The Tax Advantage January 2021
2020 was a busy year for lawmakers with several tax bills passed by Congress. Following are some of the most prevalent changes and what it could mean for you.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided payments to taxpayers below certain income levels. A second round of payments as a result of additional legislation began in late December. If you did not get all the payment(s) you were entitled to, you could still receive it when you file your 2020 tax return. There is no provision in the law that requires individuals who legally received too much to have to pay it back. Visit this link on IRS.GOV for more information and to check on the status of your payment: https://www.irs.gov/coronavirus/get-my-payment
The Paycheck Protection Program (PPP) provided forgivable loans to eligible business owners. Round 2 of the program begins this month. The IRS originally ruled that expenses paid with forgiven funds were not deductible, but Congress recently allowed businesses to deduction those expenses. California law however, has stated that they will not allow such expenses to be deducted, which means your CA business income will be higher than your income for federal tax purposes.
There is relief for unused funds in health and dependent care flexible spending accounts. Normally, such accounts are on a “use it or lose it” basis, but legislation now allows a 12 month grace period for unused funds. Your employer must have opted-in for the favorable treatment.
Distributions from retirement plans (up to $100,000) can escape the usual penalties if you have suffered adverse financial consequences as a result of the pandemic. You will still pay the tax on the distributions, however you will be able to spread it out over a three year period. You also have the option of repaying the distribution in order to avoid the tax completely.
Although the IRS removed the health care mandate penalty, California reinstated it effective 1/1/2020. If you did not have health insurance coverage for part of 2020, you may have to pay a penalty on your CA return unless you qualify for one of the limited exemptions. For a taxpayer with no insurance for anytime in 2020, the penalty starts at $750 per adult and $375 per child, and goes up depending on your income. Follow this link to the FTB website for possible exemptions and more information: https://www.ftb.ca.gov/about-ftb/newsroom/health-care-mandate/personal.html
There are some new rules regarding the so-called “Kiddie Tax”, which is the unearned (primarily investment) income of a child under 19 years old (or a full-time student under 24). Effective 2020, unearned income over $2,200 is taxed at the parent’s rates if higher than the child’s rates, which is a return to the pre-2018 law. Earned income (primarily wage income) is still taxed at the child’s rates. Unearned income less than $1,100 (assuming no other income) would not be taxed.
The CARES and SECURE Acts made a few other changes to IRAs and other retirement plans:
· Individuals of any age can now make contributions to a traditional IRA, assuming they have compensation. Prior to this change, the age limit was 70 ½.
· The required minimum distribution (RMD) age was raised from 70 ½ to 72. This applies to participants in IRAs, 401(k)s and some other employer-sponsored plans.
· RMDs were not required for 2020, nor do you have to make up for it.
· The maximum loan amount from a qualified plan (primarily 401Ks) was increased to $100,000 (instead of $50,000) minus loans you have outstanding. You now have six years instead of five to repay the loan.
There is a special temporary rule allowing lower-income individuals to use their income from tax year 2019 to determine the Earned Income Credit and the Additional Child Tax Credit in the 2020 tax year. This will help those who experienced lower wages due to the pandemic to get a larger refund that is consistent with prior earnings.
Mileage rates for deductible driving have decreased for 2021. The rate for business mileage driving falls from 57.5 cents to 56 cents. The allowance for medical and military moves drops from 17 cents to 16 cents. The charitable driving rate stays put at 14 cents.
The lifetime estate and gift tax exemption has increased for 2021, but the gift tax exclusion remains at $15,000 per donee. That means you can give up to $15,000 per year to each child, grandchild, or any other person without having to file a gift tax return or tap your lifetime exemption. Over the $15K, you may have to file a gift tax return, but unlikely required to pay any tax until you exceed the very high lifetime exemption.
The IRS standard deduction amounts increased slightly for 2020. Married couples get $24,800 plus $1,300 for each spouse age 65 or older. Singles claim $12,400 plus $1,650 if 65+. Those qualifying for head of household get $18,650 plus the $1,650 if 65 or older. The amounts are indexed, so they will go up a bit in 2021. The California standard deductions are much lower, so many taxpayers will benefit by still itemizing deductions.
Starting in mid-January 2021, an IRS Identity Protection PIN will be available to all taxpayers who can properly verify their identity. Previously, IP Pins were only available to victims of identity theft. An IP PIN is a tool in assuring that no one else uses your social and other personal information to file a fraudulent return. If you sign up for one on IRS.GOV, you will receive a new PIN each January to use on your tax return. If you have been a confirmed victim of tax-related identity theft, you should still file a Form 14039 with the IRS to get your PIN.
Employee business expenses continue to be non-deductible for federal purposes in most cases. Only a few specific occupations qualify for deductions: eligible educators, armed force reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses. For California state tax purposes, qualifying employee expenses may be deductible, but only if they exceed the CA standard deduction and 2% of adjusted gross income. In light of the non-deductibility of such expenses, those affected might consider discussing reimbursement with their employer.
If you have a business or a “Section 199” rental property, the 2020 deadline for issuing the new 1099-NEC is February 1, 2021. If you paid anyone $600 or more during the year (for services performed) in the course of your business, this applies to you. Common examples include payments made to subcontractors, landlords, or property managers. You should discuss with us whether or not you need to do this for your rental property as the rules behind this are complex.
Other key provisions and items to note:
· The CARES Act allows up to a $300 deduction for of charitable donations made in 2020 even to those who do not itemize. That amount increases to $600 in 2021 for joint filers.
· Businesses can temporarily deduct 100% of business-related meals beginning in 2021.
· The deduction for mortgage insurance premiums was extended through 2021.
· The non-business energy property credit for certain energy improvements to your principal residence has been extended through 2021.
· The federal exclusion from income for the discharge of qualified principal residence debt has been extended through 2025 (California has not complied).
· Unemployment insurance benefits have been extended and enhanced by $300 per week.
· The moratorium on renter’s evictions has been extended until January 31, 2021.
· Federal student loans received an additional extension on payment deferrals until April 1, 2021.
· Federal tax rates remain the same for 2020, ranging from 10% to 37% for ordinary income. The thresholds for each bracket have increased, as usual. Capital gains and qualifying dividends rates remain at 0-20%.
· The child tax credit for dependents less than 17 years of age remains at $2,000 per child. A $500 credit is available for dependents age 17 and older.
· Educators can use PPE expenses towards their $250 (maximum) Educator Credit.
· There are various credits available for employers that retain their employees or provided paid leave, assuming the wages are not paid with forgiven PPP funds.
· The repayment period for deferral of the employee portion of payroll taxes has been extended through 12/31/21.
Please email or call if you have any questions. Most of these changes depend on your individual circumstances, and are subject to change.
Phone: (925)754-9299 or (925)685-2137