COVID-19 Relief Package Advances in the House

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The House Budget Committee has approved the American Rescue Plan Act of 2021, a bill to enact President Biden’s COVID-19 relief package. The bill includes another round of economic impact payments as well as several tax and pension changes. Its provisions are subject to change by the full House and/or the Senate.

The bill now goes to the House Rules Committee. It is expected to be taken up by the full House by the end of the week. The Senate will then either vote on the House bill or its own bill. It is expected to do so during the first or second week in March.

Senate Democrats have begun discussions with the Senate parliamentarian as to whether the entire bill, which includes the $15 per hour minimum wage, can be passed under the reconciliation process under which a simple majority is enough to pass the bill.

Here are some of the key tax and pension provisions in the bill that has been sent to the House Rules Committee.

Individual tax provisions

•Economic impact payment/recovery rebate credit. The payment/credit is a maximum of $1,400 for a single taxpayer ($2,800 for joint filers), in addition to $1,400 per dependent for qualifying taxpayers.

•Child tax credit. Makes the child tax credit fully refundable for 2021 and increases the maximum amount from $2,000 to $3,000 per child ($3,600 for a child under age 6).

•Earned Income Tax Credit. Various liberalizations. For example, the bill would expand the credit for taxpayers without children for 2021 by increasing the credit percentage and phase out thresholds. It also would allow taxpayers ages 19 and older without children to qualify.

•Child and dependent care tax credit. Makes a number of modifications for 2021. For example, makes the credit fully refundable and increases the maximum credit rate to 50%. Amends the phaseout threshold to begin at $125,000 instead of $15,000.

•Premium tax credit. Increases credits for individuals eligible for assistance under current law and provides credits for taxpayers with income below 400% of the federal poverty line. Liberalizes the rules for taxpayers receiving unemployment compensation.

•COBRA. The bill would subsidize 85% of premiums for individuals eligible for COBRA continuation coverage if they lose their job. The employee would pay 15% of the premium, and the employer or health plan could claim a refundable tax credit for paying the remaining amount.

Business tax provisions

•Employer provided dependent care assistance. Increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

•Credits for paid sick and family leave. The bill would make a number of changes. Among them: extend through September 30 tax credits for employer-provided paid sick and family leave; and increase the wages covered by the paid family leave credit to $12,000 per worker, from $10,000.

•Employee retention credit. The bill would extend this credit through December 31, 2021.

•Corporate interest expense. The bill would eliminate the ability of companies to allocate interest expenses on a worldwide basis beginning in 2021.

Pension provisions

•Multiemployer pensions. The bill would: establish a fund for the Pension Benefit Guaranty Corporation (PBGC) to provide financial assistance to struggling multiemployer pension plans; permit plans to amortize investment and other losses incurred after February 29, 2020, over 30 years instead of 15.

•Pension smoothing. The bill would extend and modify “pension smoothing,” which increases the interest rates used to calculate pension fund liabilities, allowing companies to contribute less money to pension plans in the short term.

•Other pension provisions. The bill would: extended amortization for single employer plans; modify the special rules for minimum funding standards for community newspaper plans; and freeze cost of living adjustments

Individual Tax Provisions of the New Appropriations Act

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On 12/27/20, the massive Consolidated Appropriations Act, 2021 (CAA, 2021) was signed into law. Before the CAA, 2021 hit the books, a bevy of federal income tax breaks were set to expire on 12/31/20. The tax changes explained in this letter are found in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR) and the COVID-related Tax Relief Act of 2020 (COVIDTRA). Both of these Acts are folded into the CAA, 2021.

This letter explains what the TCDTR has to say about so-called tax extenders that benefit individuals. These extenders are tax breaks that Congress has repeatedly allowed to expire before restoring them, often retroactively. This letter also covers some other important tax changes included in the COVIDTRA that benefit individuals.

College Tuition Deduction Replaced by Liberalized Education Credit

For 2020, the college tuition deduction can be up to $4,000 at lower income levels or up to $2,000 at middle income levels. Taxpayers with Modified Adjusted Gross Income (MAGI) up to $65,000, or up to $130,000 for married joint-filers, can deduct qualified expenses up to $4,000. Taxpayers with MAGI between $65,001 and $80,000, or between $130,001 and $160,000 for married joint-filers, can deduct up to $2,000. The allowable 2020 deduction is zero if MAGI is more than $80,000, or more than $160,000 for married joint-filers.

If your 2020 income allows you to be eligible for the deduction, you can claim it whether you itemize or not.

New Law: The TCDTR repeals the college tuition write-off for 2021 and beyond. Also, starting in 2021, the new law aligns the phase-out rule for the Lifetime Learning credit, which can be worth up to $2,000 annually, with the more favorable phase-out rule for the American Opportunity credit, which can be worth up to $2,500 per student. In effect, the TCDTR trades the old-law write-off for the more favorable new-law Lifetime Learning credit phase-out rule.

Key Point: After this TCDTR change, both education tax credits are phased out for 2021 and beyond between MAGI of $80,001 and $90,000 for unmarried individuals and between $160,001 and $180,000 for married joint-filing couples. Before the TCDTR, the Lifetime Learning credit was phased out for 2020 between MAGI of $59,001 and $69,000 for unmarried individuals and between $118,001 and $138,000 for married joint-filing couples.

Tax-free Treatment of Employer Payments of Student Loans Extended

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed federal-income-tax-free treatment for payments made by employer-sponsored educational assistance plans towards student loan debts of participating employees. Between 3/28/20 and 12/31/20, up to $5,250 per employee could be paid out (towards principal or interest) with no federal income tax hit for the employee. Also, employers could deduct these payments.

New Law: The TCDTR extends this break to cover qualifying student loan debt payments made through 12/31/25.

Intersection of Emergency College Financial Aid Grants and Higher Education Tax Credits

Eligible individuals can claim the American Opportunity credit (worth up to $2,500 per student) or the Lifetime Learning credit (worth up to $2,000) for qualifying higher education expenses. However, expenses paid from federal-income-tax-free sources generally can’t be used to claim these credits.

New Law: The COVIDTRA grants federal-income-tax-free treatment to certain CARES Act emergency financial aid grants to college students. Under an exception, expenses paid with these tax-free grants can be used to claim the two higher education tax credits. The exception applies to qualified emergency financial aid grants made after 3/26/20 pursuant to the CARES Act.

Lower Itemized Medical Expense Deduction Threshold Made Permanent

The Tax Cuts and Jobs Act (TCJA) set the threshold for itemized medical expense deductions at 7.5% of Adjusted Gross Income (AGI). The threshold was scheduled to increase to a daunting 10% of AGI for 2021 and beyond.

New Law: The TCDTR makes the 7.5%-of-AGI threshold permanent for 2021 and beyond.

Tax-free Treatment of Forgiven Principal Residence Mortgage Debt Extended with Lower Limits

For federal income tax purposes, a forgiven debt generally counts as taxable Cancellation of Debt (COD) income. However, an exception applies to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the exception, up to $2 million ($1 million for married individuals who filed separately) of COD income from principal residence acquisition debt that was cancelled in 2007–2020 qualified as a federal-income-tax-free item.

New Law: The TCDTR extends this break to cover principal residence mortgage debt that’s forgiven in 2021–2025. However, the maximum amount of forgiven debt that can be treated as tax-free for those years is reduced to only $750,000 ($375,000 for married individuals who file separately).

Mortgage Insurance Premium Write-off Extended

Premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence can potentially be treated as deductible qualified residence interest. The deduction is phased out for higher-income individuals.

New Law: The TCDTR extends this break through 2021.

$500 Credit for Energy-efficient Home Improvements Extended

This break allows you to claim a federal income tax credit of up to $500 for the installation of certain energy-saving improvements to a principal residence. However, the $500 maximum allowance must be reduced by any credits claimed in earlier years. In other words, the $500 amount is a lifetime limitation.

New Law: The TCDTR extends this break to cover qualifying improvements placed in service in 2021. However, if you’ve already claimed the credit for an earlier year, you may be ineligible for any additional credit.

Bigger Credit for Residential Solar Energy Equipment Extended

There’s a generous federal income tax credit for qualifying solar energy equipment expenditures for your home. For equipment placed in service in 2020, the credit rate is 26%. The rate was scheduled to drop to 22% for equipment placed in service in 2021 before vanishing entirely for 2022 and beyond.

New Law: The TCDTR extends the 26% credit rate to cover equipment placed in service in 2021 and 2022 and extends the 22% rate to cover equipment placed in service in 2023. For 2024 and beyond, the credit is scheduled to expire.

Credit for Fuel Cell Vehicles Extended

You can claim a federal income tax credit for vehicles propelled by chemically combining oxygen with hydrogen to create electricity. The base credit is $4,000 for vehicles weighing 8,500 pounds or less. Heavier vehicles can qualify for credits of up to $40,000. An additional $1,000 to $4,000 credit is available to cars and light trucks to the extent their fuel economy meets federal standards.

New Law: The TCDTR extends this break to cover qualifying 2021 purchases.

Credit for Electric Motorcycles Extended

The 10% federal income tax credit for the purchase of qualifying electric-powered two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (i.e., electric-powered motorcycles) can be worth up to $2,500.

New Law: The TCDTR extends this break to cover qualifying 2021 purchases.

Credit for Alternative Fuel Vehicle Refueling Equipment Extended

There’s a personal and business federal income tax credit for up to 30% of the cost of installing nonhydrogen alternative fuel vehicle refueling equipment (for example, for your Tesla or other electric vehicle).

New Law: The TCDTR extends this break to cover qualifying 2021 expenditures.

Charitable Deductions for Nonitemizers Extended and Expanded

For 2020, individuals who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities. The same $300 limit applies to both unmarried taxpayers and married joint-filing couples.

New Law: The TCDTR extends the $300 break to cover cash contributions made in 2021. It also doubles the deduction limit to $600 for married joint-filing couples for cash contributions made in 2021.

Bigger Charitable Deduction Limit for Generous Donors Extended

Before 2020, individuals could not claim an itemized charitable deduction for cash contributions to IRS-approved charities that exceeded 60% of AGI.

New Law: The Cares Act suspended the AGI limit for qualifying charitable contributions made in 2020. The TCDTR extends this taxpayer-friendly suspension into 2021. In other words, you can deduct up to 100% of AGI for qualifying charitable contributions made in those years.

Liberalized Rule for Calculating 2020 Refundable Child Credit and Earned Income Credit

You can collect refundable tax credits even if you have no federal income tax liability. Eligible taxpayers can claim a refundable Child Tax Credit (CTC) equal to 15% of earned income in excess of $2,500. The refundable Earned Income Tax Credit (EITC) equals the applicable percentage of an eligible taxpayer’s earned income. Earned income means wages, salaries, tips, other taxable employee compensation, and self-employment income. More earned income can translate into bigger refundable credits, and less earned income can translate into smaller refundable credits. You may have had lower earned income in 2020 due to the COVID-19 economic fallout, which could result in lower refundable credits.

New Law: For purposes of calculating allowable CTCs and EITCs for the 2020 tax year, the TCDTR allows taxpayers to use either their 2020 earned income or their 2019 earned income amount if that’s more than the 2020 figure.

Liberalized Rules for Flexible Spending Account (FSA) Balances

An employer-sponsored health FSA can allow an employee to carry over up to $550 of his or her unused FSA balance into the following plan year. This rule is called the carryover rule. At the employer’s option, a separate grace period rule can be offered to give you up to 2½ months after the plan’s year-end to submit qualifying expenses for reimbursement and thereby use up your FSA balance. Health FSAs can offer either the carryover rule or the grace period rule, but not both.

For dependent care FSAs, employers cannot offer the carryover rule, but they can offer the grace period rule.

New Law: For plan years ending in 2020 and 2021, the TCDTR allows employers to extend health FSA and dependent care FSA grace periods for up to 12 months into the following plan year. Also, for these plan years, both types of FSA plans can apparently allow the carryover rule in addition to the grace period rule. The employer also can allow an employee who ceases to participate in an FSA plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused balances through the end of the plan year in which the employee’s participation ceased, including any grace period.

Liberalized Rule for Educator Expense Deduction

Eligible K–12 teachers and instructors are entitled to a $250 annual above-the-line deduction for certain school-related expenses paid out of their own pockets.

New Law: The COVIDTRA stipulates that by no later than 2/28/21, the IRS must issue official guidance to clarify that the costs of Personal Protective Equipment (PPE), disinfectant, and other supplies used to prevent the spread of COVID-19 count as allowable expenses for the $250 educator expense deduction. This guidance will apply to such expenses paid or incurred after 3/12/20.

Conclusion

You now have updated information on the status of tax extenders and other important tax changes that benefit individuals. Please contact us if you have questions or want more information.

InvestmentNews – PPP Loans

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Click Here for InvestmentNews video featuring Bill Vasil, ARM CPA partner.

Foreign Bank and Financial Accounts (FBAR) Filing Requirement for Virtual

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Virtual currency is a digital representation of value that functions as a unit of account, a store of value, or a medium of exchange. Some virtual currencies have an equivalent value in real currency or act as a substitute for real currency. Generally, a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial accounts, including bank, securities, or other types of financial accounts located in a foreign country, must file an FBAR with the FinCEN if the aggregate value of those foreign financial accounts exceeds $10,000 at any time during the calendar year. Currently, the FBAR regulations do not define a foreign account holding virtual currency as a type of reportable account . However, FinCEN intends to propose to amend the regulations regarding FBARs to include virtual currency as a type of reportable account under 31 CFR 1010.350. FinCEN Notice 2020-2 .

House Democrats unveil partial draft of COVID relief bill

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The House Ways and Means Committee is slated to mark up legislative proposals for approximately half of the $1.9 trillion COVID relief package over three days beginning February 10.

The measures includes an additional direct payment of $1,400 per person and extends temporary federal unemployment benefits through August 29, 2021.

In addition, the bill calls for the following related to tax credits targeted at individuals and families:

* Enhancing the Earned Income Tax Credit for workers without children by expanding the maximum credit and extending eligibility.

* Expanding the Child Tax Credit to $3,000 per child ($3,600 for children under 6) and making it fully refundable and advanceable.

* Expanding the Child and Dependent Care Tax Credit (CDCTC) to allow families to claim up to half of their child care expenses.

The completed markup will eventually be added to legislative proposals made by 12 other House committees to create a single bill. The goal is getting the legislation through the House by the end of February.

Victims of unemployment comp identity theft should seek corrected Form 1099-G

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In a News Release, IRS has urged taxpayers who receive a Form 1099-G, Certain Government Payments, for unemployment benefits they did not actually get because of identity theft, to contact their appropriate state agency for a corrected form.

Background: Unemployment compensation is taxable income. (Code Sec. 85(a))

Form 1099-G is used by a state or local government to report to IRS that it made certain payments, including unemployment compensation payments.

IRS News Release: Noting that scammers have taken advantage of the COVID-19 pandemic by filing fraudulent claims for unemployment compensation using stolen personal information of individuals who had not filed claims, IRS has told taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive, to contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits.

A corrected Form 1099-G showing zero unemployment benefits in cases of identity theft will help taxpayers avoid being hit with an unexpected federal tax bill for unreported income.

And, taxpayers who are unable to obtain a timely, corrected form from states should file a tax return reporting only the income they received.

Taxpayers do not need to file a Form 14039, Identity Theft Affidavit, with IRS regarding an incorrect Form 1099-G.

For IRS instructions to issuers of Form 1099-G with respect to unemployment compensation payments made to imposters, see Reporting unemployment compensation payments made to imposters.

Deductibility of Business Meals Provided by Restaurants in 2021 and 2022

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You’ve probably heard that the recent stimulus legislation included a provision that removes the 50% limit on deducting business meals provided by restaurants in 2021 and 2022 and makes those meals fully deductible. Here are the details.

In general, the ordinary and necessary food and beverage expenses of operating your business are deductible. However, the deduction is limited to 50% of the otherwise allowable expense.

The new legislation adds an exception to the 50% limit for expenses for food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant makes it clear that the new rule isn’t limited to meals eaten on the restaurant’s premises. Takeout and delivery meals provided by a restaurant are also fully deductible.

It’s important to note that, other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for deducting business meals. All the other existing requirements continue to apply. Thus, to be deductible:

  • The food and beverages can’t be lavish or extravagant under the circumstances.
  • You or one of your employees must be present when the food or beverages are served.
  • The food or beverages must be provided to you or to a “business associate.” This is defined as a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser with whom you could reasonably expect to engage or deal in your business.

If food or beverages are provided at an entertainment activity, either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice, or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

Which clients could benefit from a Roth conversion?

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https://www.investmentnews.com/video/200644

A few factors make this year a good opportunity to move IRA savings into a Roth IRA, says Bill Vasil, a tax partner at ARM CPA, and he suggests the types of clients who might benefit from such a move.

@GeoMoriarty  @WilliamVasil

Transcript

George Moriarty: Roth conversions seems to be a hot topic in 2020.  Why all the buzz?

Bill Vasil: First – you have relatively low tax rates from a historical perspective that may be increasing in the future.  Second – the market has been turbulent and it is ideal to complete a conversion when the market is low to allow for significant post-conversion appreciation.  Third – the RMD requirement has been waived which permits a taxpayer to convert their first IRA dollars to a Roth whereas typically only IRA withdrawals in excess of the RMD can be converted.

George Moriarty: How do you identify clients that should consider a Roth conversion?

Bill Vasil: I like to break clients down into four buckets.

Bucket one would be clients that are already taking RMDs.  With the RMD suspension for 2020, I look to convert amounts that will utilize the lower tax brackets.

Bucket two would be clients that are in their gap years, which is post retirement, but before RMDs and Social Security start.  These clients are typically in lower tax brackets, thus I look to strategically convert to utilize the lower brackets.

Bucket three would be younger clients that may have a small traditional IRA balance.  Converting now in a favorable environment not only allows for tax-free growth over their lifetime, but it also allows them to start completing back-door Roth IRA conversions on an annual basis.

Bucket four would be business owners or high income earners that are having a low income year or loss.  Here I look to utilize the lower tax brackets, which won’t be available once income goes back up.

George Moriarty: When should the conversions be completed?

Bill Vasil: Now is the time to start running tax projections and having conversations with clients as the conversion needs to be completed before year-end.  If accurate income data is not yet available, I would at least start the high-level conversation now so that the conversion process won’t be rushed at year-end.

See also: 3 questions to ask before converting to a Roth IRA – To do a Roth conversion, money has to be spent. Here is what financial advisers and their clients should consider before they incur tax costs

IRS won’t postpone July 15 filing, payment deadline

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In an Information Release, the IRS has announced that the July 15 tax filing and payment deadline won’t be postponed. Individuals unable to meet the July 15 filing deadline can request an automatic extension, until October 15, to file. However, tax payments are due on July 15.

Background. Due to the COVID-19 pandemic, the April 15 filing and tax payment due date for 2019 was postponed to July 15.  Previously, the Treasury Secretary indicated that the July 15 deadline might be postponed.

July 15 deadline won’t be postponed. The IRS has announced that the July 15 filing and payment deadline won’t be postponed. Individuals unable to meet the July 15 filing deadline can request an automatic extension of time to file. However, tax payments are due on July 15.

Automatic extensions of time to file a return. Taxpayers who need more time to file their federal income tax return can get an extension until October 15 by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, before the July 15 deadline. Taxpayers should estimate their tax liability on Form 4868 and pay any amount due when filing the form.

Taxpayers can also get an automatic extension by making a tax payment using Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or an authorized credit or debit card processor, and indicating that the payment is for an automatic extension.

When using one of the above payment methods to request an automatic extension, taxpayers do not have to file a Form 4868 and will receive a confirmation of their payment for their records.

State filing deadlines. The IRS also reminds taxpayers to check their state filing and payment deadlines, which may differ from the federal July 15 deadline. A list of state tax division websites is available through the Federation of Tax Administrators.

Improvements to Interior Parts of Nonresidential Buildings

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This article is to alert you to a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings (‘‘qualified improvement property’’ or ‘‘QIP’’). You may recall that following the 2017 Tax Cuts and Jobs Act (‘‘TCJA’’), any QIP placed in service after Dec. 31, 2017 was not considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period instead of entirely in the year the QIP was placed in service. That result was due to an inadvertent drafting error by Congress.

The 2020 Coronavirus Aid, Relief, and Economic Security Act (‘‘CARES Act’’) was signed into law on Mar. 27, 2020. The CARES Act corrects the TCJA drafting error for QIP. Thus, most businesses are now allowed to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What also is helpful is that the correction is retroactive, and it reaches back to apply to any QIP placed in service after Dec. 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to be outside of the definition of QIP.

In the current business climate, you may not be in a position to undertake new capital expenditures, even if needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you are ready to undertake qualifying improvements, the generous subsidy of 100% bonus depreciation will be available.

And, the retroactive effect of the CARES Act presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided me to identify QIP expenditures.

For not-yet-filed returns, we can simply reflect the favorable treatment for QIP on the return.

If you’ve filed returns that didn’t claim 100% bonus depreciation for what may prove to be QIP, we can investigate based on available documentation as discussed above. If there is QIP that was in fact eligible for 100% bonus depreciation, note that IRS has, for past retroactive favorable depreciation changes, provided taxpayers with detailed guidance for how the benefit is claimed. That is, IRS clarified how much flexibility taxpayers have in choosing between a one-time downward adjustment to income on their current returns or an amendment to the return for the year the QIP was placed in service. I will monitor what your options are as anticipated IRS guidance for the QIP correction is released.

If you have any questions about the news shared above, or about how you can take advantage of it, please do not hesitate to contact us.