There are a lot of tax provisions and updates for individuals and businesses that have been included in the Act that was signed into law on Sunday Dec 27, 2020. These are only some important ones that will probably affect most taxpayers.
I am urging everyone to choose their tax accountant very carefully this year. Make sure he/she is credentialed, licensed, and well versed with the ongoing tax updates. Stay away from seasonal/unprofessional and ghost preparers.
Recovery Rebates/Direct Stimulus Payments
$600 per adult and dependent child. Other dependents do not qualify. Structured as an advance credit for 2020 tax year. Any unreceived amount will be claimed with 2020 tax return based on 2019 income. Phase out Gross income for 2019 $75K and $150K MFJ. Join filers where one of the married persons is a nonresident alien are eligible to receive the payments, and retroactively for the first payment under CARES Act.
Teacher Expenses
The act requires that the Treasury issues regulations providing that personal protective equipment and other supplies used to prevent the spread of COVID-19 qualify as an educator expense deduction. This will apply retroactively to March 12, 2020.
Earned income tax credit and Child tax credit – Temporary change in the calculations.
The bill allows taxpayers to refer to earned income from the immediately preceding tax year (2019) for purposes of determining the credits. The calculation of both credits can result in a lower credit amount in a year where there is a reduction in income. Taxpayers can choose the most beneficial credit for them.
Charitable Contribution Extensions and Limitations updates
For individuals, the limitation on charitable contributions was increased from 60 percent of the contribution base to 100 percent for 2020. Also, individual taxpayers can claim a $300 above-the-line charitable contribution on 2020 tax returns, with their standard deductions. In addition, the provision increased the maximum amount that may be deducted in 2021 to $600 for married couples filing jointly.
PPP and Business Expenses
Business expenses paid with the proceeds of a forgiven PPP loan will be fully deductible.
Exclusions of Grants and Loan Forgiveness
The act clarifies that certain financial aid received by college students under the CARES Act, as well forgiveness of Economic Injury Disaster Loans (EIDL) granted to small businesses under the CARES Act are excluded from income. These are non-taxable grants.
Business Meals Deduction
The deduction allows for businesses to deduct the full amount (100%) of meals, including beverages, provided at a restaurant. The deduction is allowed for 2021 and 2022 only…
Tax Credits
The employer credit for paid sick and family leave, originally part of the Families First Coronavirus Response Act, is extended. The credit was originally set to expire at the end of 2020, but the covered period is extended to March 31, 2021.
*The bill also allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit.
The act extends the employee retention tax credit (ERTC) to apply to compensation paid to a covered employee through June 30, 2021. The credit, originally part of the CARES Act, was set to expire with respect to compensation paid after December 31, 2020.
AGI floor for medical and dental expense
AGI floor has been permanently extended to be 7.5% of Adjusted Gross Income (AGI), instead of 10%.
2020 tax returns will require a lot more reconciliations and special treatments, so make sure you choose licensed and credentialed tax expert to help you. We, at Taxville Financial, will help you deal with all these changes and better understand and plan for better returns.
Michael Zachary, EA CPHRC