Not surprisingly, tax planning and compliance activities continue to increase in complexity. Not only are we in the third year of tax reporting under the Tax Cuts and Jobs Act of 2017, we have experienced a plethora of new tax legislation in the last 12 months related to COVID-19, including but not limited to the Consolidated Appropriations Act, which we wrote about in this Alert. While tax compliance may have been simplified for some wage earners, the multitude of tax law changes impacted executives, investors, entrepreneurs and high-net-worth individuals in terms of increased complexities, more voluminous tax returns, new computations, new and revised decisions and many interactions with their tax lawyer or CPA. Guidance and interpretation related to new tax legislation continue to evolve at a staggering pace. To help address these challenges, here’s a quick hit list of some of the most significant changes facing taxpayers when preparing (or properly extending) their tax returns for 2020.
- Economic impact payments. Any economic impact payments you received are not taxable for federal income tax purposes, but they reduce your recovery rebate credit. Eligibility and credit amount for the economic impact payments are based on your 2020 tax year information.
- Ability to defer or repay required minimum distributions (RMDs). Perhaps most significantly for retired persons, the Coronavirus Aid, Relief and Economic Security (CARES) Act allowed any taxpayer with an RMD due in 2020 from a defined contribution plan to skip the RMD for 2020, or repay the RMD by August 31, 2020, to avoid inclusion in taxable income.
- Other tax relief. Recent legislation (which you can read about on our publications page) provided certain tax-related benefits, including an election to use your 2019 earned income to figure your 2020 additional child tax credit.
- Educator expenses. Includes amounts paid or incurred after March 12, 2020, for personal protective equipment, disinfectant and other supplies used for the prevention of COVID-19.
- Retirement plans. If you reside in certain federally declared disaster areas, special rules may apply to distributions from your IRA, profit-sharing plan or retirement plan.
- Charitable contributions. If you do not itemize your deductions, you may qualify to take a deduction for charitable contributions of up to $300.
- Temporary suspension of limits for cash contributions. For tax year 2020, certain cash contributions you made are not subject to the 60 percent limit for cash contributions.
- Virtual currency. If, in 2020, you engaged in a transaction involving virtual currency, you will need to answer the question on page 1 of your tax return.
- Deductible IRA contributions. You no longer need to be younger than age 70 1/2 to take a deduction for your contributions to an IRA.
- Coronavirus tax relief for certain individuals. The CARES Act permits certain individuals who file Schedule SE (Form 1040) or Schedule H (Form 1040) to defer the payment of 50 percent of self-employment tax imposed for the period beginning on March 27, 2020, and ending December 31, 2020.
- Coronavirus distributions. Recent legislation contains new rules that provide for tax-favored withdrawals, income inclusion and repayments for individuals who were diagnosed with or suffered economic losses as a result of the coronavirus.
- Qualified birth or adoption distribution. Beginning in tax years after December 31, 2019, you can take a distribution from your IRA without it being subject to the 10 percent additional tax for early distributions.
- Qualified disaster distributions. Special rules provide for tax-favored distributions from and repayments to certain retirement plans for taxpayers who suffered economic losses as a result of certain disasters in tax years 2018, 2019 and 2020. However, these disasters do not include major disasters declared only by reason of COVID-19.
- Credits for sick and family leave for certain self-employed individuals. The Families First Coronavirus Relief Act helps self-employed individuals affected by coronavirus by providing paid sick leave and paid family leave credits equivalent to those that employers are required to provide their employees for qualified sick leave wages and qualified family leave wages paid during the period beginning April 1, 2020, and ending December 31, 2020.
- Standard deduction amount increased. For 2020, the standard deduction amount has been increased for all filers. The amounts are: single or married filing separately—$12,400; married filing jointly or qualifying widow(er)—$24,800; and head of household—$18,650.
- Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $72,900 ($113,400 if married filing jointly or qualifying widow(er); $56,700 if married filing separately). The income levels at which the AMT exemption begins to phase out have increased to $518,400 ($1,036,800 if married filing jointly or qualifying widow(er)).
- Standard mileage rates. The 2020 rate for business use of your vehicle is 57.5 cents a mile. The 2020 rate for use of your vehicle to get medical care or to move is 17 cents a mile.
- Adoption credit. The adoption credit and the exclusion for employer-provided adoption benefits have both increased to $14,300 per eligible child in 2020. The amount begins to phase out if you have modified adjusted gross income (MAGI) in excess of $214,520 and is completely phased out if your MAGI is $254,250 or more.
- Identity Protection Personal Identification Numbers (IP PINs). New IP PINs are generated every year. In mid-January, you should have received your IP PIN to use when filing your 2020 tax returns. You may also opt in to the expanded IRS IP PIN Program. We provided our perspectives on this program in this Alert.
- Deduction for tuition and fees. The deduction has been extended for 2020. You can deduct qualified expenses paid in 2020, subject to certain limitations. This deduction will be replaced in 2021 with more beneficial education credits.
- Tax on certain children with unearned income (kiddie tax). Recent legislation modified the tax rates and brackets used to figure the tax on 2020 unearned income for certain children.
Select Individual Tax Extenders
- Charitable contribution AGI limit increase from 60 percent to 100 percent (expiring 2021).
- Charitable contribution up to $300 for taxpayers who claim the standard deduction ($600 MFJ) (expiring 2021).
- Child tax credit increase to $2,000 and new $500 credit for other dependents (expiring 2025).
- Cancellation of qualified principal residence indebtedness exclusion from gross income (expiring 2025).
- Coronavirus Aid, Relief and Economic Security Act. The CARES Act, which we wrote about in this Alert, introduced the Paycheck Protection Program (PPP), which provided billions of dollars to small business to assist in navigating the challenges of the pandemic. Funds obtained through the PPP are forgivable loans, provided the funds were used for certain expenses, such as payroll, utility, rent and mortgage payments. These funds are not deemed to be taxable income to the extent of amounts forgiven, while business expenses paid with loan proceeds are deductible.
- Economic Injury Disaster Loan (EIDL). These loans provide funding for small businesses impacted by mandatory lockdowns and/or economic downturns because of the pandemic. The EIDL program was expanded by the Small Business Administration.
- Employee retention tax credit. Staff retention initiative for those businesses that were partially or completely closed due to COVID-19 and the closures were mandated by the government, or the business experienced a decline in gross revenues in excess of 50 percent of the comparable quarter of the previous year.
- Families First Coronavirus Response Act (FFCRA). FFCRA required certain businesses to provide family/sick leave to employees who were impacted by COVID-19. Businesses providing leave are eligible for 100 percent tax credits equal to the cost of family and sick leave pay, health insurance costs and the employer’s share of Social Security taxes for sick leave expenses incurred under the act.
- Business interest expense deductions. The CARES Act increased the allowable business interest expense deduction to 50 percent from 30 percent of adjusted taxable income.
- Business meals. Effective for 2021 and 2022 only, a taxpayer can deduct 100 percent of the cost of a business meal purchased in a restaurant.
- Net operating losses (NOLs). For an NOL occurring in any tax year beginning after December 31, 2017, and before January 1, 2021, an NOL may be carried back to each of the five tax years preceding the tax year of the NOL.
- Maximum net earnings. The maximum net self-employment earnings subject to the Social Security part of the self-employment tax is $137,700 for 2020. There is no maximum limit on earnings subject to the Medicare part.
- Standard mileage rate. For 2020, the standard mileage rate for the cost of operating your car, van, pickup or panel truck for each mile of business use is 57.5 cents a mile.
- Maximum first year depreciation for passenger automobiles. Remains at $18,100 ($10,100 if electing out of bonus depreciation).
Select Business Tax Extenders
- New markets tax credit (expiring 2025).
- Employer tax credit for paid family and medical leave (expiring 2025).
- Work opportunity tax credit (expiring 2025).
- Employee retention credit (expires June 30, 2021).
- De minimis meals, related eating facilities and meals for the convenience of employer limit decreased from 100 percent to 50 percent (expiring 2025).
Each year at this time, at the top of everyone’s mind is how tax law changes will affect their individual and business tax situation, both current and prospective. With the flurry of pandemic-induced changes, the continuation of reporting under various new tax acts over the last few years and the second year of tax reporting underway, the income tax landscape has changed dramatically and continues to impact nearly all taxpayers. As major legislative developments and opportunities emerge, we are always available to discuss the impact of a new or pending tax law on your personal or business situation. Many of the rules under tax reform are complex and require careful planning.
For Further Information
Contact us for further information and guidance. If you would like to discuss the tax law changes indicated herein or have other concerns, please do not hesitate to contact John I. Frederick, Steven M. Packer or the practitioner with whom you are regularly in contact. For information on other pertinent topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.