President Biden’s top priority is COVID-19, both tackling the disease and shoring up the economy.
He has already set forth his stimulus plan …
And House Democrats are fast at work on it. Democrats on the House Ways & Means Com. crafted part of the bill, which passed the committee on a partisan basis and is awaiting approval by the full House … expected by the end of Feb.
The main battle will take place in the Senate. With no Republican support for the plan, Democrats are turning to budget reconciliation to allow legislation to pass the Senate with a simple-majority vote.
Let’s take a look at some of the tax relief provisions in the House proposal:
A third round of stimulus checks to individuals of $1,400 per person, plus each dependent claimed on a return. Allowing stimulus checks for dependents, instead of limiting them to children under the age of 17, gives more money to families with college-age children and people who claim a disabled adult child or elderly parent as a dependent. The plan applies the same adjusted-gross-income phaseout thresholds that were used for the two previous stimulus payments … $150,000 for joint filers, $112,500 for household heads and $75,000 for single returns. The stimulus checks would be an advance payment of a refundable tax credit on the 2021 Form 1040.
A temporarily higher child credit … plus monthly payments. For 2021, the plan would hike the $2,000-per-child credit to $3,000 … $3,600 for kids under age 6 … and let 17-year-olds qualify. The higher credit would phase out at the same AGIs that apply to stimulus checks. Folks ineligible for the higher credit who have AGIs of less than $400,000 on joint returns and $200,000 on others get the $2,000 credit. The plan makes the credit fully refundable and calls for IRS to pay half of it to families in advance through monthly payments of up to $250 per kid ($300 if under age 6) from July 2021 to Dec. 2021. Tax experts question whether IRS is up to the challenge.
Three other tax credits for individuals would also be expanded for 2021:
The earned income tax credit would increase for workers without children.
Working parents would get a higher child and dependent care credit … up to $4,000 for one child and $8,000 for two or more kids. Today’s limits are $1,050 and $2,100. Parents with up to $125,000 of AGI would be eligible for the full credit. Taxpayers with AGIs between $125,000 and $500,000 would get a partial credit.
Also, more individuals would be able to take the health premium credit when they buy insurance through the exchange, and the subsidies would be higher.
Two temporary COVID-19-related payroll tax credits would be extended. The employee retention tax credit for firms financially hurt by the COVID-19 pandemic that keep paying wages would go through Dec. 31, 2021. Also, the payroll credit for sick and family leave paid by firms to employees affected by the coronavirus would go through Sept. 30, 2021, and the maximum credit would be increased.
The Biden administration is giving the uninsured a bit of a reprieve.
It reopened the federal exchange for them to buy health coverage for 2021. The special enrollment period runs from Feb. 15 to May 15. Go to healthcare.gov to get started and to review your insurance choices and the cost of coverage.
Many who buy insurance through an exchange will qualify for tax credits. The premium credit is estimated for eligible applicants when they buy insurance through the marketplace, and individuals can choose to have it paid in advance directly to the insurance company to lower their monthly premiums.
Did you return a 2020 RMD from your IRA after learning RMDs were waived?
You’ll need to know how to report it on your return, and it’s a tad tricky. We have written before that required minimum distributions from IRAs and 401(k)s were suspended for 2020. People who took out an RMD in 2020 had until the later of Aug. 31, 2020, or 60 days after the payout to put the money back into the account and treat the distribution and subsequent redeposit as a tax-free rollover.
The 1099-R you get from your IRA custodian will show the original payout.
But it won’t account for the later return of the funds. In other words, the tax-free rollover is not shown on the form. Don’t worry … the 1099-R is not wrong. Rollovers are generally not reflected on the 1099-R because custodians know only of the distributions. They are generally not aware of a future rollover.
When filling out your 1040 or 1040-SR, you should include the total amount of IRA distributions shown on Form 1099-R on line 4a. Then you subtract the amount that you properly and timely returned to the IRA and report the remainder … even if $0 … on line 4b. Write “Rollover” next to line 4b so IRS knows why the numbers don’t match. And if federal income taxes were withheld from the original distribution and reported on the 1099-R, remember to claim the withholding on line 25b of the 1040 or 1040-SR.
There is no age limit on making contributions to traditional IRAs or Roth IRAs. Prior to 2020, individuals could not make IRA contributions once they turned 70½. The SECURE Act, passed by Congress in 2019, repealed this rule for 2020 and later. For 2020, you can contribute up to the lesser of $6,000 … $7,000 if age 50 or older … or your taxable compensation. You have until April 15, 2021, to make payins for 2020. Note that the same contribution limits apply for IRA payins made for the 2021 year.
Here’s how to report uninsured personal losses from a 2020 disaster. The year-end stimulus law lets individuals claim uninsured casualty losses from federally declared disasters that occurred in 2020, in excess of a $500 threshold, even if they don’t itemize. This net loss is treated as an additional standard deduction.
2020’s losses can be claimed on 2019 or 2020 returns. The instructions to Form 4684 tell you how to do it. If you want to take 2020 losses on your 2019 1040, you’ll have to amend the 2019 return. If taking the losses on your 2020 return, you first figure the loss on the 4684 and transfer the amount to Schedule A, line 16, and write “Net Qualified Disaster Loss” on the dotted line. If you are not itemizing, then you would also put your regular standard deduction on line 16 of Schedule A and write next to it “Standard Deduction Claimed With Qualified Disaster Loss.” You then combine these two amounts and transfer the total to Form 1040, line 12.
Marijuana legalization may not be at the top of Congress’s to-do list.
But lobbyists for the cannabis industry now see a brighter path forward. For years, they have lobbied Congress to legalize marijuana for federal purposes, or at the very least to allow marijuana businesses that are located in states where the drug is legal to claim deductions for expenses on their federal tax returns. But they ran into roadblocks, with some key Republican lawmakers as naysayers. Now, Democrats control the Senate, and Majority Leader Chuck Schumer (D-NY) and Ron Wyden (D-OR), the Senate Finance Com. chief, back marijuana legalization.
Pay close attention to the Schedule K-1 you receive from an S corporation.
There are a couple of additions. The 2020 K-1 issued to each shareholder will report on item H the amount of debt owed by the firm to that shareholder at the beginning and end of the year. Corporate indebtedness owed to third parties for which the shareholder is a co-borrower or guarantor is not included in the amounts. There’s also a new item G, reporting the owner’s number of shares in the firm.
Many S corporation owners must include basis information with their 1040s. This requirement applies to shareholders who report a loss, dispose of their stock, or receive a distribution or loan repayment from the company. The shareholder must check a box on line 28 of Schedule E and attach a basis computation. These taxpayers can use the shareholder stock basis and debt basis worksheets in the Shareholder’s Instructions for Schedule K-1 (Form 1120-S) for this purpose.
A shipbuilder’s development of vessels doesn’t qualify for R&D credits.
It didn’t conduct qualified research, according to the Tax Court. The company contracts to design and build vessels such as tankers and dry docks, and it took research credits for the cost of those projects. The Service argued that none of the development projects were credit-eligible, and the Court agreed because the shipbuilder couldn’t show that its research activities rose to the level of a process of experimentation (Little Sandy Coal Co., TC Memo. 2021-15).
Want to know whether fringe benefits offered to employees are taxable?
The Service has a helpful guide to fringes, a detailed manual for employers that has been updated to reflect current law. It covers all kinds of workplace perks: Employer-provided cell phones, education assistance, health savings accounts, employee discounts, tuition reduction, on-premises gyms, achievement awards, meals, adoption assistance and much more. IRS Publication 15-B has the details.
There’s a new tax form for some self-employed individuals to fill out:
Form 7202 is used by self-employeds to determine the tax credits for qualified sick and family leave taken between April 1, 2020 and Dec. 31, 2020. Eligible filers then transfer the credit amount to line 12b of Schedule 3 of the 1040. Self-employed individuals who couldn’t work because they had coronavirus or had to care for a family member with the disease can claim refundable credits to offset their federal income tax. There are lots of special rules and restrictions. For more details, see the Form 7202 instructions and a set of FAQ on IRS’s website. Note that this credit has been extended and now goes through March 31, 2021.
Employees can’t deduct unreimbursed business expenses on Schedule A. The write-off used to be part of miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income threshold, but the 2017 tax law ended it.
However, some workers can write off the costs elsewhere on their returns:
“Statutory” employees … agent or commission delivery drivers, home workers, sellers of life insurance and some traveling salespeople … use Schedule C to take costs.
Teachers can deduct $250 of supplies on Schedule 1, line 10 of the 1040. This includes their out-of-pocket costs for COVID-19 protective equipment, such as face masks, disinfectants, hand sanitizer, air purifiers and disposable gloves. The deduction cap is $500 for spouses who are both teachers and file a joint return.
Reservists or National Guard members can deduct overnight travel expenses for trips over 100 miles. They use Form 2106 and Schedule 1, line 11 of the 1040.
Starving artists also use Form 2106 and deduct expenses on Schedule 1, line 11 of the 1040. To qualify, they must have been employed in the performing arts by at least two employers, earned $200 or more in wages per employer, had expenses in excess of 10% of income, and their adjusted gross income can’t exceed $16,000.
A reminder for 501(c)(4) organizations on a key reporting requirement:
They generally have 60 days from the date of formation to notify IRS of their establishment and intention to operate as social welfare organizations.
Organizations electronically file Form 8976 for this purpose and pay $50. IRS will send an acknowledgement within 60 days. This receipt isn’t a determination that the organization qualifies for tax exemption as a 501(c)(4) social welfare group.
Groups wanting certainty can file Form 1024-A to seek an IRS determination.
The Revenue Service has developed an electronic version of Form 1024-A. Applicants must electronically file it at www.pay.gov and pay the $600 user fee. There is a grace period … IRS will accept a paper Form 1024-A postmarked by April 5.
Preparers are at risk from phishing scams. And the crooks are quite crafty. For example, scammers are sending fake e-mails seeking sensitive information such as e-Service credentials and Centralized Authorization File numbers.
IRS is warning about the latest e-mail scam targeting preparers. The e-mail asks them to verify their electronic filing identification number. The subject line of the fake message is “Verifying Your EFIN before e-filing.” Don’t open or respond to the e-mail. Instead, send it to IRS at firstname.lastname@example.org.
Private tax-debt-collection firms get mixed reviews from Treasury inspectors. IRS started using private agencies in 2017 to collect inactive tax receivables, and, as of May 2020, had turned over 3.3 million taxpayer accounts to those firms.
The good: Private collection agencies are bringing in much more in tax dollars than what it costs IRS to run the program. They consistently do well on IRS evaluations. And they get good marks for professionalism when talking to taxpayers on the phone.
The bad: The private collectors have collected about $500 million so far, which amounts to only 1.7% of the total value of accounts assigned to them by IRS. The private agencies have established more than 130,000 payment arrangements, such as installment agreements, but taxpayers later defaulted on over half of them.
IRS has a Spanish version of the 2020 Form 1040 for the first time. The form and Schedules 1, 2 and 3 are all in Spanish and can be printed from IRS’s website. Also, 1040 filers can attach the new Schedule LEP to their return to indicate whether they wish to receive written communications from the Service in a language other than English. There are 20 languages to choose from.
Filing a paper return by mail this year and expecting a tax refund?
Be prepared to wait a very long time before getting your money. The Service is still working on processing 2019 individual tax returns requesting refunds and other mailed-in correspondence. So if you file a paper 2020 return this year and are seeking a refund, understand that your mailed submission will be put at the bottom of IRS’s unopened mail pile. The coronavirus pandemic, lengthy mail times and social distancing rules are all contributing to the delay.
Your best bet is to e-file your 1040 and ask for direct deposit of your refund. Note that if you filed a paper return last year that has not yet been processed by IRS, and you are e-filing this year, IRS says to enter 0 as your 2019 AGI when you e-file.