An overview of federal tax trends in 2022 and projections for federal tax receipts
A recent report by the Joint Committee on Taxation (JCT) highlights some interesting tax trends and makes important projections about federal tax receipts for 2022.
The current Federal tax system has four main elements:
An income tax on individuals, estates, trusts, and corporations
Payroll taxes on wages (and corresponding taxes on self-employment income) to finance certain social insurance programs
Estate, gift, and generation-skipping transfer taxes
Excise taxes on selected goods and services.
Here’s a broad overview of each of these elements, as they’re explained in JCT’s report, and projections for 2022 tax reporting.
Income taxes for individuals and corporations
The worldwide taxable income of a United States citizen or resident alien generally is subject to the U.S. individual income tax. Taxable income equals the taxpayer’s total income less certain exclusions, exemptions and deductions. The Joint Committee staff estimates that for the 2022 taxable year approximately 142.2 million taxpayers will claim the standard deduction while 18.5 million taxpayers will elect to itemize deductions.
In addition to standard or itemized deductions, an individual taxpayer generally may deduct 20 percent of qualified business income from a partnership, S corporation or sole proprietorship, as well as 20 percent of aggregate qualified real estate investment trust (“REIT”) dividends and qualified publicly traded partnership income. The Joint Committee staff estimates that for the 2022 taxable year approximately 22.4 million taxpayers will claim the deduction for qualified business income, representing approximately $188 billion in tax deductions.
Net investment income is, in general, the excess of (1) the sum of (a) gross income from interest, dividends, annuities, royalties, and rents, and (b) net gain attributable to the disposition of property, over (2) deductions properly allocable to such gross income or net gain. The Joint Committee staff estimates that for the 2022 taxable year, approximately 7.0 million taxpayers will pay the additional tax on net investment income, representing approximately $43.1 billion in tax revenue.
Corporate income generally is taxed at 21 percent, but certain entities are taxed at lower rates on their foreign-derived intangible income (“FDII”). The preferential rate is achieved by allowing corporations a 37.5-percent section 250 deduction on their FDII. Like individuals, corporations may reduce their tax liability by any applicable tax credits.
According to the JCT, the four largest dollar amount credits are:
Research credit, which targets intangible investment
Low-income housing tax credit, which targets real property investment
Energy credit, which targets investment in certain renewable energy property
Renewable electricity production credit, which targets electricity production.
Payroll taxes on wages
Social Security benefits and certain Medicare benefits are financed primarily by payroll taxes on covered wages. The Federal Insurance Contributions Act (“FICA”) imposes tax on employers and employees based on the amount of wages paid to an employee during the year. The tax imposed is composed of two parts: (1) the old age, survivors and disability insurance (“OASDI”) tax equal to 6.2 percent of covered wages up to the taxable wage base ($147,000 in 2022); and (2) the Medicare hospital insurance (“HI”) tax amount equal to 1.45 percent of covered wages with no wage cap.
JCT staff estimates that for the 2022 taxable year, approximately 6.6 million taxpayers will pay the additional HI tax.
Estate, gift and generation-skipping taxes
The United States generally imposes a gift tax on any transfer of property by gift made by a U.S. citizen or resident, whether made directly or indirectly and whether made in trust or otherwise.
Annual gifts of $16,000 (for 2022) or less made by the donor to any person generally are not subject to tax.
The gift and estate taxes are unified such that a single graduated rate schedule and exemption apply to an individual’s cumulative taxable gifts and bequests. The unified estate and gift tax rates begin at 18 percent on the first $10,000 in cumulative taxable transfers and reach 40 percent on cumulative taxable transfers over $1,000,000. A unified credit of $4,769,800 (for 2022) is available with respect to taxable transfers by gift or at death. This credit effectively exempts a total of $12.06 million (for 2022).
A separate transfer tax is imposed on generation-skipping transfers in addition to any estate or gift tax that is imposed on such transfers. For 2022, the generation-skipping transfer tax is determined using a 40-percent rate and an exemption of $12.06 million.
The Federal tax system imposes excise taxes on selected goods and services. Large excise taxes in terms of revenue, for fiscal year 2021, are those imposed on gasoline motor fuel ($26.0 billion), diesel motor fuel ($12.4 billion), domestic air tickets ($5.3 billion), domestic and imported tobacco products ($12.1 billion) and domestic and imported alcoholic beverages ($11.6 billion). Starting in July of 2022, excise taxes are also imposed on certain taxable chemicals.
Tax projection graphics by JCT
The individual income tax is expected to account for 54.2% of Federal receipts in 2022. This means the individual income tax will continue to be the largest source of revenue for the Federal government.
Perhaps the most interesting statistic is the fact that Federal receipts as percentage of GDP have remained between 16-18% over the last 75 years, regardless of changes in the economic environment and fluctuations in marginal tax rates.