TAX LAW UPDATE & INFORMATION
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Be on the Alert for more updates to the Tax Law Changes section. You can always call us to discuss your particular questions and needs. For further explanations of how any of these changes may effect you or your business, please call our office for an appointment to discuss your situation further.
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Employee Travel Reimbursements - Effective October 1, 2020
The M&IE rates have changed effective October 1, 2020. The M&IE per diem rates are $55, $56, $61, $66, $71, and $76 depending on the locality the taxpayer sleeps that night. The full per diem tables by state and city can be found at www.gsa.gov
The High/Low cost amounts are now $292 and $198 with the M&IE portion deemed to be $71 and $60, respectively.
The special M&IE per diem rate for taxpayers in the transportation industry for travel in the continental United States stays at $66
IRS ALLOWABLE MILEAGE RATES (in place of actual vehicle expenses)
Rates in cents per mile are as follows:
Business 57.5
Charitable 14
Medical & Moving 17
Charitable Giving
’Tis the season to be charitable. Charities
of all stripes are struggling, in large part because
of the coronavirus pandemic. Charitable organizations,
such as food pantries, animal protection groups,
homeless shelters, churches, colleges and universities,
and arts organizations, need help more than ever.
Giving to charity not only helps the donee…
The donations can be a great tax write-off.
Here are tips to supercharge your deduction.
Bunch into 2020 the charitable donations
that you would usually give over multiple years.
The goal is for your charitable write-offs, along with any other itemized deductions
you plan to take on Schedule A, to exceed the standard deduction for your filing status.
That’s because taxpayers can either itemize or take standard deductions, but not both.
If you want to donate valuable property, contribute appreciated investments,
such as stocks or shares in mutual funds. Provided you have owned the property
for more than a year, you can generally write off the full value if you itemize.
Don’t donate property that has declined in value since you acquired it.
Donate cash to make use of two new tax rules that apply only for 2020.
Nonitemizers can claim an above-the-line deduction of up to $300
for charitable cash contributions that they make in 2020. This means that for 2020,
individuals who don’t itemize on Schedule A can take both the standard deduction
and a deduction for up to $300 in cash contributions. Note that this extra write-off
is per return, meaning couples who file jointly can deduct only $300, not $600.
The 60%-of-AGI limit on charitable gifts of cash by individuals is suspended.
Gifts to donor-advised funds and private nonoperating foundations are excluded.
The relief applies only to charitable cash contributions that you make this year
and deduct on Schedule A of the 2020 Form 1040 or 1040SR that you file in 2021.
Carryovers of excess charitable contributions from prior years don’t get the break.
If you’ve been contemplating a large cash gift to charity, now’s the time to do it.
Give to an IRS-recognized section 501(c)(3) charitable organization.
Use IRS’s online “Tax Exempt Organization Search” tool to verify whether a group
is tax-exempt and whether it is eligible to receive tax-deductible contributions.
Watch out for bogus charities and solicitors. IRS is warning taxpayers
to be alert both to scammers who claim to solicit funds for coronavirus victims
and to charities with names similar to well-known charitable institutions.
Donations you make to individuals are not tax-deductible.
Ditto for donations you make through personal fund-raising websites
that are earmarked for a single person or small group. This includes contributions
made on sites to assist with a person’s medical costs or to help a family
who is struggling because of the coronavirus pandemic or a natural disaster.
But you can deduct gifts to 501(c)(3) groups that solicit donations on those sites.
Gifts
Don’t waste the annual gift tax exclusion. You can give up to $15,000
to each child, grandchild or any other person in 2020 without having to pay gift tax
or tap your lifetime estate and gift tax exemption. Your spouse can also give $15,000
to the same donee, making the tax-free gift $30,000. For example, if you are married
with three children and five grandkids, you and your spouse can give up to $30,000
in 2020 to each relative without gift tax consequences. That’s $240,000 in tax-free gifts.
Any unused exclusion amount is gone. You can’t use more next year to make up for it.
Annual gifts over the exclusion amount will trigger filing of a gift tax return for the year.
But no gift tax will be due unless your total lifetime gifts exceed $11,580,000.
If you’ve been considering a large gift to a family member, now’s the time to do it.
Contribute to a 529 plan. You can shelter from gift tax up to $75,000
in contributions per beneficiary this year ($150,000 if your spouse agrees).
If you put in the maximum, you’ll be treated as gifting $15,000 (or $30,000)
to that beneficiary in 2020 and in each of the next four years…2021 through 2024
Social Security:
Social Security recipients get a 1.3% increase in their benefits in 2021.
The earnings test limits head up. Individuals who turn 66 next year
will not lose any benefits if they earn $50,520 or less before they reach that age.
Individuals who are 62 through 65 by the end of 2021 can make up to $18,960
before they lose any benefits. There is no earnings cap once a beneficiary turns 66.
The amount needed to qualify for coverage increases to $1,470 a quarter. The amount of earnings subject to Social Security taxes increases to $142,800 (up from $137,700 for 2020). This translates into an additional $316.20 of social security tax withholding. The employer would also match that amount and the self-employed would be subject to both parts at $632.40.
The amount of earnings required to be subjected to Social Security taxes in order to receive a quarter of coverage increases to $1,470 (up from $1,410).
Earnings limitations for taxpayers who have not reached full retirement age (before having to repay Social Security benefits) increases to $18,960 ($1,580/month) [up from $18,240 ($1,520/month)].
Earnings limitations for taxpayers who reach full retirement age in the current year (before having to repay Social Security benefits) increases to $50,520 ($4,210/month) [up from $48,600 ($4,050/month)]. (“Full retirement age” is age 66 for those born in 1943-1954 and age 66 years and 2 months for those born in 1955.)
The amount of the SSI Federal Payment Standard increases to $794/month (up from $783/month). For a married couple this increases to $1,191 (up from $1,175/month). The SSI Student Exclusion Limits increases to $1,930/month with an annual limit of $7,770 (up from $1,900/month with the annual limit of $7,670).
The Substantial Gainful Activity earnings increase to $1,310/month for non-blind disabled recipients (up from $1,260) while the blind disabled recipient amount increases to $2,190 (up from $2,110 month). The Trial Work Period earnings increase to $940/month (up from $910/month).
The full Social Security Administration Press Release (including a link to the Fact Sheet) can be found by going to ssa.gov, clicking on Press Releases, and opening the Press Release from October 13, 2020, titled “Social Security Announces 1.3 Percent Benefit Increase for 2021.”
Retirement Plans:
Many key dollar limits on retirement plans will remain the same in 2021.
The maximum 401(k) contribution stays at $19,500. People born before 1972
can contribute an extra $6,500. These limits apply to 403(b) and 457 plans as well.
The cap on SIMPLEs is $13,500. Individuals age 50 and up can put in $3,000 more.
Anyone making over $130,000 is highly paid for discrimination testing.
Some amounts are higher. The payin limitation for defined-contribution plans
rises to $58,000. And retirement plan payins can be based on up to $290,000 of salary.
The 2021 payin cap for traditional IRAs and Roth IRAs stays steady at $6,000.
But the income ceilings on Roth IRA payins go up. Contributions phase out
at AGIs of $198,000 to $208,000 for couples and $125,000 to $140,000 for singles.
Also, deduction phaseouts for traditional IRAs start at higher levels in 2021,
from AGIs of $105,000 to $125,000 for couples and $66,000 to $76,000 for single filers.
If only one spouse is covered by a plan, the phaseout zone for deducting a contribution
for the uncovered spouse starts at $198,000 of AGI and ends at $208,000.
Filers get a new form to report a COVID-19 retirement-related easing:
Coronavirus-related distributions from workplace retirement plans and IRAs.
The 10% fine on pre-age-59½ payouts from retirement accounts in 2020 is waived
on up to $100,000 of coronavirus-related distributions from 401(k)s, 403(b)s and IRAs.
Tax on these distributions can be paid over three years, beginning with the payout year,
unless the individual elects to pay the tax all at once. Amounts recontributed
within the three-year time span won’t be taxable. They will be treated as rollovers.
Individuals use Form 8915-E to spread the tax on these payouts.
Income tax paid on a distribution that is later rolled over within three years
of the payout can be recovered by filing an amended return on Form 1040-X.
Good news for owners of traditional IRAs who turn age 72 this year.
You needn’t take your first required minimum distribution. The CARES Act
waives RMDs for 2020 from traditional IRAs, 401(k)s and many other retirement plans.
If you turn 72 in 2020, your first RMD, which would generally be due by April 1, 2021,
is also waived, according to the staff of the bipartisan Joint Com. on Taxation.
Thus, your first RMD would be for 2021, which must be paid to you by Dec. 31, 2021
Stimulus Payments
Nonfilers get more time to request stimulus payments on IRS’s website.
The nonfilers tool is for individuals who are eligible for a stimulus check
but did not file a 1040 for 2018 or 2019 because their income was under the threshold
to file a return. IRS has extended the original Oct. 15 date for filling in the information
to Nov. 21. If you believe you qualify to use the nonfilers tool, go to www.irs.gov
and look for the box “Non-Filers: Enter Payment Info Here” to begin the process.
Health Care
IRS released proposed regulations allowing medical deductions for payments for direct primary care arrangements (as in concierge medical services) and health care sharing ministries, including if paid via HRA reimbursements.
Business Owners
Businesses get final rules on meal and entertainment expense write-offs.
The regulations closely mimic proposed guidance issued earlier this year,
which we wrote about in our March 6 Letter. Although entertainment expenses
are not deductible, IRS reiterated that food and drinks usually aren’t entertainment.
Among the topics addressed: Activities that constitute entertainment.
Meals purchased at an entertainment event. Client and employee business meals.
Employee meals while on travel. The cost of food made available to the public.
And meals provided to workers at an employer-operated, on-premise eating facility
PAYROLL TAXES
The Social Security wage base rises next year to $142,800, a $5,100 hike.
The Social Security tax rate on employers and employees stays pat at 6.2%.
Both will continue to pay the 1.45% Medicare tax on all compensation, with no cap.
Individuals also pay the 0.9% Medicare surtax on wages and self-employment income
over $200,000 for singles and $250,000 for couples. The surtax doesn’t hit employers.
The nanny tax threshold is $2,300 for 2021, a $100 increase from 2020.
Employers can truncate employee Social Security numbers on W-2s
Depreciation Changes
Business assets can now be expensed (section 179) up to $1M, indexed for inflation.
Just as important 100% bonus depreciation has been extended through tax year 2022.
Section 179 will generally be more advantageous to use in Virginia as bonus has not been allowed.
Qualifying for Section 179 now include Commercial Roofs, HVAC, Security & Fire Systems, Personal Property Rentals, and Qualified Improvement Property.
Educational Fringe Benefits
CARES Act Section 2206 modifies IRC Sec. 127 by allowing an employer to pay
up to $5,250 in 2020 of an employee’s student loan obligation on a tax-free basis.
Any money paid by the employer toward the loan reduces the employee’s student
loan interest deduction. IRC Sec. 127 is the general fringe benefit allowing an employer to pay for educational expenses, under a written educational assistance program. No more than 5% of the amounts paid or incurred can be for shareholders (or their spouses or dependents).
employer.
Virtual Currency
Virtual currency is treated as property
for tax purposes. This includes bitcoin and other forms
of similar digital representations of value that act as a substitute for real currency.
Taxpayers who sell or exchange virtual currency will recognize gain or loss
on the transaction. The profit or loss will be capital gain or loss if the bitcoins
were held for investment, similar to stocks or bonds. If you held the virtual currency
for more than one year before selling or exchanging it, then the capital gain or loss
is long-term and subject to preferential tax rules. Otherwise, it is short-term.
Real Estate
The passive-loss rules are strict for short-term rentals of real estate…
average rentals of seven days or less. A couple owned beachfront property
that they rented out over the years for an average rental period of seven days or less.
They paid a management company to get tenants, collect rents, clean and the like.
The couple visited the property occasionally to buy supplies and to make repairs.
According to the Tax Court, the couple did not materially participate in the property
and can’t deduct the losses. The couple’s claim that they devoted at least 100 hours
a year to the activity and that their participation was more than anyone else’s,
even the management firm’s, didn’t fly with the Court (Lucero, TC Memo. 2020-136).
HSA Limits - 2021
Single coverage is $3,600 (up from $3,550 for 2020)
Family coverage is $7,200 (up from $7,100 or for 2020)
(The catch-up amount for taxpayers reaching age 55 or older by the end of the year remains at $1,000.)
** A HIGH DEDUCTIBLE health plan is a plan that has an annual deductible that is not less than: $1,400 for self-only coverage or $2,800 for family coverage
The annual OUT-OF-POCKET expenses (deductibles, co-payments, and other amounts, but not premiums) cannot exceed:
$7,000 for self-only coverage or $14,000 for family coverage