January 13, 2021
Dear Clients and Friends,
As a year-end holiday gift, Congress overwhelmingly approved a $900 billion COVID relief package for individuals and businesses. The President signed the bill into law on December 27, 2020. The law provides for $600 payments to individual taxpayers with adjusted gross income (AGI) of $75,000 or less (or $112,500 AGI for heads of households), payments of $1,200 to joint filers with AGI of $150,000 or less, and an additional $600 payment for each qualifying child. The legislation also extends numerous expiring tax provisions for individuals.
The provisions of greatest interest to individuals and businesses fall in the following categories spanning the three bills that were passed into law; (i) COVID-related tax relief, (ii) Paycheck Protection Program extension and enhancement, (iii) tax extenders, (iv) miscellaneous tax provisions, and (v) disaster tax relief. We have also enclosed our most recent Tax Update newsletter for your review which includes more information regarding tax changes for 2021.
You will notice a new voice answering the phone if you call the office. Please take a minute to introduce yourself to our new administrative assistant, Rebecca Watkins. She and her family live here in Milford. If you’re wondering about Mary, don’t worry she hasn’t gone far. She has joined the accounting staff to head up our new book keeping division and moved her desk to the back office. We are excited for both of them and wish them success in their new positions as we move forward into the new year.
If you know of someone who would benefit from this information please let us know and we will send it right away. It is also available on our website. We look forward to hearing from you soon and assisting you with your tax and financial needs. As always, contact us if you have any questions.
Starkey & Company, P.A.
$900 BILLION COVID RELIEF PACKAGE – INDIVDUAL
Highlights of the year-end Covid-related legislation include:
- Additional unemployment assistance which provides 11 weeks of $300 per-week emergency unemployment benefits, an extension of expiring pandemic-related unemployment assistance, and protection for individuals who received pandemic-related unemployment benefit overpayments through no fault of their own and are now unable to repay the funds
- A second round of direct cash assistance payments of $600 for each family member, subject to certain family adjusted gross income limitations, with mixed-status families now eligible where only one spouse has a social security number
- Eligibility to use 2019 income to determine the earned income tax credit and the additional child tax credit
- A permanent reduction in the adjusted gross income threshold for medical expense deductions from 10 percent to 7.5 percent
- An expansion of the carryover and grace period policies relating to employees with unused amounts in their health and dependent care flexible spending accounts
- An increase in the income threshold at which the Lifetime Learning Credit phases out
- Permanent and temporary extensions of expiring tax provisions (“tax extenders”).
COVID-RELATED TAX RELIEF
Additional 2020 Recovery Rebates for Individuals and Amendments to Earlier Recovery Rebates
Sections 272 and 273 of the Covid-Related Tax Relief Act provide a refundable tax credit in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
The provision also provides for the Department of Treasury to issue advance payments based on the information on 2019 tax returns. Eligible taxpayers treated as providing returns through the non-filer portal in the first round of Economic Impact Payments, provided under the CARES Act, will also receive payments. The Treasury Department may issue advance payments for Social Security Old-Age, Survivors, and Disability Insurance beneficiaries, Supplemental Security Income recipients, Railroad Retirement Board beneficiaries, and Veterans Administration beneficiaries who did not file 2019 returns based on information provided by the Social Security Administration, the Railroad Retirement Board, and the Veterans Administration.
Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.
In general, taxpayers without an eligible social security number are not eligible for the payment. However, married taxpayers filing jointly where one spouse has a social security number (SSN) and one spouse does not are eligible for a payment of $600, in addition to $600 per child with an SSN. The provision aligns the eligibility criteria for the new round of Economic Impact Payments and the credit for the Economic Impact Payments provided by the CARES Act.
Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors. Additionally, the provision instructs the Treasury Department to make payments to the United States territories that relate to each territory’s cost of providing the credits.
Election to Use Prior Year Net Earnings from Self-Employment in Determining Average Daily Self-Employment Income for Purposes of Credits for Paid Sick and Family Leave
Section 287 of the Covid-Related Tax Relief Act provides an election for an individual who elects the credit for paid sick or family leave to use prior year net earnings from self-employment income, rather than current year earnings, in calculating the income tax credit available.
Clarification of Educator Expense Deduction for PPE
Section 275 of the Covid-Related Tax Relief Act requires the IRS to issue guidance or regulations providing that personal protective equipment (PPE) and other supplies used for the prevention of the spread of Covid-19 are treated as eligible expenses for purposes of the educator expense deduction. Such regulations or guidance will be retroactive to March 12, 2020.
Emergency Financial Aid Grants
Section 277 of the Covid-Related Tax Relief Act provides that certain emergency financial aid grants under the CARES Act are excluded from the gross income of college and university students. The provision also holds students harmless for purposes of determining eligibility for the American Opportunity and Lifetime Learning tax credits. The provision is effective as of March 27, 2020, the date of enactment of the CARES Act.
Application of Special Rules to Money Purchase Pension Plans
The CARES Act temporarily allows individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permits taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increases the allowed limits on retirement plan loans. Section 280 of the Covid-Related Tax Relief Act clarifies that money purchase pension plans are included in the retirement plans qualifying for these temporary rules. The provision applies retroactively as included in the CARES Act.
Election to Waive Application of Certain Modifications to Farming Losses
Section 281 of the Covid-Related Tax Relief Act allows farmers who elected a two-year net operating loss carryback prior to the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. This provision also allows farmers who previously waived an election to carry back a net operating loss to revoke the waiver. These clarifications are aimed at eliminating unnecessary compliance burdens for farmers. The provision applies retroactively as if included in the CARES Act.
The Disaster Tax Relief Act permanently extends the following tax provisions:
(1) Reduction in medical expense deduction floor from 10 percent of adjusted gross income (AGI) to 7.5 percent of AGI
(2) Energy efficient commercial buildings deduction
(3) Exclusion from income of certain tax benefits for volunteer firefighters and emergency medical responders
(4) Repeal of deduction for qualified tuition and related expenses, replaced with increased income limitation on lifetime learning credit
The Disaster Tax Relief Act extends the following tax provisions through December 31, 2025:
(1) Exclusion from gross income of discharge of qualified principal residence indebtedness; and
(2) Exclusion from income for certain employer payments of student loans;
The Disaster Tax Relief Act extends the following tax provisions through December 31, 2023:
(1) Residential energy-efficient property credit
(2) Energy credit under Code Sec 48
The Disaster Tax Relief Act extends the following tax provisions through December 31, 2021:
(1) Credit for electricity produced from certain renewable resources
(2) Treatment of mortgage insurance premiums as qualified residence interest
(3) Credit for health insurance costs of eligible individuals
(4) Nonbusiness energy property credit
(5) Qualified fuel cell motor vehicles credit
(6) Energy efficient homes credit
Temporary Special Rule for Determination of Earned Income
Section 211 of the Disaster Tax Relief Act provides that, if the earned income of a taxpayer for the taxpayer’s first tax year beginning in 2020 is less than the taxpayer’s earned income for the preceding tax year, the credits allowed under Code Sec. 24(d) (i.e., child tax credit) and Code Sec. 32 (i.e., earned income tax credit) may, at the taxpayer’s election, be determined by substituting the taxpayer’s earned income for the preceding tax year for the earned income for the taxpayer’s first tax year beginning in 2020. For these purposes, in the case of a joint return, the earned income of the taxpayer for the preceding year means the sum of the earned income of each spouse for the preceding tax year.
Certain Charitable Contributions Deductible by Non-Itemizers
Section 212 of the Disaster Tax Relief Act provides that, in the case of any tax year beginning in 2021, if an individual does not elect to itemize deductions, the deduction under Code Sec. 170 for a charitable contribution equals the deduction, not in excess of $300 ($600 in the case of a joint return), which would be determined under Code Sec. 170 if the only charitable contributions taken into account in determining the deduction were contributions made in cash during the tax year to an organization described in Code Sec. 170(b)(1)(A) and not (1) to a Code Sec. 509(a)(3) supporting organization, or (2) for the establishment of a new, or maintenance of an existing, donor advised fund (as defined in Code Sec. 4966(d)(2)). In addition, the penalty under Code Sec. 6662(a) for an underpayment attributable to an overstatement of the deduction for charitable contributions by non-itemizers is increased from 20 percent to 50 percent of the underpayment.
Modification of Limitations on Charitable Contributions
The increase of the limitation for the deduction for donations of food inventory in a tax year from 15 percent to 25 percent under Section 2205 of the CARES Act is extended by Section 213 of the Disaster Tax Relief Act through 2021. Under the CARES Act, the increased deduction limitation for food inventory donations is available only to taxpayers other than C corporations.
Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements
Section 214 of the Disaster Tax Relief Act provides that, for plan years ending in 2020 or 2021, a plan that includes a health flexible spending arrangement or dependent care flexible spending arrangement will not fail to be treated as a cafeteria plan under the Code merely because the plan or arrangement permits participants to carry over any unused benefits or contributions remaining in any such flexible spending arrangement from the 2020 or 2021 plan year to the next plan year.
In addition, a plan that includes a health flexible spending arrangement or dependent care flexible spending arrangement will not fail to be treated as a cafeteria plan under the Code merely because the plan or arrangement extends the grace period for a plan year ending in 2020 or 2021 to 12 months after the end of such plan year, with respect to unused benefits or contributions remaining in a health flexible spending arrangement or a dependent care flexible spending arrangement.
A plan that includes a health flexible spending arrangement will not fail to be treated as a cafeteria plan under the Code merely because the plan or arrangement allows an employee who ceases participation in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which such participation ceased (including any grace period).
DISASTER TAX RELIEF
Disaster Tax Relief in General
Section 301 of the Disaster Tax Relief Act provides relief for individuals and businesses in Presidentially declared disaster areas for major disasters declared on or after January 1, 2020, through February 25, 2021. The relief generally applies to incident periods beginning on or after December 28, 2019. It does not apply to areas for which a major disaster has been so declared only by reason of Covid-19.
Special Disaster Related Rules for Use of Retirement Funds
Section 302 of the Disaster Tax Relief Act provides an exception to the 10 percent early retirement plan withdrawal penalty for qualified disaster relief distributions (not to exceed $100,000 in qualified disaster distributions cumulatively). Amounts withdrawn are included in income ratably over 3 years or may be recontributed to a retirement plan to avoid taxable income and restore savings. It also allows for the re-contribution of retirement plan withdrawals for home purchases cancelled due to eligible disasters, and provides flexibility for loans from retirement plans for qualified disaster relief.
Other Disaster Related Tax Relief Provisions
Section 304 of the Disaster Tax Relief Act temporarily suspends limitations on the deduction for charitable contributions associated with qualified disaster relief. With respect to uncompensated losses arising in the disaster area, the provision eliminates the current law requirements that personal casualty losses must exceed 10 percent of adjusted gross income to qualify for deduction. The provision also eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief.