Updated Tax Thresholds for 2022 AND Is the Biden Tax Plan Really Cost Neutral?

Joe Biden has talked about how his tax plan is cost neutral, where the increases in taxes on the wealthiest Americans will offset the costs. Maya MacGuineas recently took a look at the numbers to find out if that’s true.

The Build Back Better Act is set to cost $2.1 trillion as it’s currently written. It relies on a number of sunsets and expirations to keep the costs down. If the plan’s temporary policies were made permanent, the costs would increase by an additional $2.2 trillion.

When the federal government is trying to make a bill seem cost neutral, they often build expiry dates into the legislation, knowing full well that Americans will get hooked on those programs and then demand they be renewed. This makes the cost of the program appear lower and much more palatable on the front end.

The Build Back Better Act has several such gimmicks built into it including extending the child tax increase, the earned income tax credit, and setting universal Pre-K and childcare to expire after six years. These are things that are likely to be around for the long term.

The most expensive provision would cost roughly $1 trillion to make permanent. Universal Pre-K and childcare subsidies would cost over $400 billion a year when combined if extended beyond their expiration dates.

As written, the Build Back Better Act will increase the deficit by $800 billion over the first five years and then taper off from there for a net additional cost of $2.2 trillion.

If the legislation were made permanent without additional taxation, it would add nearly $1.5 trillion to the deficit over five years and increase the total debt by $3 trillion by 2031.

The Build Back Better Act relies on short-term policies and arbitrary expiration dates to lower the cost. This allows the government to present the bill as cost neutral, although any extensions will have to be funded by debt.

History serves as a model, and it’s fairly likely that those short-term programs will become permanent in time.

The tax rules have recently been updated for 2022. Because of higher than usual inflation in 2021, the index for inflation has increased as well.

The standard deduction has modestly increased from $25,100 to $25,900 for married couples.

The personal exemption is not coming back until 2026. Under the current law, the standard deduction will be reduced when the personal exemption returns and will end up with a net neutral effect.

Capital gains tax rates remain the same, but the tax brackets are changing.

The federal state tax exemption for decedents dying in 2022 will increase to $12.06 million per person. The gift tax exclusion jumps from $15,000 in 2021 to $16,000 in 2022.

The Roth IRA is not changing to adjust for inflation because that would require an act of congress.

401(k) contribution limits are being adjusted alongside Roth 401(k) and 403(b) plans.

Roth income limits will go up slightly in 2022 from $204,000 to $214,000. This is something that should definitely be changed because the cost of living is not the same all over the country.

There has been no change to the provisional income thresholds. If inflation continues to go up and Social Security is increased to keep up, there are going to be more people that bump into Social Security taxation.