A highlight of a few Tax Law Changes that are likely to impact you…
Individual Taxes
Economic impact payments. The $1,200 paid to each eligible taxpayer during 2020 was considered an advance of a 2020 tax credit. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance payment received. If you did not receive the full payment in 2020, you are entitled to claim the difference as a credit on your 2020 return.
Unemployment Benefits are taxable income on your federal tax return. If you did not elect withholding on the benefits, you should expect to owe tax in April 2021. State tax rules vary by state, with the majority of states taxing unemployment benefits.
2020 Withholding and Estimated Tax Payments. If your payroll taxes were under-withheld last year and you didn’t like having tax due, you may want to file a new Form W-4 with your employer. The 2020 Form W-4 changed from prior year versions. If your income has dropped because of reduced work hours, a layoff, or a shutdown due to Covid-19, your estimated tax payments may need to be adjusted.
Standard Deduction. The 2020 standard deduction is $12,400 for singles, $18,650 for heads of household, and $24,800 for married filing joint, which means fewer taxpayers will benefit from itemizing deductions. Under the 2020 CARES Act, a $300 deduction for cash contributions is added to the standard deduction.
Home Office Expense. Even if your employer requires you to work remotely because of COVID-19, a W-2 employee may not deduct home office expenses, as all W-2 employee business expenses are currently nondeductible. If you are self-employed, the rules are similar to prior years.
Pension and IRA Reform. The SECURE act passed earlier this year changed:
- the required minimum distribution (RMD) starting age from 70½ to 72 years,
- ends the 70½ age limit for a contribution to an IRA (with earned income),
- reduces the non-spousal “stretch” period to 10 years, and,
- requires employers to offer part-time employees 401(k) participation.
Legislation passed in response to the COVID-19 pandemic waives all RMDs for the calendar year 2020. You may take a 2020 distribution from your IRA or pension plan, but you are not required.
A few items to consider from the SECURE act changes are:
- If you named your estate as the beneficiary of your pension or IRA, the elimination of the “stretch” provisions for non-spousal beneficiaries means you may need to discuss removing the Trust as the beneficiary of the accounts with your estate planning attorney.
- If you turn 70½ in 2020, your RMD can be delayed until you turn 72, and
- the ability to contribute to your IRA regardless of your age, if you have earned income
COVID-19 related Distributions. The CARES Act allows individuals affected by COVID-19 to withdraw monies from their retirement plans at any time during 2020, including amounts withdrawn before the enactment.
- Qualified individuals could be a taxpayer, spouse, or someone that resides with them who suffered directly from the virus, job loss, income loss, or lost out on a job.
- The taxable portion of the withdrawal can be spread over three years (2020, 2021, and 2022), or the withdrawals can be paid back to the plan within the same three-year period. Neither situations are subject to the 10% penalty for early distribution – this treatment is only available for withdrawals of $100,000 or less
- The taxpayer self-certifies they qualify and will add Form 8915-E to report qualifying COVID-19 distribution treatment on their return.
Arizona Tax Credits. Arizona Individual Tax Credits allow the taxpayer to designate the use of their State Income Tax dollars. Arizona State tax credits are available like prior years with slight increases in the maximum limits and new organizations that qualify. Please see the State of Arizona website for updates or contact our office. A list of the Arizona Tax credits can be found on the Resources page on our website.
Business Taxes
COVID-19 Programs:
- Sick Pay and Family Leave. The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The government reimburses the employer for the cost of the leave through a temporary payroll tax credit. If you are a self-employed, Schedule C filer, specific provisions may qualify you for these credits. These sick paid wages cannot be used in the PPP Loan (discussed below) forgiveness calculations.
- Employee Retention Credit. The CARES Act allows qualified employers to receive a 50% payroll tax credit up to $5,000 ($10,000 x 50%) per employee for qualified wages paid after Mar. 12, 2020, and before Jan. 1, 2021. If the credit amount exceeds the employer’s withholding tax liability, the excess is refundable. This credit cannot be used if the employer received a PPP Loan (discussed below).
- SBA Paycheck Protection Program Loan. The CARES Act made SBA loans available for cash-strapped businesses suffering from the nationwide economic impact of COVID-19. The Paycheck Protection Program (PPP) loan was meant to help companies to continue paying their employees during the pandemic. The PPP loan may be forgiven if the loan proceeds were spent on payroll costs and certain other qualifying business expenses. Congress has not finalized the deductibility of the expenses incurred and paid with PPP Loan funds. Due to the unknowns about the deductibility of expenses and the forgiveness application’s timing, there is a high possibility your business tax return will be placed on an extension to avoid amending the return later in the year. If you participated in the PPP loan, please let your tax preparer know to ensure we follow the most up to date legislation regarding expenses.
- Net operating losses. The CARES Act provides for net operating losses (NOLs) arising in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021, to be carried back to the five tax years preceding the tax year of such loss to offset taxable income in those prior years. The NOL change is retroactive from previous law and may require an amended return.
- Employer Payroll Tax Delay. Under the CARES Act, employers can defer paying the 6.2% employer share of the Social Security tax (but not the 1.45% employer share of the Medicare tax) through the end of 2020. The employee share of these taxes is not eligible for deferral. The deferred tax would be payable over two years, with half paid by Dec. 31, 2021, and the other half by Dec. 31, 2022. If you did not include this provision in your payroll calculations earlier in 2020, it might make sense to amend your quarterly payroll reports to allow for the deferral.
- Qualified disaster relief payment as discussed in Code Section 139(b) includes any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Qualified disaster relief payments are not included as wages to the employee, even those paid when they do not provide services. These payments might help employees working from home with a deductible benefit to the employer and non-taxable income to the employee.
Bonus depreciation. The 100% bonus depreciation allowance for qualifying property placed in service after Sep. 27, 2017, and before Jan. 1, 2023, continues to be in place. A phase-out of the deduction begins Jan. 1, 2023. The requirement that the original use of the qualified property must begin with the taxpayer has been removed. Thus, bonus depreciation is allowed on the purchase of new or used property.
Section 179 expensing. The §179 expensing amount is $1.04 million, and the investment limitation is $2.59 million. Some property, such as a roof on nonresidential property, can qualify for a §179 expensing deduction.
Tax-deferred exchanges. The tax-deferred exchange rules in §1031 apply only to real property. Personal
property, such as autos, machines, tractors, equipment, etc., may no longer qualify under the tax-deferred
exchange rules.
Entertainment expense deductions have been repealed; therefore, the cost of tickets to concerts, football games, or the ballet is no longer deductible.
Arizona Corporate Tax Credit. Like the individual Arizona Private Tuition Organization credit, there is a credit available to C and S-Corporations. C or S- Corporations interested in donating towards the corporate credit must contact a School Tuition Organization directly to discuss applying for a corporate credit donation pre-approval.
Estate Planning
The current estate tax exemption is $11,580,000 for estates of decedents dying in 2020. Due to the potential future reduction of this exemption, including the portability of the unused exemption of the first spouse to die, now is an excellent time to revisit your estate plans to determine if your plans are up to date and your gifting objectives need revising.
