2020 END-OF-YEAR TAX UPDATE
The 2019 filing season in 2020 was unlike any other. Due to COVID-19 and the California fires, the filing season was extended until December 15, 2020.
The most important tax legislation was the CARES Act (Coronavirus Aid, Relief and Economic Security Act). Many of its provisions apply to both individual and business tax returns for 2020 and also affect 2021 tax planning.
A year-end COVID-19 relief bill, signed December 27, includes a second round of unemployment benefits, economic impact payments, small business loans, and other taxrelated measures.
Individual Income Tax Law Changes
Pension and IRA Changes –
• For 2020 the usual required minimum distribution (RMD) became voluntary for qualified plans and IRAs. This provision is unlikely to be available to taxpayers in 2021. Therefore, certain taxpayers may have more income in 2021 than 2020. If this applies to you, we recommend preparation of a 2021 income tax projection.
• If COVID-19-related, premature distributions of up to $100,000 are not subject to the usual 10 percent penalty. Similarly, COVID-19-expense-related loans of up to $100,000 can be taken from these retirement plans without penalty if repaid in up to three years.
• Any taxpayer born after July 1, 1949 can wait until age 72 to take their first required minimum distribution.
Itemized Deductions –
• Starting in 2020, individuals who cannot itemize will be able to claim a $300 deduction for most charitable contributions.
• Cash contributions can now be deducted up to 100 percent of adjusted gross income.
• Medical expenses continue to qualify as an itemized deduction if they exceed 7.5 percent of adjusted gross income. (This amount was previously scheduled to change to 10 percent of adjusted gross income.)
• Under the Tax Cuts and Jobs Act (TCJA) the SALT (State and Local Taxes) deduction is limited to $10,000 as an itemized deduction. State taxes deducted on a corporate or partnership tax return are exempted from the individual SALT limitation.
Unemployment Benefits – Under the CARES Act, additional unemployment benefits up to $600 per week were provided to qualified individuals. These benefits are taxable on the US return and do not have withholding deducted. The year-end COVID-19 relief bill provides for a supplemental $300 in benefits for eleven additional weeks.Kiddie Tax – Starting with 2020 returns, children under age 19 and full-time students under age 24 are taxed at the parents’ tax rate(s) on investment income over $2,200.
Crypto Currency Transactions – The IRS has ramped up the audit of crypto currency transactions. If you are involved in substantial crypto currency transactions, please call to review this with Bob or Janelle.
Economic Impact Payment (EIP) – Some taxpayers received EIP stimulus checks of up to $1,200 for single individuals and $2,400 for married couples, plus $500 for each qualifying child under age 17. The IRS based these payments on 2018 or 2019 income (base year). The year-end COVID-19 relief bill provides for an additional payment of $600 for single individuals and $1,200 for married couples. The qualifying child payment is $500.
Student Debt – The CARES Act paused all payments for student loans, set interest rates at 0 percent, and halted the collection of past due student loan debt. These changes apply to the period between March 13, 2020 and January 31, 2021.
Independent Contractors – Beginning in 2020, independent contractors will receive a new form 1099-NEC. Rules for independent contractors are complicated. If you want to know how this affects you, please call to schedule a meeting with Bob or Janelle.
Business Tax Law Changes
Payroll Protection Plan (PPP) and Economic Injury Disaster Loans (EIDL) – The CARES Act provided for forgivable SBA (Small Business Administration) loans for applicable sole proprietorships, partnerships, corporations, and exempt organization. PPP loans helped provide a lifeline for businesses affected by COVID-19. Congress determined that if these loans are forgiven, the underlying payroll, rent and utilities are also deductible on the 2020 tax returns. The year-end COVID-19 relief bill provides for a second round of PPP loans for businesses severely affected by COVID-19. If you have any questions regarding these loans please call Bob or Janelle. The CARES Act provides for an immediate infusion of up to $10,000 for a small business as an Economic Injury Disaster Loan Advance (EIDL). The advances are tax-free under the year-end relief bill. The act also provides for low interest on traditional EIDL loans to a business affected by COVID-19.
Bob was featured at town hall events for three members of Congress and their constituents, explaining and responding to questions about PPP and EIDL loans. He has also provided training on this topic for professionals through the AICPA.
Payroll credits – The CARES act provides for several tax credits and payroll tax benefits, including: Paid Sick Leave Credit, Paid Family Leave Credit, and Delay of Payroll Tax Payments. These benefits have complex provisions and applicability. If you would like to know how they may apply to your business, contact Bob or Janelle.
Net Operating Losses (NOL) – The CARES Act provides that net operating losses can be carried back up to five years. NOLs may also be used to offset up to 100 percent of taxable income beginning in 2021.
Qualified improvement property (QIP) – QIP is now eligible for bonus depreciation. The most common QIP is leasehold improvements for a tenant.
Health Insurance Mandate – Effective January 1, 2020, California residents are required to maintain minimum health coverage for themselves and their families. The maximum penalty for noncompliance is $750. (The Federal penalty was eliminated in 2019.)
Proposition 19 Property Tax Reassessment (Passed in November 2020) –
• Prop 19 allows eligible homeowners (persons over 55 years old, subject to a wildfire, or with severe disabilities) to transfer their property tax assessments anywhere within California, and it allows tax assessments to be transferred to a more expensive home with an upward adjustment. Previous law allowed only one such transfer per lifetime. Now the number of transfers is unlimited.
• The property tax for inherited homes that are not used as principal residences by a nonspouse heir (such as second homes or rentals) will be reassessed at market value. When the inherited property is used as the recipient’s principal residence the first $1,000,000 of increase in appraised value is exempt from re-appraisal.
• If you are considering transferring title of your property to a family member to limit reassessment, please contact us beforehand as this may have significant tax consequences.
Employee vs Independent Contractor –
• AB 2257 expands the list of businesses and occupations that are exempt from the tests that define an independent contractor.
• Proposition 22, which passed in November 2020, provided that Uber, Lyft and DoorDash may continue to treat drivers as independent contractors.
To determine how any of these changes will affect you, contact us to request a tailored analysis of your 2020 and 2021 taxes and develop a strategy for reducing your tax liability. The best time to schedule this planning session is during January or after May 15.
We wish you a safe and happy New Year!
Bob Caplan and Janelle Wong
Caplan & Wong, CPAs, LLP