1. The deadline to repay deferred payroll taxes is extended.
Taxpayers now have until Dec. 31, 2021, to repay deferred payroll taxes. Therefore, as compared to expectations prior to the passage of the Appropriations Act, affected employees will have modestly higher-than-expected cash flow from Jan. 1 through April 30, and modestly less-than-expected cash flow from May 1 through Dec. 31.
2. Charitable contribution deductions are extended.
The above-the-line deduction for cash contributions to charity included in the CARES Act has been extended through 2021. The deduction was capped at $300 for single and joint filers. For 2021 only, the marriage penalty has been eliminated, so joint filers will be able to claim a deduction of up to $600, Levine noted. One key thing to keep in mind: “You cannot itemize your return and claim this deduction.”
Also extended through 2021 is the ability to deduct up to 100% of an individual’s adjusted gross income as a qualified contribution when making an all-cash contribution to a charity that is not a donor-advised fund or a 509(a)(3) supporting organization.
3. The hurdle rate for medical expense deductions is set to 7.5% of AGI.
Section 101 of the law provides a “welcome change” that tax planners have been yearning for, Levine said. It “permanently” restores the “hurdle rate” for medical expense deductions to 7.5% of AGI. In recent years, the hurdle rate had “oscillated between” 7.5% of AGI and 10% of AGI, and for a while, even depended upon a taxpayer’s age, he noted.
4. You can carry forward unused FSA balances.
Flexible spending account balances from 2020 will be carried into 2021. This year, due to COVID-19, many individuals miscalculated the amount of money they would spend. Any remaining balances at the end of 2021 will be rolled forward into 2022.
Notably, however, the language of the new law says a plan will not fail to qualify and receive its intended tax benefits because it “permits” plan participants to roll forward such funds. Therefore, employees should be encouraged to reach out to their HR departments to see whether the relief applies to their plan. For 2021 only, Section 214 also authorizes FSA plans to allow participants to modify future contributions to the FSA.
5. Business meals at restaurants are 100% tax-deductible.
In an effort to encourage business spending at restaurants, the law allows for a full deduction for such expenses in 2021 and 2022.
6. Tuition deductions are streamlined.
The tuition and related expenses deduction has been replaced by an expanded — and more generous — lifetime learning credit. Congress has “simplified our lives” with the new plan, Levine said. Starting in 2021, the lifetime learning credit phaseout range will be aligned with the American Opportunity Tax Credit phaseout range. Both credits will phase out from $80,000-$90,000 for single filers, and from $160,000-$180,000 for joint filers.
7. Earned income from 2019 can be used to determine eligibility for 2020 earned income tax credit and additional child tax credit.
Section 211 of the law allows individuals to use their 2019 earned income to calculate the amount they will receive for either credit for 2020. Significantly, there is no requirement of an intention to work. Therefore, even those who intentionally retired in, or voluntarily took off large parts of 2020 — or even those who left the workforce in 2019 — may be able to receive one or both credits for 2020, Levine said.
8. Exclusion for employer payments of student loans is extended through 2025.
Initially authorized by the CARES Act in March for 2020 only, the ability for an employer to provide up to $5,250 of annual tax-free education assistance used to pay the principal or interest on an employee’s qualified student debt is extended through 2025. These payments can be made direct to a lender or they can be made to the employee, who can then use the payments to pay down their own student debt, Levine noted.
9. The exclusion for the discharge of qualified principal residence debt is extended through 2025.
The new law extends the period in which forgiven debt attributable to a primary residence may be excluded from income through 2025 for those who go through a short sale and end up resolving their outstanding mortgage balance with a foreclosure or sale of the home for less than the remaining balance. However, starting in 2021, the maximum amount of debt that can be discharged has been reduced from $2 million under prior law to $750,000 for joint filers, and from $1 million under prior law to $375,000 for single filers.
10. There is no additional relief on RMDs.
It is significant that some widely discussed potential changes were not included in the new legislation. They include expected additional relief on required minimum distributions from retirement accounts, Levine noted.
Now that President Donald Trump has signed the spending bill containing the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which contains $900 billion in pandemic relief, there are several tax-related items in the bill that advisors and their clients need to know.
The legislation includes a variety of personal income tax planning relief provisions, Jeffrey Levine, Buckingham Wealth Partners director of advanced planning and Kitces.com director of advisor education, said Wednesday during the a Kitces webinar “Coronavirus Stimulus Legislation: What Advisors Should Know About The Latest Stimulus Bill,” as well as in a report released after the event.
To be fair, “I don’t know that there’s anything in this bill that I would call, like, earth-shattering or game-changing from a personal financial planning perspective,” Levine told viewers. “But there are a lot of things to be aware of here and, inevitably, clients will qualify for one or more of these things, so you definitely want to be aware of what they are — especially the tax ones, because everybody loves paying lower taxes, right? Save the client $50 on taxes and they think you’re a hero.”
See the gallery above for 10 top tax takeaways from the new legislation that all advisors and their clients should know.
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