THE 2020 TAX SEASON IS A WILD RIDE!
Continued considerations have been put into place to help Americans ease the pain of their 2020 tax burden.
The Consolidated Appropriation Act of 2021 was signed into law by the President on December 27. It contains more COVID-19 relief provisions as well as tax provisions that you need to know!
ADDITIONAL STIMULUS PAYMENTS
- In addition to the original stimulus payment, eligible individuals are allowed $600 for 2020 ($1200 for married joint filers) plus $600 for each qualifying child.
- Eligibility of stimulus payments is phased out at income levels of $75,000 for individuals, $150,000 for married, filing joint, and $112,500 for the head of household.
- This provision excludes non-resident aliens and one who is a dependent of another.
- Families of mixed immigration status who have a valid Social Security number for one spouse are eligible.
- Advanced refunds and credits are based on the individual’s 2019 income
INDIVIDUAL TAX CHANGES
- Child Tax Credit and Earned Income Tax Credit: The new revision allows taxpayers to use their 2019 income to calculate eligibility for the child tax credit for the 2020 tax year. This is because 2020 earnings may be significantly lower than in 2019 due to the pandemic. This rule is also intended to prevent unemployment insurance benefits to affect credits.
- Charitable Contributions: The above-the-line charitable contribution (subtracted from gross income to calculate adjusted gross income on the IRS form 1040) deduction through 2021 is set for $600 for joint filers and $300 for others.
- Flexible Savings Accounts (FSAs): FSA subscribers can roll over their balances from 2020 into 2021. Balances from 2021 may be rolled into 2022 to avoid loss of unused funds.
- Educator Expenses for PPE: The cost of PPD and other supplies for preventing the spread of COVID-19 is eligible for the educator expense deduction. This applies retroactively to March 12, 2020.
- Emergency Financial Aid Grants: The following applies to students who receive an emergency financial aid grant: it will not be categorized as income. It will also not be treated as reducing qualified tuition or related expenses so that the American Opportunity and Lifetime Learning Credits can be maximized.
- PPP Expenses: Businesses can deduct expenses paid with forgiven PPP loans. There are no caps, guardrails, or limitations.
- Other Cares Act Loan Forgiveness and Financial Assistance: Gross income will not be increased due to loan forgiveness on emergency grants and loan repayment assistance. Expenses paid with these funds will be deductible.
- Deductibility of Business Meals: The deduction is increased from 50% to 100% for 2021 and 2022. (what about 2020??)
- Depreciation of Certain Residential Rental Property: The Tax Cuts and Jobs Act permitted a real property trade or business to elect out of the business interest deduction rules. The cost of the election is the requirement to use the ADR life for non-residential real estate, residential real property, and qualified improvement property. The new law provides that a 30-year life applies even for properties placed in service before January 1, 2018 (when a 40-year life had been a requirement).
EMPLOYER AND EMPLOYEE PAYROLL TAX PROVISIONS
- Elective Deferral of Employee Social Security Taxes: Employers may defer the payment of their employees’ social security taxes on specific eligible salaries (bi-weekly less than $4,000) for September 1 – December 31, 2020. This new law extends the period for the payment of the deferred taxes from the original cut-off of April 30, 2021.
- Payroll Tax Credits: Refundable tax credits are available through the new law for paid sick and emergency medical leave. The law allows for an election to use average daily self-employment income from 2019 in computing the credit for self-employed persons.
Employee Retention Tax Credit: This credit has been extended to June 20, 2021, and has been modified as follows:
- The computation of the payroll tax credit is adjusted for calendar quarters beginning after December 31, 2020
- It applies to per-employee eligible wages of $10,000 per quarter (vs. per year)
- There is an increase in the credit rate from 50% (max. $5,000 credit/year) to 70% (MAX. $7,000 credit/year)
- A substantial reduction of gross income is now defined as 20%, rather than 50%
- Employers can use prior-quarter gross receipts to determine eligibility
- To determine wages eligible for credit, the sweet-spot has been increased from 100 to 500 employees
- New employers that did not exist in 2019 are permitted to receive the credit
Other changes were made to the Employee Retention Tax Credit are now retroactive to the CARES Act of March 2020:
- Employers who received PPP loans (and were not previously eligible for credit under the original law) may qualify for the credit for wages not paid with forgiven PPP proceeds. The law permits an employer to elect to treat specific paid amounts as not being qualified wages.
- The Employee Retention Tax Credit now conforms with the current IRS position that group health plan costs may be counted as part of qualified wages even though the employee may have no other wages (i.e., furlough)
- Further guidance is available for tax-exempt organizations, including rules for gross receipts
- Since employers may have already filed a return for employment taxes at the enactment of the new law, it provides an election option to treat an applicable amount as an amount paid in the appropriate calendar quarter
In addition to COVID relief, the legislation contains several tax extenders:
- SEC 179D Energy Efficient Commercial Building Deduction: This provision, scheduled to expire in 2020, has been made permanent. It allows taxpayers to claim a deduction for energy-efficient improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial real property. The deduction is based on $1.80 per s.f. However, a $.60 deduction is permitted where certain subsystems meet standards if the entire building does not. The new law will adjust the $1.80 rate based on inflation after 2020.
- Qualified Tuition and Related Expenses: The different phase-out rules for the American Opportunity Tax Credit and the Lifetime Learning Credit have been removed. For 2021 and beyond, a single phase-out policy will be created. The deduction for higher education expenses is repealed for tax years following 2020.
NEW MARKETS TAX CREDIT
The $5 billion allocations of available credits are extended for 2021 through 2025.
PRINCIPAL RESIDENCE INDEBTEDNESS DISCHARGE
The new law extends the exclusion for debt discharges between 2021 and 2025. The prior discharge for a qualified principal residence debt of up to $2 million ($1 million for a married filing separate filer) was scheduled to terminate after 2020. The maximum amount is reduced to $750,000 ($375 for married, separate filers).
MORTGAGE INSURANCE PREMIUMS TREATED AS QUALIFIED RESIDENT INTEREST
Mortgage insurance premiums related to acquisition indebtedness for a principal residence are now treated as an interest expense, which will be extended through 2021.
EMPOWERMENT ZONE TAX INCENTIVES
These are extended through December 31, 2025, for the period that an empowerment zone’s designation is in effect.
EXCLUSION FOR EMPLOYER PAYMENT OF STUDENT LOANS
Payment pertaining to a qualified educational assistance program, up to $5,250, will be treated as a non-taxable benefit through 2025.
EMPLOYER PAID FAMILY AND MEDICAL LEAVE PROGRAM
This extends a credit of 12.5% of eligible wages to an employer that provides paid family and medical leave where the payment is 50% of wages, increased by .25% for each percentage point above 50% of wages paid for a maximum 12-week period. This new law extends the credit through 2025.
It’s a lot of information—just think about how Congress feels! (Or, maybe don’t!) Now, more than ever, it’s critical to have a qualified accountant and tax expert in your corner to help you prepare and be ready for another roller-coaster tax season. Give me a call at 201.787.6542 to “buckle up” and prepare for your 2020-21 tax strategy.