint/Surviving Spouse | Single | Head of Household | Married Filing Separately | Estates & Trusts |
0% | $0 – $83,350 | $0 – $41,675 | $0 – $55,800 | $0 – $41,675 | $0 – $2,800 |
15% | $83,351 – $517,200 | $41,676 – $459,750 | $55,801 – $488,500 | $41,676 – $258,600 | $2,801 – $13,700 |
20% | Over $517,200 | Over $459,750 | Over $448,500 | Over $258,600 | Over $13,700 |
Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:
Net Investment Income Tax
An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.
The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities:
Social Security Tax
The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $142,800 for 2021 and $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.
Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax.
Long-Term Care Insurance and Services
Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2021 and 2022 (the limitations are per person, not per return):
Age | Deduction Limitation 2021 | Deduction Limitation 2022 |
40 or under | $450 | $450 |
Over 40 but not over 50 | $850 | $850 |
Over 50 but not over 60 | $1,690 | $1,690 |
Over 60 but not over 70 | $4,520 | $4,510 |
Over 70 | $5,640 | $5,640 |
Retirement Plan Contributions
Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age.
Foreign Earned Income Exclusion
The foreign earned income exclusion is $108,700 in 2021, to be increased to $112,000 in 2022.
Alternative Minimum Tax
A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2021 are $73,600 for unmarried individuals and individuals claiming head of household status, $114,600 for married individuals filing jointly and surviving spouses, $57,300 for married individuals filing separately and $25,700 for estates and trusts. For 2022, those amounts are $75,900 for unmarried individuals and individuals claiming the head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts.
Kiddie Tax
The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate.
Limitation on Deductions of State and Local Taxes (SALT Limitation)
For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017 and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases.
The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year.
Charitable Contributions
The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include:
Estate and Gift Taxes
The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:
Net Operating Losses
The CARES Act permitted individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The unused portion of such losses was eligible to be carried forward indefinitely and without limitation. Net operating losses generated beginning in 2021 are subject to the TCJA rules that limit carryforwards to 80% of taxable income and do not permit losses to be carried back.
Excess Business Loss Limitation
A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer’s trades or businesses when computing excess business loss in the subsequent year.