Authored by Mark Lobb and David Kotik
Last year at this time our clients were being flooded with news and updates about possible new and draconian tax and estate planning laws being implemented at the federal level. Significant changes may still occur in 2022, but the vitriolic attacks on businesses and wealthy individuals in Washington seem to have lessened. Senator Joe Manchin has cooled down the Build Back Better (“BBB”) fire with other issues taking center stage.
Even though BBB did not go forward, there are still new tax, estate, and gift tax laws for 2022. Furthermore, some dramatic change may be on the horizon for business owners in California.
Below are some of the changes and information applicable in the new year:
Federal Filing Deadlines
Federal deadlines have been shifting over the past few years in part due to the pandemic. The following deadlines have been set for 2022:
- January 18, 2022: Fourth quarter 2021 estimated tax payment due.
- March 15, 2022: Partnership and S corporation returns for calendar year 2021.
- April 18, 2022: Deadline to file individual tax returns.
- April 18, 2022: First quarter 2022 estimated tax payment due.
- April 18, 2022: Last day for individuals to make a 2021 IRA contribution and C corporation tax returns due for calendar year 2021.
- May 16, 2022: Not-for-profit returns due for calendar year 2021.
- June 15, 2022: 2nd quarter 2022 estimated tax payment due.
- September 15, 2022: Third quarter 2022 estimated tax payment due.
- September 15, 2022: Extended returns for partnerships and S corporations due.
- October 15, 2022: Extended individual tax returns due.
- October 15, 2022: Extended C corporation returns due.
- January 15, 2023: Fourth quarter 2022 estimated tax payment due.
Adjusted Tax Brackets for 2022
For tax year 2022, inflation-adjusted federal tax brackets for individuals are as follows:
- 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly);
- 35%, for incomes over $215,950 ($431,900 for married couples filing jointly);
- 32% for incomes over $170,050 ($340,100 for married couples filing jointly);
- 24% for incomes over $89,075 ($178,150 for married couples filing jointly);
- 22% for incomes over $41,775 ($83,550 for married couples filing jointly);
- 12% for incomes over $10,275 ($20,550 for married couples filing jointly);
- 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
Tax Items of Interest
- Itemized Deductions: There is no limitation on itemized deductions in 2022.
- Alternative Minimum Tax: The Alternative Minimum Tax exemption amount for tax year 2022 is $75,900 and begins to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption begins to phase out at $1,079,800).
- Charitable deductions. You can deduct up to 100% of your adjusted gross income (AGI) in qualified charitable donations if you plan to itemize your deductions. Nonitemizers (those taking the standard deduction) may claim an above-the-line deduction of up to $300 ($600 for married filing jointly) for charitable contributions made in cash.
The annual gift tax exclusion amount has increased in 2022 from $15,000 to $16,000 per donor which means $32,000 for married couples. This adjustment will take effect for gifts of a present interest made on or after January 1, 2022.
The unified lifetime federal gift and estate tax exemption increases from $11,700,000 for 2021 to $12,060,000 for 2022. For the gross value of an estate above the exemption amount, a flat tax rate of 40% is imposed.
Absent congressional action, the exemption amount is scheduled to revert to approximately half of the current exemption amount on January 1, 2026.
Many of our clients created irrevocable grantor trusts in 2021 but did not fund their trusts. Even through the BBB proposal to eliminate the use of grantor trusts for estate planning did not become law, if you have assets you expect to appreciate in value, you should likely fund those assets into a grantor trust sooner than later. Do not ignore the need to complete planning simply because the BBB proposal does not appear to be a pending threat.
“The Good, The Bad and The Ugly”
Normally employers do not hear the words “good” and “PAGA” in the same sentence, much less in the same day. However, good things may be on the horizon as it comes to the stench Governor Gray Davis left the Golden State as he was dethroned.
First, the U.S. Supreme Court has granted review of a case challenging PAGA’s anti-arbitration rule. Isolating these claims to arbitration would save employers millions of dollars in fees and costs.
Additionally, a new initiative called the Fair Pay and Employer Accountability Act (“FPEAA”) may be headed for the November 2022 ballot, which will substantially eliminate the extortion nature of the law.
As most of you know, PAGA authorizes “aggrieved” employees to bring representative actions to recover penalties for alleged Labor Code violations. The recovery of attorneys’ fees fuels plaintiff lawyers to file these claims in mass. Concerns over any actual harm to an employee are irrelevant. In fact, the employees receive a very small percentage of any recovery. This statute assists plaintiff lawyers in making money from California employers through a scheme which often looks like extortion.
If passed, FPEAA will take enforcement out of the hands of “aggrieved” employees and their attorneys and give it back to the Labor Commissioner. FPEAA provides employees 100% of the penalties recovered. The FPEAA also eliminates “stacking,” which allows penalties for multiple violations.
The FPEAA establishes a Consultation and Policy Publication Unit (“CPPU”) within the Department of Industrial Relations. The CPPU will be tasked with publishing information and providing confidential consultations to employers with compliance questions.
Governor Gavin Newsom campaigned on a single-payer health care program when he ran for office in 2018. Mr. Newsom may now be able to deliver on his campaign offering.
Democrat Assembly person Ash Karla Single is proposing single-payer legislation under Assembly Bill 1400. The proposal, also known as CalCare will replace Medicare, Medicaid, and private health insurance with a state-run system. On January 11, the bill passed the Assembly Health Committee by a vote of 11-3. The proposal claims to eliminate co-pays, deductibles and premiums and entitles Californians to “free” vision, dental, hearing, and long-term care. As of the time of this publication, Governor Newsom has yet to endorse CalCare. The single-payer proponents are nevertheless pushing forward.
The “free” aspect of the bill is very interesting. It will be paid for by the largest state tax increase in the history of the United States. To provide some prospective, the California state budget for 2022 is $286 billion. CalCare is projected to cost $400 billion a year.
Sacramento bureaucrats will control costs and care decisions. Furthermore, CalCare “imposes a limitation on the public’s right of access to the meetings of public bodies” in order to “protect private, confidential, and proprietary information.” This means deliberations over rationing care will be concealed from the public. “Free” health care may not be provided decide it is not necessary and the reason for the denial can be kept secret. CalCare effectively bans private insurance for benefits covered by the state which is basically everything. Medical tourism for Californians may become a reality.
As stated above, the program will be paid by tax increases as follows:
- A new 2.3% excise tax on business with more than $2 million in annual gross receipts for what the proposedlegislation refers to as “the privilege of doing business in this state.” This tax applies to revenues rather thanprofits. Low margin companies will be forced out of business or out of the state.
- Employers with 50 or more workers will incur a 1.25% payroll tax on total wages. Workers earning more than$49,900 will pay an additional 1% payroll tax. These taxes raise the effective income tax on wage earners makingmore than $61,213 to 11.55%.
- An additional progressive surtax will start at 0.5% on income over $149,509 and rise to 2.5% at $2.5MM inincome. Couples making more than $299,509 will pay a top rate of 12.55%. The top marginal rate will rise to15.8% on unearned income, including capital gains, and 18.05% on wage income.
Some publications doubt the ability of California to pass CalCare due to the cost. Keep in mind, Democrats have a comfortable super-majority in Sacramento, holding 75% of seats in the state Assembly and 78% in the state Senate. New legislative maps will give Democrats three more seats in the Assembly in 2022.
Please do not sign initiatives if you do not understand them. There are two items of ugly to note:
- Initiative 21-0040, the “Affordable Housing and Financial Accountability Act,” would amend the state constitution to authorize local jurisdictions to issue bonds to build, renovate, maintain, or subsidize affordable housing for targeted groups. The cost will be paid by raising the property tax rate above Proposition 13’s limit of 1%.
- Initiative 21-0032, the “Tax Cut and Housing Affordability Act” seeks to exceed the 1% tax-rate limit. It would put a surcharge of up to 1.2% on high-value property starting at $4 million and use the money to increase the homeowner’s exemption and fund two credits for renters. It also attempts to cement Sacramento’s power to override local zoning by blocking initiative 21-0016 from taking effect if that measure passes with fewer votes. Initiative 21-0016 is the “Local Land Use” initiative that repeals controversial housing density bills and protects local control of zoning.
Each initiative needs just under 1 million signatures to be placed on the November 2022 ballot.
With the federal tax rates, brackets and exclusions remaining very favorable and state taxes teetering on the insane, it is imperative to have your 2022 tax and estate planning in place sooner than later. We will try to keep you informed of changes to the rates, exclusions and credits as we navigate through the year.