The Consolidated Appropriations Act, 2021 (the CAA, 2021), signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic.  The CAA, 2021 includes, along with spending and other non-tax provisions, tax provisions affecting individuals and businesses.  Some of these key tax provisions are briefly summarized below:

The Consolidated Appropriations Act, 2021 (the CAA, 2021), signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic.  The CAA, 2021 includes, along with spending and other non-tax provisions, tax provisions affecting individuals and businesses.  Some of these key tax provisions are briefly summarized below:

INDIVIDUAL TAX PROVISIONS:

RECOVERY REBATE/ECONOMIC IMPACT PAYMENT: The Act provides for a refundable recovery rebate credit for 2020 that will paid in advance to eligible individuals, often automatically, early in 2021. These payments are in addition to the direct payments/rebates provided for in earlier Federal legislation, the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which were called Economic Impact Payments (EIP).  The amount of the rebate is $600 per eligible family member-$600 per taxpayer ($1,200 for married filing jointly), plus $600 per qualifying child. Thus, a married couple with two qualifying children will receive $2,400, unless a phase-out applies. The credit is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.

Treasury must make the advance payments based on the information on 2019 tax returns. Eligible taxpayers who claimed their EIPs by providing information through the nonfiler portal on IRS's website will also receive these additional payments.  Nonresident aliens, persons who qualify as another person's dependent, and estates or trusts don't qualify for the rebate. Taxpayers without a Social Security number are likewise ineligible, but if only one spouse on a joint return has a Social Security number, that spouse is eligible for a $600 payment. Children must also have a Social Security number to qualify for the $600-per-child payments.

Taxpayers who receive an advance payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the credit determined on the taxpayer's 2020 return exceeds the amount of the advance payment, taxpayers receive the difference as a refundable tax credit.

DEDUCTIONS: Summarized below are new provisions, modified and extended provisions:

• $250 educator expense deduction applies to PPE, other COVID-related supplies. The Act provides that eligible educators (i.e., kindergarten-through-grade-12 teachers, instructors, etc.) can claim the existing $250 above-the-line educator expense deduction for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 that were bought after March 12, 2020.
• 5%-of-AGI "floor" on medical expense deductions is made permanent. The Act makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was to have increased to 10% of adjusted gross income after 2020. The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later years.
• Mortgage insurance premium deduction is extended by one year. The Act extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to a phase-out based on the taxpayer's adjusted gross income.
• Above-the-line charitable contribution deduction is extended through 2021; increased penalty for abuse. For 2020, individuals who don't itemize deductions can take up to a $300 above-the-line deduction for cash contributions to "qualified charitable organizations." The Act extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains at $300 for other taxpayers). Taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%).
• Extension through 2021 of allowance of charitable contributions up to 100% of an individual's adjusted gross income. In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual's adjusted gross income. (The usual limit is 60% of adjusted gross income.) The Act extends this rule through 2021.

EXCLUSIONS FROM INCOME:

• Exclusion for benefits provided to volunteer firefighters and emergency medical responders made permanent. Emergency workers who are members of a "qualified volunteer emergency response organization" can exclude from gross income certain state or local government payments received and state or local tax relief provided on account of their volunteer services. This exclusion was due to expire at the end of 2020, but the Act made permanent.
• Exclusion for discharge of qualified mortgage debt is extended, but limits on amount of excludable discharge are lowered. Usually, if a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. But under an exclusion that was due to expire at the end of 2020, a taxpayer can exclude from gross income up to $2 million ($1 million for married individuals filing separately) of discharge-of-debt income if "qualified principal residence debt" is discharged. The Act extends this exclusion through the end of 2025, but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately).
• Extension of exclusion for certain employer payments of student loans.  Qualifying educational assistance provided under an employer's qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee's income. The CARES Act added to the types of payments that are eligible for this exclusion, "eligible student loan repayments" made after Mar. 27, 2020, and before Jan. 1, 2021. These payments, which are subject to the overall $5,250 per employee limit for all educational payments, are payments of principal or interest on a qualified student loan by the employer, whether paid to the employee or a lender. The Act extends the exclusion for eligible student loan repayments through the end of 2025.

TAX CREDITS:

• Individuals may elect to base 2020 refundable child tax credit (CTC) and earned income credit (EIC) on 2019 earned income. If an individual's child tax credit (CTC) exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer's taxable "earned income" for the tax year as exceeds $2,500. And the earned income credit (EIC) equals a percentage of the taxpayer's "earned income." For both of these credits, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. But for determining the refundable CTC and the EIC for 2020, the Act allows taxpayers to elect to substitute the earned income for the preceding tax year, if that amount is greater than the taxpayer's earned income for 2020.
• Health coverage tax credit (HCTC) for health insurance costs of certain eligible individuals is extended by one year. A refundable credit (known as the health coverage tax credit or "HCTC") is allowed for 72.5% of the cost of health insurance premiums paid by certain individuals (i.e., individuals eligible for Trade Adjustment Assistance due to a qualifying job loss, and individuals between 55 and 64 years old whose defined-benefit pension plans were taken over by the Pension Benefit Guaranty Corporation). The HCTC was due to expire at the end of 2020, but the Act extended it through 2021.
• New Markets tax credit extended. The New Markets credit provides a substantial tax credit to either individual or corporate taxpayers that invest in low-income communities. This credit was due to expire at the end of 2020, but the Act extended it through the end of 2025. Carryovers of the credit were extended, as well.
• Nonbusiness energy property credit extended by one year. A credit is available for purchases of "nonbusiness energy property"-i.e., qualifying energy improvements to a taxpayer's main home. The Act extends this credit, which was due to expire at the end of 2020, through 2021.
• Qualified fuel cell motor vehicle credit extended by one year. The credit for purchases of new qualified fuel cell motor vehicles, which was due to expire at the end of 2020, was extended by the Act through the end of 2021.
• 2-wheeled plug-in electric vehicle credit extended by one year. The 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500) was extended until the end of 2021 by the Act.
• Residential energy-efficient property (REEP) credit extended by two years, bio-mass fuel property expenditures included. Individual taxpayers are allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. The REEP credit was due to expire at the end of 2021, with a phase-down of the credit operating during 2020 and 2021. The Act extends the phase-down period of the credit by two years-through the end of 2023; the REEP credit won't apply after 2023.

BUSINESS TAX PROVISIONS:

Legislation extends the following tax credits without other changes:

• the new markets tax credit
• the work opportunity credit
• the employer credit for paid family and medical leave that was provided by the 2017 Tax Cuts and Jobs Act (2017 TCJA)
• the two-wheeled plug-in electric vehicle credit as applied to businesses
• the energy efficient homes credit
• the exclusion from employee income of certain employer payments of student loans
• expensing for film, television and live theatrical productions
• empowerment zone tax incentives except for the increased section 179 expensing for qualifying property and the deferral of capital gain for dispositions of qualifying assets

Extensions and Modifications of Earlier Payroll Tax Relief: Legislation extends the CARES Act credit, allowed against the employer portion of the Social Security (OASDI) payroll tax or of the Railroad Retirement tax, for qualified wages paid to employees during the COVID-19 crisis. Under the extension, qualified wages must be paid before July 1, 2021 (instead of January 1, 2021). Additionally, beginning on January 1, 2021, the credit rate is increased from 50% to 70% of qualified wages. And qualified wages are increased from $10,000 for the year to $10,000 per quarter.

Legislation extends (1) the credits provided by the Families First Coronavirus Response Act (FFCRA) against the employer portion of OASDI and Railroad Retirement taxes for qualifying sick and family paid leave and (2) the equivalent FFCRA-provided credits for the self-employed against the self-employment tax. Under the extension of the employer credits, wages taken into account are those paid before April 1, 2021 (instead of January 1, 2021). Under the extension of the credits for the self-employed, the days taken into account are those before April 1, 2021 (instead of January 1, 2021).

Legislation also makes retroactive clarifications of (1) the FFCRA paid leave credits that were extended as discussed above, (2) the exclusion of qualifying paid leave in calculating the employer portion of Railroad Retirement taxes and (3) and the increase in the amount of the FFRCA paid leave credits against the employer portion of Railroad Retirement taxes by the amount of the Medicare payroll taxes on qualifying paid leave. Additionally, legislation directs IRS to extend the presidentially ordered deferral of the employee's share of OASDI and Railroad Retirement taxes. As first provided by IRS, the deferral was of taxes to be withheld and paid on wages and other compensation (up to $4,000 every two weeks) paid in the period from September 1, 2020 to December 31, 2020 so that the taxes were instead withheld and paid ratably in the period from January 1, 2021 to April 30, 2021. Under the deferral, the period over which the deferred-from-2020 taxes are ratably withheld and paid is extended to all of 2021 (instead of the four-month period ending on April 30, 2021).  

Employee Benefits and Deferred Compensation:

• Expenses for business-related food and beverages provided by a restaurant are fully deductible if they are paid or incurred in calendar years 2021 or 2022, instead of being subject to the 50% limit that generally applies to business meals.
• The Act temporarily allows (1) carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts, whether in a health FSA or a dependent care FSA, (2) the raising of the maximum eligibility age of a dependent under a dependent care FSA from 12 to 13 and (3) prospective changes in election limits set forth by a plan (subject to the applicable limits under the Code). 
• With a view to layoffs in the current economic climate, the Act relaxes rules that would otherwise cause a partial qualified retirement plan termination if the number of active participants decreases.

Residential Real Estate Depreciation:  For tax years beginning after December 31, 2017, legislation assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 (when the 2017 TCJA first applied the more-favorable 30-year period) if the property (1) is held by a real property trade or business electing out of the limitation on business interest deductions and (2) before January 1, 2018 wasn't subject to the ADS.

UPDATE TO PAYCHECK PROTECTION PROGRAM (PPP) LOAN RULES:

Clarifications of Tax Consequences of PPP Loan Forgiveness:

The reduction or cancellation of indebtedness generally results in cancellation of debt (COD) income to the debtor. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) would not generally be reduced on account of this exclusion; however, timing issues may exist between the date the loan is received and the date the loan is forgiven by the Small Business Administration (SBA).

Deductibility of Expenses Paid By PPP Loans:

The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. IRS took the position that these expenses were nondeductible. However, the Consolidated Appropriations Act, 2021, enacted at the end of 2020, provides that expenses paid from the proceeds of PPP loans are deductible.

Waiver of Information Reporting for PPP Loan Forgiveness:

The Act allows IRS to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. Note: IRS had already waived information returns and payee statements for loans that, before enactment of the Act, were guaranteed by the Small Business Administration under Section 7(a) (36) of the Small Business Act.

Sourced: 2021 Thomson Reuters/Tax & Accounting/Federal Tax Update/COVID-19 News

The Tax Organizers to assist in compiling the information necessary to prepare your 2020 individual income tax return(s) were mailed mid to late January 2021. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2020 Tax Organizer or if you would like a blank version.

The Tax Organizers to assist in compiling the information necessary to prepare your 2020 individual income tax return(s) were mailed mid to late January 2021. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2020 Tax Organizer or if you would like a blank version.

The Internal Revenue Service and State Taxing Authorities are matching information returns submitted by businesses, employers and financial institutions with amounts reported on individual tax returns.  Negligence penalties may be assessed when income is underreported. Please be certain to mail or bring with you all of the following original unstapled forms:

Due to the current global pandemic, we require additional information and details concerning economic impact payments, COVID-19, PPP loans and PPP loan forgiveness.  Please provide documentation relating to any of these items if applicable to you (i.e. proof of economic impact payments, PPP loan received and PPP loan forgiveness).

1)    Dependent information including names, relationship, date of birth and social security numbers (if a dependent is no longer a student please indicate).   Please remember that names and social security numbers must match exactly in order for the dependent to be allowed.

2)    All W-2 forms for wages.

3)    All 1099 forms for interest, dividends, sales of securities, pension / IRA distributions, social security benefits, commissions and other income received as well as brokerage statements and realized gain/loss schedules.  If you have a foreign bank account, please list it and provide all applicable information.  If you took any distributions from retirement plans due to Coronavirus-related reasons, please be sure to provide the details regarding the reason and amount of the distributions.  If any of these distributions were paid back to the retirement plan in full or in part, please provide the details.  Congress has been sharply focused on requiring taxpayer reporting of foreign bank/financial accounts and assets for the last several years.  Besides filing the Report of Foreign Bank and Financial Accounts, information may be required to be attached to the taxpayer's income tax return for those assets with aggregate values exceeding specific thresholds.  If applicable, you will be requested to provide additional information. 

NOTE: Form 114 FinCEN (previously known as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) (FBAR) must be electronically filed via the BSA E-Filing System.  Our firm can assist you with the preparation and submission of the electronic FBARs; however, the primary responsibility for this filing remains with the taxpayer.  2020 FBAR filings are due April 15, 2021 with a maximum extension for a 6- month period ending October 15, 2021 to file.

4)    All notices from corporations, financial institutions or mutual funds that advise of special tax treatment for earnings.

5)    Report of tax-exempt interest and dividends received with payer identification.

6)    Supporting information (including 1099 MISC/1099-NEC forms) for business income and expenses.  For business use of your home, please include the square footage of your home used exclusively for business as well as total square footage of your home (this is required information).

7)    Copies of closing statements for any real estate, co-op or condominium purchases or sales which occurred during the year and a copy of the Form 1099B received for gross proceeds.  Please remember to include the acquisition date of the property sold, the original cost and improvements. 

8)    All 5498 forms and support for 2020 retirement contributions made to date or anticipated to be made for the 2020 tax year.  Please indicate if you want maximum contribution limits calculated.

9)    All 1098 and 1099 MISC forms supporting rental income and expenses.  Please be sure to include details for all improvements made and capital assets purchased including acquisition dates.

10)  All Schedule K-1 forms from partnerships, limited liability companies, S corporations, trusts and estates including all supporting literature received including state specific K-1s and transmittal/cover letters.

11)  All 1099G forms issued/received from State Taxing Authorities.  These forms are available from Connecticut and New York online only. 

12)  Adjustments to Income – please be sure to include educator expenses, alimony paid/received, health savings account contributions/distributions and student loan interest paid including all 1098-E forms.  For Health Savings Accounts, please include a statement(s) and 1099 forms that recap the 2020 activity in order to verify the beginning and ending balances of the account.

13)  Real estate and personal property taxes paid – please be sure to include only taxes paid during the calendar year 2020.

14)  All 1098 forms for interest expense deductions - Please identify for each 1098 form if the loan interest paid is for a home mortgage (secured by principal residence or vacation home) or investment activity.  If your total debt exceeds $1 million for home acquisition loans acquired before December 15, 2017, please include the balance of each loan at January 1, 2020 and December 31, 2020.  In addition, please supply the balance of each loan at January 1, 2020 and December 31, 2020 for new home acquisition loans acquired from December 15, 2017 and beyond if the debt exceeds $750,000. 

15)  Contributions – be careful in reporting your contributions as the IRS is aggressively challenging those which appear to be excessive in dollars and valuation.  Please include supporting documentation for cash contributions with values in excess of $250 and noncash contributions with values that exceed $500.

16)  Child/Dependent care expenses – Please provide the name, address and social security number and/or employer identification number of the providers as this is required.

17)  Household Employment Taxes including W-2 forms for wages paid and quarterly state unemployment returns filed for the 2020 tax year.

18)  A schedule of estimated taxes paid for federal and state income taxes including payments made in January 2021 for the 2020 tax year and payments made in January 2020 for the 2019 tax year.  Please be sure to include the FULL date for each payment made.

19)  All W-2G forms for gambling winnings.

20) HEALTH INSURANCE: Notification received from provider documenting the existence of health insurance coverage through the Marketplace for 2020 for you, your spouse and/or dependents.  Please be sure to include Form 1095-A.

21)  Copies of any notices or other communications received during the year from the Internal Revenue Service and State Taxing Authorities.

22) Identity Protection Personal Identification Number – If you have received notification that an IP PIN has been assigned to you and/or your spouse by the IRS, it is imperative that this information be provided to us with your tax documents as you cannot efile your income tax return without it and our firm has no access to this information.  IP PINs can be retrieved online through the IRS website.  If you had one in the past but did not receive a letter for Tax Year 2020 from the IRS, it is likely that you still have one so you should check the IRS website before tax filing day arrives.

Because of government enforcement regulations and fraud prevention initiatives, we are requesting that you include copies of the social security cards for yourself, spouse and dependents.  If you provided us with copies of social security cards in the past, you do not have to provide it again; however, the driver’s license and passports on file must be current.  Also, if you are a new client to the firm, include a copy of the current driver’s license for yourself and your spouse as we are required to input the current information in order to electronically file. If you have any questions, please call our office to verify your information on file.  The spelling of names must match the social security cards issued or correspondence from the IRS will be generated.  Returns cannot be filed electronically if discrepancies exist between the tax return and the Social Security Administration.  Refunds will not be issued until the matter is resolved.  .

When providing information related to the Sales of Stocks, Securities, Capital Assets & Installment Sales, special care should be taken in providing complete and accurate information, especially acquisition dates and cost. For re-investment programs, such as mutual funds and dividend reinvestment programs, it is necessary to provide all data since initial acquisition unless the fund/broker provides the cost information.  Taxpayers are required to complete Form 8949, Sales and Other Dispositions of Capital Assets, along with Schedule D to report this activity.  Form 8949 captures the detail data of each individual sales transaction in conjunction with cost basis information as reported by your broker/financial institution under reporting regulations.

In order to continue providing quality service on a timely basis, we urge you to collect your information as soon as possible.  If information from a “pass-through” entity such as a partnership, S corporation, limited liability company, trust or estate is the only data you are missing, please send the data you have assembled and forward the missing information as soon as it is available. Please clearly indicate which information is missing.  If we do not receive your complete information by March 22, 2021, we cannot guarantee timely completion of your tax returns for the April 15, 2021 filing deadline.  

After completing the Tax Organizer, please sign and date the COVER SHEET before returning it to our office.  Please be sure to include all of your contact information on the COVER SHEET as well - telephone numbers, fax numbers and email addresses, if applicable and the preferred method of contact.

If you or your spouse worked in New York with your residence outside of New York or you worked in Connecticut with your residence outside of Connecticut, please complete the enclosed allocation of wage and salary income.  If you held multiple jobs during the year, please provide a separate allocation schedule for each job.

Three full years have passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Over the last three years, the IRS and Treasury have released a considerable amount of guidance in the form of both proposed and final regulations.  While some of this guidance has been taxpayer friendly, not all of the proposed regulations yield favorable results.  As we approach year end, taxpayers continue to seek additional clarity about areas where temporary regulations might affect their individual returns.

Three full years have passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Over the last three years, the IRS and Treasury have released a considerable amount of guidance in the form of both proposed and final regulations.  While some of this guidance has been taxpayer friendly, not all of the proposed regulations yield favorable results.  As we approach year end, taxpayers continue to seek additional clarity about areas where temporary regulations might affect their individual returns.

The following is a discussion of the rules applicable to the filing of 2020 individual income taxes at this time.

TAX RATES - For 2020 there are seven income tax brackets ranging between 10% and 37% for ordinary income.  The 37% tax bracket is imposed on taxable income over threshold amounts as follows:

• $622,050 for married taxpayers filing jointly and surviving spouses
• $311,025 for married taxpayers filing separately
• $518,400 for heads of households
• $518,400 for single taxpayers

For 2021, there are still seven brackets and the 37% tax bracket is imposed on taxable income over the following thresholds:

• $628,300 for married taxpayers filing jointly and surviving spouses
• $314,150 for married taxpayers filing separately
• $523,600 for heads of households
• $523,600 for single taxpayers

These rates apply, absent new legislation, to all years until December 31, 2025.

Besides the reduction in rates and expansion of the tax brackets, perhaps the biggest change to deductions was the elimination of the personal exemption effective 2018.  This is to be offset, in part, by the increase in the standard deduction.  For 2020, the standard deduction has essentially been doubled to $12,400 for single taxpayers and $24,800 for married couples filing jointly.  For 2021, the standard deduction is $12,550 for single taxpayers and $25,100 for married filing jointly.

On December 28, 2018 New York State Department of Taxation issued a Technical Memorandum stating that they decoupled from certain personal income tax IRS changes implemented by TCJA for tax years 2018 and thereafter.  These items include certain itemized deductions, alimony or separate maintenance payments, qualified moving expenses reimbursement and moving expenses, Empire State child tax credit and New York 529 college savings account withdrawals.

LONG TERM CAPITAL GAINS AND QUALIFYING DIVIDENDS TAX RATE – The favorable rate of 0% for taxpayers in the 10% and 15% brackets remains unchanged from 2017.  In the TCJA, these rates apply at different thresholds for 2020 and 2021 as follows:

• The 0% tax rate applies to adjusted net capital gain up to $80,000 and $80,800 for joint filers and surviving spouses, $53,600 and $54,100 for heads of household, $40,000 and $40,400 for single filers, $40,000 and $40,400 for married taxpayers filing separately and $2,650 and $2,700 for estates and trusts;
• The 15% tax rate applies to adjusted net capital gain over the amount subject to the 0% rate, and up to $496,600 and $501,600 for joint filers and surviving spouses, $469,050 and $473,750 for heads of household, $441,450 and $445,850 for single filers, $248,300 and $250,800 for married taxpayers filing separately, and $13,150 and $13,250 for estates and trusts; and
• The 20% tax rate applies to adjusted net capital gain over $496,600 and $501,600 for joint filers and surviving spouses, $469,050 and $501,600 for heads of household, $441,450 and $445,850 for single filers, $248,300 and $250,800 for married taxpayers filing separately, and $13,150 and $13,250 for estates and trusts.

Remaining unchanged from prior years is the 25% rate for unrecaptured Code Sec. 1250 gain, the 28% rate for collectibles and the gain on qualified small business stock equal to its partial exclusion.

Qualified dividends received from domestic corporations and qualified foreign corporations continue to be taxed at the same rates that apply to capital gains.  Certain dividends do not qualify for the reduced rates, including dividends paid by credit unions, mutual insurance companies and farmers’ cooperatives.

NET INVESTMENT INCOME TAX (NIIT) – An additional Medicare surtax of 3.8% is imposed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above a specified threshold.  However, the Medicare surtax is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business.

NII includes the following investment income reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty related expenses, and state and local taxes allocable to items included in net investment income:

• Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business
• Gross income from a trade or business that is a passive activity
• Gross income from a trade or business of trading in financial instruments or commodities
• Gain from the disposition of property, other than property held in an active trade or business

Individuals are subject to the 3.8% NIIT if their MAGI exceeds the following thresholds (which are not adjusted for inflation):

• $250,000 for married taxpayers filing jointly or a qualifying widower with a dependent child
• $125,000 for married taxpayers filing separately
• $200,000 for single and head of household taxpayers

ADDITIONAL HIGHER INCOME MEDICARE TAX - Higher income (HI) individuals continue to be subject to an additional 0.9% HI (Medicare) tax, not to be confused with the 3.8% Medicare surtax on NIIT. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) is subject to a 2.35% Medicare tax rate (normal 1.45% plus additional .9%). The additional Medicare tax also applies to self-employed individuals.   

ALTERNATIVE MINIMUM TAX (AMT) – The TCJA temporarily increased the alternative minimum tax (AMT) exemption amounts for 2020 and 2021 as follows:

• $113,400 for married taxpayers filing jointly and surviving spouses for 2020 and $114,600 for 2021
• $72,900 for unmarried taxpayers and heads of household, other than surviving spouses, for 2020 and $73,600 for 2021
• $56,700 for married taxpayers filing separately for 2020 and $57,300 for 2021

Exemptions for the AMT are phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI). Generally, the exemption amounts are phased out by an amount equal to 25% of the amount by which an individual’s AMTI exceeds a threshold level.  The threshold amounts for calculating the exemption phase-out are adjusted for inflation as follows:

• $1,036,800 in 2020 and $1,047,200 in 2021 for married taxpayers filing jointly and surviving spouses
• $518,400 in 2020 and $523,600 in 2021 for unmarried taxpayers and heads of household, other than surviving spouses
• $518,400 in 2020 and $523,600 in 2021 for married taxpayers filing separately

For 2020 and 2021, the AMT rates are 28% and 28% on the excess of AMTI over the applicable exemption amount. You should not ignore the possibility of being subject to the AMT as it can negate certain year-end tax strategies; however, tax planning strategies can be used to reduce its impact. As a general rule, taxpayers subject to AMT should accelerate income into AMT years and postpone deductions into non-AMT years.

STOCK LOSSES – Taxpayers should continually review their investments for return and portfolio balance.  They should monitor their investments to take steps necessary to time the recognition of capital gains and losses to minimize their net capital gains tax and maximize the benefit of capital losses.  Remember for tax purposes it is not how much your investments have gone up or down in value but rather how much gain or loss you have realized when an investment is sold since its original purchase date.  The maximum capital loss deduction available to offset ordinary income is $3,000 ($1,500 for married taxpayers filing separately) with the additional capital losses being carried forward until used.  Taxpayers also need to take “wash sale” rules into consideration when generating losses.  The wash sale rule defers use of a tax loss realized upon a sale of stock if the investor repurchases it within 30 days before or after the sale.  Worthless stock also generates an immediate capital loss; however, the rules for “worthless” stocks are very strict.  Stocks and securities must be totally worthless for a taxpayer to take a loss deduction; a mere decrease in value, no matter how great, will not trigger a loss deduction.

CRYPTOCURRENCY – The market value of Bitcoin has hit a new high, increasing attention on cryptocurrency by the public.  Holders of cryptocurrency claim it is a form of currency, and fluctuations in value are not taxable.  IRS law defines it as property, like any other investment, where fluctuations in value are subject to gains and losses when reporting income.  When cryptocurrency is “spent”, exchanged for goods and services, the IRS expects a calculation of gains from the original basis.  The IRS is escalating attention to this area as it suspects widespread under reporting of cryptocurrency transactions.  The 2020 Form 1040 will feature a prominent new question right under the taxpayers’ name and address: “At any time during 2020, did you sell, receive, send, exchange, or otherwise acquire any financial interest in any virtual currency?” 

ROTH IRA CONVERSIONS - Modified gross income limitations applicable to Roth IRA conversions were repealed and 2010 was the first year in which a taxpayer could convert all or part of their traditional retirement accounts to a Roth account, regardless of income, age or filing status.  A conversion is a taxable transfer and is taxable in the year of conversion.  Under prior law, a taxpayer could recharacterize IRA contributions from one type of IRA to another.  TCJA provides that a recharacterization cannot be used to unwind a Roth conversion. A taxpayer may still make a contribution to a traditional IRA and convert the Traditional IRA to a Roth IRA but the change is that the Roth conversion can then not be unwound using recharacterization.

IRA & ROTH IRA CONTRIBUTIONS – The maximum contribution is $6,000 for 2020 and 2021 provided you have at least $6,000 respectively of wage, salary or net self-employment earnings.  An additional “catch-up” contribution of $1,000 is allowed for taxpayers over 50 years of age by the end of the tax year for 2020 and 2021.  Contributions to a traditional or Roth IRA may continue after age 70 1/2 (by the end of the tax year).  Remember that IRA and Roth IRA contributions for the 2020 tax year can be made up to April 15, 2021. 

401K AND 403B CONTRIBUTIONS - The annual limit on employee elective deferrals to these plans for 2020 is $19,500 and $19,500 for 2021. The maximum “catch-up” contribution to a 401K and 403B plan for taxpayers over 50 years of age by the end of the tax year is an additional $6,500 for 2020 and $6,500 for 2021.

CHILD DEPENDENT CARE (CDC) CREDIT – For 2020, the maximum amount of qualifying expenses to which the credit may be applied is $3,000 for individuals with one qualifying child or dependent (for a maximum credit of $1,050) or $6,000 for individuals with two or more qualifying children or dependents (for a maximum credit of $2,100).  For taxpayers with AGI between $15,000 and $43,000, the 35% credit rate is reduced by 1% for each $2,000 of AGI until the credit percentage is 20% for taxpayers with AGI over $43,000.

CHILD TAX CREDIT (CTC) – Beginning 2018, the CTC doubled to $2,000 for each qualifying child under the age of 17.  For example, a taxpayer with two qualifying children will be entitled to a credit of $4,000.  The refundable portion of the credit increased to a maximum amount of $1,400 per qualifying child.  In addition, the earned income threshold for determining refund ability is decreased to $2,500 (from the $3,000 amount that was in effect before TCJA was enacted).  A qualifying child must have a Social Security Number to be eligible for the CTC. 

Taxpayers are allowed a $500 credit per qualifying person for any dependents who are not eligible for CTC.  Eligibility is subject to certain rules including the tax tests for dependency.

For 2020, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000.  The threshold is $200,000 for all other taxpayers.  So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

EDUCATION INCENTIVES – The following are education incentives which exist under current law.

American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) was made permanent by the 2015 PATH Act and was not changed by TCJA.  This $2,500 maximum credit per eligible student is subject to the higher income phase-out ranges of $80,000 to $90,000 for single filers ($160,000 to $180,000 for joint filers) and contains a 40% refundable credit component.  The eligibility extension to the first four years of post-secondary education contains an inclusion for text books and course materials as eligible expenses. The Lifetime Learning Credit was also retained.

Student Loan Interest Deduction: If your modified adjusted gross income during 2020 is less than $85,000 ($170,000 for married filing jointly), a deduction is allowed for interest paid on a student loan used for higher education up to a maximum of $2,500.  This figure will continue to be adjusted each year for inflation. 

Coverdell Education Savings Accounts (ESAs): Total contributions for the beneficiary of this account cannot exceed $2,000 in any year no matter how many accounts have been established.  Contributions to a Coverdell ESA are not deductible but amounts deposited in the account grow tax free until distributed.

Employer-Provided Education Assistance: Employees are allowed to exclude from gross income and wages up to $5,250 in annual educational assistance provided under an employer's nondiscriminatory "educational assistance plan." 

Scholarship Programs: An amount received as a qualified scholarship and used for qualified tuition and related expenses is excludable from income.  The exclusion does not apply to any portion of the amount received which represents payment for teaching, research, or other services by the student as a required condition for receiving the qualified scholarship.  However, scholarship recipients with obligatory service requirements under the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program can exclude from income qualified tuition and related expenses as well as amounts that represent payment for services.

Section 529 Accounts:  TCJA expanded potential usage of 529 plans to include elementary and secondary school tuition for public, private and religious schools up to $10,000 per year per student.  Previously, only Coverdell ESA funds could be used for primary and secondary expenses.  New York opted not to follow TCJA; therefore, for New York purposes, withdrawals for kindergarten through 12^th grade school tuition are NOT qualified withdrawals under the New York 529 college savings account program.

MEDICAL EXPENSE THRESHOLD -  For tax years beginning 2019, a deduction is allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse and the taxpayer’s dependents to the extent the expenses exceed 7.5% of adjusted gross income through the end of 2020.  In 2021, the 7.5% threshold will increase to 10%. 

CHARITABLE GIVING –

• Congress has long used the tax laws to encourage charitable giving and for many individuals, charitable giving is also a part of their year-end tax strategy. The 2015 PATH Act made permanent the popular charitable giving incentive with tax-free IRA distributions to public charities by individuals age 70 1/2 and older up to a maximum of $100,000 per qualified taxpayer per year. Individuals taking this option cannot claim a deduction for the charitable gift as the distribution is not claimed as income.
• Congress tightened the rules for substantiation requirements for charitable contributions effective August 17, 2006. The IRS will not allow charitable deductions, regardless of the amount, without proper documentation. Contributions of $250 or more must be substantiated by a written acknowledgement from the donee organization; the acknowledgement must include the date of the donation, amount of cash or a description of property donated and a description and good faith estimate of the value of any goods or services received in exchange for the contribution.  If the donor does not receive a written acknowledgment from a charitable organization, it is the donor’s responsibility to obtain it in order to claim the charitable contribution.  Contributions under $250 must be substantiated by cancelled checks, bank records or receipts from the donee organization.  If it would be impracticable to obtain a receipt, the donor must maintain reliable written records. 
• Just like the rules for cash gifts, the rules for substantiating deductions for donations of clothing and household items (i.e. furniture, furnishings, electronics, appliances) were tightened after August 17, 2006 and will only be allowed if the property is in “good used condition or better”. Donors must have a written acknowledgement from the charity documenting the donation date, description of property donated, a description and good faith estimate of the value of any goods or services received in exchange for the contribution and a valuation/qualified appraisal of the property donated, if applicable.  A deduction for the noncash goods will be allowed, without regard to condition, only if a qualified appraisal is attached to the return for each single item or group of similar items over $500.  We recommend that pictures be taken of any noncash goods that are donated as it will be helpful in supporting the deduction.

Taxpayers donating vehicles (i.e. car, truck, boat, and aircraft) to a charity valued over $500 must obtain from the charity and attach to the tax return Form 1098-C and/or a written acknowledgment of the contribution.  The donation amount is usually limited to the gross proceeds from the sale of the vehicle by the charity.

Gifting of appreciated securities for making charitable contributions continues to be a significant alternative instead of using cash.  In this manner, the appreciated value will not be taxed, low cost basis stock is removed from your portfolio/estate and the fair-market value of the security will be used as the charitable contribution.

IRS has been aggressively reviewing and challenging charitable donations in response to these new substantiation requirements.  It is expected that this trend will continue.  The burden of proof will be on the taxpayer so it is imperative that good records and supporting documentation is maintained.

Individuals are allowed to deduct contributions to charitable organizations up to a certain percent of their "contribution base" (generally, adjusted gross income (AGI)).  The limit on charitable contributions of cash by an individual in 2020 was increased temporarily to 100% of the individual's contribution base in response to the Coronavirus (COVID-19) pandemic.  Except as discussed below, 2020 qualified contributions are disregarded in applying the percentage limitations for individuals.

• 2020 qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of the individual's contribution base over the amount of all other charitable contributions allowed as deductions for the contribution year.The excess is disallowed and carried over to subsequent years.
• “2020 qualified contributions" are charitable contributions if:
• (i)  They are paid in cash during calendar year 2020 to an organization described in Code Sec. 170(b)(1)(A), and
• (ii)  The taxpayer has elected to apply this provision with respect to the contribution.

However, contributions to a Code Sec. 509(a)(3) supporting organizationor a donor advised fundare NOT qualified contributions.In addition, contributions to a charitable remainder trust generally are not qualified contributions, unless the charitable remainder interest is paid in cash to an eligible charity during the applicable time period.

EDUCATOR EXPENSES – The 2015 PATH Act permanently extended the teacher's classroom expense deduction that allows primary and secondary education professionals to deduct (above-the-line) qualified expenses up to $250 paid out-of-pocket during the year.  Eligible expenses in excess of the $250 limit are no longer deductible as a miscellaneous itemized deduction on Schedule A.  Even though the $250 limit is subject to adjustment for inflation, it remains the same for tax years 2020 and 2021.

BONUS DEPRECIATION & SECTION 179 BUSINESS EXPENSING ELECTIONS –

Bonus Depreciation: Pursuant to TCJA for qualified purchases placed into service after September 27, 2017, 100% of the purchase price can be expensed. This 100% expensing will continue until 2022.  There is a scheduled phase-down to 80% starting in 2023 and ending at 20% in 2026, after which the provision is set to expire.  Unlike regular depreciation, where half-year and mid-quarter conventions may apply, a taxpayer is entitled to the full 100% bonus depreciation based on when the asset is purchased. Therefore, year-end placed in service strategies provide immediate “cash discount” for qualifying purchases, even when considering finance costs.

Bonus depreciation under old law is available only for new property (i.e. property whose original use begins with the taxpayer) depreciable under MACRS that (a) has a recovery period of 20 years or less, (b) is MACRS water utility property, (c) is computer software depreciable over three years, or (d) is qualified leasehold improvement property. An enticing provision under the new law whereby qualified property includes property that has been used (i.e. the original use does not have to originate with the purchaser).  A taxpayer may elect out of bonus depreciation with respect to any class of property placed in service during the tax year. Although this election may be factored into a year-end strategy, a final decision on making it is not required until the tax return is filed. Bonus depreciation is not a preference item for alternative minimum tax.

Code Sec. 179 Expensing: The PATH Act’s provisions made the enhanced Section 179 expense deduction permanent for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (generally defined as depreciable tangible property that is purchased for use in an active trade or business) as an expense rather than a capital expenditure. Thus, the current Section 179 dollar cap for 2020 and 2021 is $1,040,000 and $1,050,000 with an overall investment limitation of $2,590,000 and $2,620,000.

AUTOMOBILE MILEAGE RATE - Many taxpayers use the standard mileage rates to help simplify their recordkeeping. Using the business standard mileage rate takes the place of deducting the applicable business percentage of the actual costs of your vehicle such as maintenance, repairs, gas, insurance, license and registration fees.  If you choose to use the actual expense method to calculate your business vehicle deduction, you must maintain very careful records by keeping track of the actual costs during the year to maintain and run your vehicle.  One of the most important tools is a mileage log book that details date, miles driven, location and purpose for the vehicle during the calendar year.  Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

Business standard mileage rate: The business standard mileage rate for 2020 is 57.50 cents per mile.  The 2021 rate has not been released yet as of the date of this letter. 

Medical/Moving standard mileage rate: The medical/moving standard mileage rate for 2020 is 17.00 cents per mile.  The 2021 rate has not been released yet as of the date of this letter.

Charitable standard mileage rate:   Taxpayers who itemize deductions may be able to claim a deduction for miles driven in service of a charitable organization. The standard mileage rate for charitable miles as determined by IRS for 2020 is 14.00 cents per mile.  The 2021 rate has not been released yet as of the date of this letter.  

COLLEGE SAVINGS PROGRAMS/PLANS – Connecticut allows a deduction from federal adjusted gross income for contributions made into a CT higher education trust fund (CHET).  New York allows a deduction from federal adjusted gross income for contributions into a New York 529 college savings plan.  The maximum deduction in each state is $5,000 for a single taxpayer and $10,000 for married filing joint.  However, Connecticut allows contributions in excess of these limits to be carried forward for five years while New York does not allow for any carry forward. 

RESIDENTIAL ENERGY CREDIT – The tax credit for making qualified energy improvements to your principal residence, including windows, energy-saving exterior doors, insulation, and certain metal roofs expired in 2016.  Individual taxpayers are still allowed a personal tax credit for expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property and qualified geothermal heat pump property.  The credit for these property expenditures was extended through 2021.  The credit rate for property placed in service in 2020 is 26% and drops to 22% in 2021.

HEALTH CARE REFORM - The Affordable Care Act (ACA) brought a sea of change to our traditional image of health insurance.  Taxpayers and employers will continue to weigh the benefits and costs of obtaining coverage in a public marketplace or a private insurance exchange for themselves and their employees.  Small businesses may be eligible for a tax credit to help pay for health insurance.  Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage.  Those who obtained insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which will explain their coverage and detail any premium tax credit they received in advance.

Individuals with flexible spending accounts (FSAs) and similar arrangements should take a look at their annual spending habits and project how they will use these tax favored funds in the future.  The maximum salary reduction contribution to a FSA is $2,750 for 2020 and $2,750 for 2021.  Adjusted for inflation, the annual limitation on deductible contributions to health savings accounts (HSAs) for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,550 for 2020 and $3,600 for 2021; $7,100 for 2020 and $7,200 in 2021 for family coverage. The HSA catch up contributions for age 55 or older is $1,000 for 2020 and 2021 for both single and family coverage.

GIFT TAXES – Slow and steady estate planning can yield dramatic results - take advantage of the annual gift giving limits to reduce your income and estate tax liabilities. For 2020 and 2021, the annual exclusion is $15,000 ($30,000 per person for couples). Remember that if you gift stock, the recipient of the gift takes over the donor’s cost basis and holding period for the security; therefore, the donor needs to provide the recipient with this information.  Effective January 1, 2005, Connecticut laws changed and no gift tax was due by a donor until their cumulative gifts from this date forward added up to $2,000,000; however, a gift tax return has to be filed annually declaring all federal taxable gifts that are made in a tax year.  Current Connecticut legislation has the estate and gift tax thresholds at $5,100,000 for 2020, $7,100,000 for 2021, $9,100,000 for 2022 and the federal basic exclusion amount for 2023 and thereafter.  Direct payments of educational expenses to a qualified institution for family members, or other beneficiaries, is not treated as a gift for tax purposes and does not count against the annual exclusion amount or the lifetime exemption.

ESTATE TAX REFORM – While TCJA retains the estate tax rate at 40%, for 2020 and 2021 the estate tax exemption moves up $11,580,000 and $11,700,000 respectively. TCJA did not repeal the death tax as had been a goal and also did not make the above changes permanent as they expire after 2025. The portability election remains as part of the tax law. Portability allows the second spouse to have the benefit of the deceased spouse’s unused portion of the $11,580,000 exemption even if the second spouse dies when a lower exemption is in effect, possibly after 2025.  No changes were made in TCJA with respect to step up in basis despite the increase in the exemption.

AUTOMATIC REFUND REDUCTIONS - With the number of information sharing acts signed by federal and state taxing authorities as well as other organizations, please be aware that refunds will be automatically reduced for the following matters: delinquent federal taxes, delinquent state taxes, back spousal and/or child support and delinquent non-tax federal debts such as student loans.  If the Department of Treasury’s Financial Management System (FMS), which disburses IRS refunds, offsets the refund for a delinquent amount (correctly or incorrectly), they will send a letter to the taxpayer explaining the reduction and giving the taxpayer the right to challenge the offset.

NEW FORM 1099-NEC Requirements:

When a person engaged in a trade or business pays wages to an employee, the payer/employer must withhold income and FICA taxes and file an annual Form W-2 for that individual. However, these withholding and reporting requirements do not apply to nonemployees—that is, they do not apply to payments made to individuals treated as independent contractors. Rather, payments for services rendered by independent contractors fall under the rules for reporting payments of nonemployee compensation of $600 or more made in the course of the payer's trade or business.

Two separate Code sections require a person engaged in a trade or business to file an information return if payments during the year to an independent contractor for services provided total $600 or more. Under IRC Sec. 6041(a), a person who, in the course of a trade or business, makes fixed or determinable payments of salaries, wages, commissions, fees, and other forms of compensation for services rendered aggregating $600 or more must file an information return for that year. Similarly, pursuant to IRC Sec. 6041A(a), payments of $600 or more made in the course of a trade or business to service providers who are not employees must be reported.

Form 1099-NEC (Nonemployee Compensation) is used to report amounts paid as nonemployee compensation (NEC), including fees, commissions, prizes, awards, or other forms of compensation for services rendered to the payer's trade or business by someone who is not an employee. For 2019 and prior years, NEC was reported in box 7 of Form 1099-MISC (Miscellaneous Income).

MAILING & RECORDKEEPING OF TAX PAYMENTS AND TAX RETURNS - When mailing tax returns or payments to federal and state taxing authorities, we advise the use of registered or certified mail to prove timely filing.  We also recommend that you make copies of the checks before mailing for your records.  The IRS has stated that other than direct proof of actual delivery, a mail receipt would be the only evidence of the timely delivery of tax documents.  It is also a good practice to make sure that you have good copies of the front and the back of the check images (where available) once your payments clear the bank in case you have to present this information at a later date.  Please keep in mind that as electronic systems of filing continue to be required, manpower at the federal and state taxing authorities will continue to decline causing longer delays in resolution of matters and placing the burden of proof on the taxpayer.  With the current pandemic situation, these delays have increased.

INCREASED REPORTING PROVISIONS ARE IN EFFECT AIMED AT COMPLIANCE AND REVENUE GENERATION - Banks and other processors of merchant payment cards are required to report a merchant’s annual gross payment card receipts to the IRS along with the merchant’s EIN #.  The law also requires reporting of third-party network transactions such as ones used by online retailers.  Expanded information reporting will continue to assist the IRS in increasing the compliance among merchants.  The IRS plans to compare the merchant’s overall volume of payment card sales in relation to expenses claimed and cash transactions reported, estimating to raise more than $9.5 billion over 10 years as a result of the increased reporting and monitoring.

As of 2013, new rules were fully implemented that required brokers to file information returns that not only provided the IRS and customers with details on the sales proceeds from each trade executed during the year, but also the customer's adjusted basis in the security and whether any realized gain/loss is short or long term. These information reporting requirements effect business customers as well. Securities subject to the reporting requirements include stocks, bonds, debentures, commodities, derivatives and other financial instruments designated by Treasury.  Brokers notified customers in 2011 regarding elections to make in their accounts concerning the methods to be used for reporting cost basis.  This provision is estimated to raise $6.7 billion over 10 years.

In response to broker reporting changes, the IRS introduced Form 8949 Sales and other Dispositions of Capital Assets in 2011.  Form 8949 is used to list all capital gain and loss transactions previously reported on Schedule D of Form 1040.  The subtotals from Form 8949 are then carried over to Schedule D where realized gain or loss is calculated in the aggregate.  Accurate reporting and matching of data from taxpayer returns to that reported by the brokers directly to the IRS is the key compliance focus and purpose of this form.

Foreign Compliance Activities:  Foreign Account Tax Compliance Act (FATCA) dominated international news beginning in 2014 and continues today.  Along with FACTA, the U.S. has been expanding its tax treaties and information agreements with foreign jurisdictions to encourage greater transparency and authorities are getting tighter with compliance efforts.  FinCen Report 114, Report of Foreign Bank and Financial Accounts (FBAR), reporting for tax year 2020 is due by April 15, 2021 with an automatic 6-month extension available until October 15, 2021.

Identity Theft:  Tax fraud and identity theft have become a growing problem over the years.  Further initiatives continue to be taken by the industry to combat identity theft issues for taxpayers throughout the country.  IRS has joint efforts with various state taxing authorities and tax preparation software companies to create a security plan to safeguard taxpayer information.  Tax preparers are required to input the current driver’s license state identification number, issue date and expiration date for ALL taxpayers prior to e-filing without exception.

CONNECTICUT DEPARTMENT OF REVENUE NEWS –

Connecticut Income Tax Exemption for Teacher Pensions: The previously authorized 50% income exemption of any taxable pension received from the Connecticut Teacher’s Retirement System is delayed.  The exemption remains at 25% for 2020 and increases to 50% in 2021.

Limitation of Property Tax Credit: For 2020, the property tax credit may only be claimed by Connecticut residents who attain the age of 65 before the end of the year or who validly claim one or more dependents on their federal income tax return.  The maximum income tax credit remains at $200.

Exemption of Social Security Benefits from Connecticut Income Tax:  For 2020, adjusted gross income thresholds for determining the amount of Social Security benefits excluded from Connecticut income tax have stayed the same as 2019.

Pension and Annuity Income Modification:  For taxable years beginning January 1, 2019, an individual with the federal filing status of single, married filing separately or head of household with federal adjusted gross income (AGI) of less than $75,000 or married filing jointly with federal AGI of less than $100,000 will be allowed to subtract 14% of any pension or annuity income received when calculating Connecticut AGI.  This applies to the extent that the pension and annuity income has been properly included in federal AGI.

Along with financial assistance for individuals, the health care system, state and local governments, businesses and other entities, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides significant tax relief to help weather the COVID-19 pandemic.  Below is a quick look at some of the tax-related CARES Act provisions that may affect you:

Individuals

• Recovery rebates of up to $1,200 for singles, $1,200 for heads of households and $2,400 for married couples filing jointly — plus $500 per qualifying child — subject to income-based phaseouts starting at $75,000, $122,500 and $150,000, respectively (based on 2018 or 2019 income tax return filings)
• Waiver of the 10% penalty on COVID-19-related early distributions from IRAs, 401(k)s and certain other retirement plans
• Waiver of required minimum distribution rules for IRAs, 401(k)s and certain other retirement plans
• Expansion of charitable contribution tax deductions
• Exclusion for certain employer payments of student loans

Businesses and other employers

• Retention tax credit for eligible employers that continue to pay employee wages while their operations are fully or partially suspended as a result of certain COVID-19-related government orders
• Deferral of the employer portion of payments of certain payroll taxes
• Modification of net operating loss (NOL) and limitation on losses rules
• Modification of the deduction limitation on business interest
• Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expensed rather than depreciated over a period of years

The CARES Act laid the groundwork for the Paycheck Protection Program (PPP) which allowed small businesses to borrow under the Small Business Administration (SBA) 7(a) loan program to stay afloat.  The most attractive aspect of the loan – forgiveness.  If used strictly to cover payroll, mortgage interest, rent and certain utilities, as defined, during the covered period, and within the correct percentages, the loan could be forgiven.  The CARES Act was hurried legislation and left many questions unanswered in its text.  Despite the issuance of numerous FAQs and interim regulations, much confusion and frustration still exists. Tweaks to the program took pressure off businesses to spend the funds quickly; however, we still stand at an intersection of confusion.  Not all banks have started the forgiveness process at the time of this letter.  In the original CARES Act legislation, many Congressional representatives stated that they intended for the PPP forgiveness to be a non-taxable event.  However, IRS has taken a contrary stance and has stated that associated expenses will be disallowed, effectively making the loan proceeds taxable.  Members of Congress disagree with the disallowance of deductions and many professional lobbying groups are currently challenging the recent 2020 IRS Revenue Ruling.  As of the date of this letter, Treasury has not reversed its decision.

The federal government spending package titled the Further Consolidated Appropriations Act, 2020, extended certain income tax provisions that had already expired or that were due to expire at the end of 2019 as well as fund the government.  The agreement on the spending package also included the Setting Every Community Up for Retirement Enhancement (SECURE) Act.  Here are some of the highlights:

Extenders

Here are some of the most widely relevant breaks that have been extended through 2020:

• The exclusion from gross income of discharge of qualified principal residence indebtedness,
• The treatment of mortgage insurance premiums as qualified residence interest for itemized deduction purposes,
• The reduction in the medical expense itemized deduction floor to 7.5% of adjusted gross income,
• The above-the-line deduction for qualified tuition and related expenses,
• Empowerment zone tax incentives,
• The New Markets credit,
• The employer tax credit for paid family and medical leave, and
• The Work Opportunity credit.

The extension of some breaks that had expired at the end of 2017 but that now have been retroactively revived means that some taxpayers should consider filing amended returns for 2018.

Retirement Plans

The SECURE Act is primarily intended to encourage saving for retirement, though it’s not entirely favorable to taxpayers. Most provisions took effect January 1, 2020. Here are some of the most significant provisions:

• Elimination of the age 70½ limit for making traditional IRA contributions, so that anyone can contribute as long as they’re working, matching the existing rules for 401(k) plans and Roth IRAs,
• Increase of the age at which taxpayers must begin to take required minimum distributions (RMDs) from 70½ to 72,
• An exemption from the 10% tax penalty on early retirement account withdrawals of up to $5,000 within one year of the birth of a child or an adoption becoming final,
• Elimination of the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies,  
• Expansion of access to open multiple employer plans (MEPs), which give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties.
• Elimination of employers’ potential liability when it comes to selecting appropriate annuity plans, and
• A new requirement that employers allow participation in their retirement plans by part-time employees who’ve worked at least 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours.

NEXUS

Nexus is now a big topic of conversation regarding the taxation of income on individuals working from home when the office is in another state, especially due to the current pandemic.  As of the release of this letter, here is the information available from Connecticut and New York:

Connecticut

Nexus imposed due to telecommuting?

No guidance

A survey was conducted in all 50 states, and the Connecticut Department of Revenue Services replied that the agency "is in the process of developing such guidance, which will ensure fair and equitable treatment of Connecticut resident individuals, as well as Connecticut-based businesses."

What state gets to tax the income of a telecommuter?

POSSIBLY employee’s regular place of work (i.e., the employer’s home state)...but it’s complicated!  

State Guidance:

Connecticut hasn’t issued any guidance on this, but, under a recent law change, it will allow a credit for taxes paid to other states on “convenience days.”  Also, Connecticut nonresidents who are commuting from a second home can apply the convenience rule so long as the state to which they are telecommuting to employs the convenience rule. Still, there is no word from Connecticut as to whether they would treat days worked at home due to  COVID-19 lockdowns as convenience days.

New York

Nexus imposed due to telecommuting?

No guidance

What state gets to tax the income of a telecommuter?

Employee’s regular place of work (i.e., the employer’s home state)

State Guidance:

The Department of Taxation and Finance posted on its website the following response to FAQ’s: “My primary office is inside New York State, but I am telecommuting from outside of the state due to the COVID-19 pandemic. Do I owe New York taxes on the income I earn while telecommuting?

If you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location. There are a number of factors that determine whether your employer has established a bona fide employer office at your telecommuting location. In general, unless your employer specifically acted to establish a bona fide employer office at your telecommuting location, you will continue to owe New York State income tax on income earned while telecommuting.”

“If I live in New York but work in another state, am I taxed twice?

A person who lives in one state but works in another may have tax liability in both states, but typically will receive a tax credit in their state of residence to eliminate double taxation of that income. If you were a full-year or part-year resident of New York State and you had income sourced to and taxed by another state, you may claim a nonrefundable resident credit against your New York State tax. This credit is allowable only for the portion of the tax that applies to income sourced to and taxed by the other taxing authority while you were a New York State resident.” N.Y. Dept. of Tax. & Finance, Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax

As the end of 2020 approaches, we can all agree that this year is unlike any other.  The coronavirus pandemic had a significant impact on the tax situation for many taxpayers.  In response to the health and economic impact of the pandemic, Congress passed two major pieces of legislation.  More relief may be forthcoming.  The outcome of the 2020 Presidential and Congressional elections no doubt will bring future tax law changes in the months and years ahead.

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

Today, with the increase in catalog and online shopping, many taxpayers are buying items out of state that would be subject to tax if they were purchased in their resident state.  The state tax authorities, especially Connecticut and New York, are actively pursuing the collection of this use tax in order to meet budgetary constraints.  In fact, the states, along with the Internal Revenue Service and U.S. Customs, have signed information sharing agreements to help each other collect all outstanding tax money.  Working together, the authorities have many resources available to gather their information.

Keep in mind that the taxing authorities are specifically targeting the purchase of items such as automobiles (and parts), appliances, furniture, jewelry, cameras, computers, electronics, cigarettes and other tobacco products, alcohol, boats, art and antiques.  However, they are also seeking out those taxpayers who are steady catalog and online shoppers not paying sales tax. 

The individual use tax is declared and paid when you file your resident state individual income tax return. 

If all the goods purchased and brought into Connecticut at one time total $25 or less, you do not have to pay Connecticut use tax.  The $25 exemption does not apply to goods shipped or mailed to you.  Connecticut requires that taxpayers separately list any individual item with a purchase price of $300 or more.  When listing this information, you must provide the date of purchase, a description of goods or service, the retailer or service provider and the purchase price.  Items with an individual purchase price under $300 do not have to be listed separately; instead the total combined purchases must be given to calculate the use tax due.

The general Connecticut sales and use tax rate for 2020 was 6.35%; however, there are categories with different tax rates from the general rates.  There are too many categories to list for the purposes of this letter; however, there are a few that need to be highlighted.  Specifically a use tax rate of 7.75% applies to the following: the sale of most motor vehicles exceeding $50,000, the sale of each piece of jewelry exceeding $5,000, the sale of each piece of clothing or pair of footwear exceeding $1,000 and a handbag, luggage, umbrella, wallet or watch exceeding $1,000.

New York provides two options for calculating the use tax due on purchases of less than $1,000 (excluding shipping and handling) each that are not related to a business, rental real estate or royalty activities - the exact calculation method or the sales and use tax chart.  For the exact calculation method, the taxpayer must provide the purchase price, purchase date and jurisdiction of purchase.  The sales and use tax chart is a simple, time-saving method whereby the taxpayer pays use tax based on their federal adjusted gross income according to the chart established by the state.  The exact calculation method must be used on each purchase of $1,000 or more.  For individual items subject to use tax greater than $25,000, the following information must be provided: date item was purchased, description of item purchased, seller’s name and address, delivery address/address of use and purchase price.

Failure to pay use tax may result in the imposition of penalties and interest.  The states are requiring taxpayers to declare an obligation for use tax on their individual income tax returns.  Zero is a valid declaration if you do not have a liability.  If you do not make an entry on the individual use tax line of your resident tax return, you are considered to not have filed a use tax return.

Therefore, when providing your information for payment of use tax, please be sure to specify the following complete information:

• Details of purchase information as specified by the state thresholds for reporting individual purchases
• Details of purchase information as specified by the special categories in Connecticut

If you have any questions regarding sales and use tax, please give us a call.  Information is also published on each state's website regarding this subject.

Internal Revenue Service regulations along with the tax authorities of Connecticut, New York and Massachusetts mandate that tax preparers electronically file individual, fiduciary and business income tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2020 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Internal Revenue Service regulations along with the tax authorities of Connecticut, New York and Massachusetts mandate that tax preparers electronically file individual, fiduciary and business income tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2020 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Our firm has informed you of the regulations and mandates for electronic filing.  However, the decision as to whether your income tax returns will be electronically filed or not rests with you, the taxpayer.  If you choose not to file electronically, we will inform you of the necessary procedures that need to be followed for opting out.

Electronic filing offers the following benefits:

1. Allows the Revenue Departments to process returns quickly and accurately, saving tax dollars.
2. Taxpayers who have a return with a balance due can file their return early and choose to make payment anytime on or before April 15, 2021.
3. Taxpayers who file returns with refunds receive those refunds faster especially if the refund is directly deposited into their bank account.
4. Electronically filed returns receive an acknowledgment of receipt from the Internal Revenue Service and the applicable State Tax Authority and are verified to be mathematically correct, eliminating data entry errors and lost or misplaced mail.

If we did not prepare your returns for 2019, we will need copies of your driver’s licenses and social security cards or passports. 

How does this affect the process of preparing your 2020 income tax returns?

The actual preparation process of your return does not change.  However, the administration, review process and completion of the returns will be effected.  The following is an overview of how the electronic filing process will work.

1)   Taxpayers should forward complete information for the preparation of their 2020 income tax returns including all supporting documentation.  Regulations for electronic filing require that our firm maintain copies of the social security cards and driver's licenses for yourself, your spouse and all dependents claimed on the 2020 tax return.  NOTE:  If you provided this information to us last year regarding the preparation of your 2019 tax return, you do not have to provide it again.  However, the driver’s license and passports on file must be current.  Please call our office to verify your information on file if you have any questions.

2)  Electronic filing provides various methods for payment and receipt of your refunds.  Payments can be made by 1) paper check, 2) credit card (a convenience fee will be charged by the processing company used by tax authorities) and 3) direct debit out of a designated account.  Refunds can be issued by 1) paper check, 2) application of all or a portion to the 2021 tax year and 3) direct deposit into designated account(s) – see NOTE below.  Returns filed electronically can be filed early but payment not made until a later date designated by you whether payment is by check, credit card or direct debit until April 15, 2021.  After that date, payment is due with filing.  When submitting the information to prepare your return, please indicate to us how you would like to handle payments and/or refunds and return it with the information to prepare your tax return.  If you desire to use direct deposit or direct debit, please enclose a voided check so we have complete account information and the financial institution routing transit number.  It is the taxpayer’s responsibility to provide proper banking information and to verify that the payments have been withdrawn from the designated account.  Please allow enough time when scheduling payments to be made directly from accounts.  If problems with payment by direct debit are encountered, taxpayers need to have enough time available for a paper check to be submitted on a timely basis.

NOTE:  Generally, if you do not elect direct deposit, the State of Connecticut will issue refunds by paper check; however, they are encouraging direct deposit.  Direct deposit will NOT be available for first time Connecticut filers.  IRS and the State of New York are offering the option for receipt of refunds by direct deposit or paper check.    

WARNING: It is suggested that refunds on joint tax returns should only be directly deposited into joint bank accounts.  The federal banking regulations, as applied by each bank, may not accept a joint refund into an individual account; our firm has no knowledge of how your bank will handle this matter.  Also, be aware that refunds will be retained, not issued or decreased for any of the following: 1) delinquent federal taxes, 2) delinquent state taxes, 3) delinquent student loans, 4) delinquent spousal and/or child support, 5) delinquent state unemployment compensation debts and 6) debts owed to other state and/or federal agencies.

3)  Once your return has been prepared, our firm will forward a "Review Copy" to you.  This review copy can be sent electronically using access through a portal system for your protection or by hard copy (either mail or you can pick it up at our office).  Please let us know the delivery method for the "Review Copy" on the bottom of the enclosed engagement letter which should be submitted with your tax information.

4)   If you review the return and are in agreement with the return as prepared, the taxpayer(s) will need to sign Form 8879, IRS e-file Signature Authorization, Form TR-579-IT New York State e-file Signature Authorization, Form FTB 8879 California e-file Signature Authorization, Form M-8453, Massachusetts e-file Signature Authorization, as applicable, and any additional efile form(s) as necessary and included in your "Review Copy" package.  Connecticut and New Jersey accept the federal signature on Form 8879.  Tax returns cannot be filed electronically until our firm is in receipt of the signature authorization forms signed by the taxpayer(s).  We can accept the signed forms electronically.

5)   If you review the return and are NOT in agreement with the return as prepared, please call our office to discuss the questions/issues.  If necessary, a new "Review Copy" and signature authorization forms will be prepared.  Please remember that the only way electronically filed tax returns can be changed is by amending the returns.  Therefore, it is imperative that you are in complete agreement with the returns before returning the signature authorization forms to us.

6)   Once we receive your completed signature authorization forms, our firm will electronically submit your Federal, Connecticut, Massachusetts, New York, New Jersey and/or California income tax returns.  Income tax returns for all other states will be filed on paper at this time unless we deem it appropriate to electronically file in the other state(s).  Once we receive acknowledgement that your electronically filed returns have been accepted by the taxing authorities, we will forward a complete package to you which will include the following documents: 1) your original information if it has not already been returned with your review copy, 2) 2020 payment vouchers to taxing authorities, if necessary, 3) 2020 income tax returns for other states to be filed by paper, if necessary, 4) 2021 estimated tax payments, if necessary, 5) a copy of the 2020 individual return electronic transmission history and acceptance notification, and 6) a final signed copy of your electronically filed 2020 Federal and state income tax returns, if requested.  Please include on the bottom of the enclosed engagement letter how you would like to receive this complete package.

Some extensions for filing 2020 tax returns must be filed electronically as paper is no longer an acceptable filing method.  Therefore, taxpayers must allow enough time for completing this process.  Please contact our office by Friday, March 26, 2021 if you will need to file extensions for the 2020 tax year.

We ask for your continued cooperation in implementing these income tax return preparation and filing requirements.  If you have any questions, please give us a call.

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

The plan includes many provisions that would make good on the President’s campaign promises. The proposal would provide universal preschool to three and four year-olds, two free years of community college, and free tuition for certain universities specializing in serving underrepresented students. The plan would also invest in teacher and child care education, provide free or lower cost child care to lower income families, expand paid leave programs, and improve the quality of student lunch programs. It would also establish automatic adjustments to unemployment insurance, depending upon economic conditions.

Personal Tax Breaks Extended

The proposal would also extend tax benefits already signed into law under the American Rescue Plan Act. This includes:

• extending enhanced premium tax credits and making premium reductions permanent;
• extending the enhanced child tax credit through 2025 (currently a fully refundable $3,000 per child ($3,600 for a child under age six) for 2021 only);
• permanently extending the enhancements of the child and dependent care tax credit, which increase the amount of the credit as well as the incomes at which the credit is phased out;
• permanently extending the increased earned income tax credit for taxpayers without children.

Tax Changes, TCJA Rollback

On the campaign trail, President Biden promised to increase taxes on both corporations and higher-income individuals. While the provisions of the American Jobs Plan are largely funded through a proposed increase in the corporate tax rate from 21% to 28%, the provisions of his American Families Plan are funded by the promised increases to individual taxes.

The proposal would increase the top tax rate on individuals to 39.6 percent from the current rate of 37 percent. This would return the tax rate on the highest bracket of income to where it was before the Tax Cuts and Jobs Act took effect in 2018.

The proposal would also increase the tax rate on capital gains and dividends for households making over $1 million, to match the 39.6 percent rate on income. For 2021, capital gains and certain qualified dividends are taxed at 20 percent for joint filers with taxable income of $496,000 or more.

The plan proposes to eliminate the tax-free step-up in basis on inherited property where the gain would be in excess of $1 million (up to $2.5 million in the case of a couple using existing real estate exemptions. The plan also eliminates the carried interest loophole that allows hedge fund partners to pay tax on income at capital gains rates. The plan would also limit a provision allowing for tax deferral on property exchanges, permanently extend the limitation on excess business losses, and ensure that higher income taxpayers cannot avoid the 3.8 percent Medicare tax.

The plan also provides increased funding for the IRS to improve enforcement, specifically to ensure that higher income taxpayers are unable to avoid proper payment of taxes. While the White House estimates that this will produce an additional $700 billion in revenue over 10 years, many believe this to be a vast overestimate.

Notably absent from the plan is an increase to the cap on the deduction of state and local taxes. The Tax Cuts and Jobs Act set a $10,000 limit for the deduction, but many lawmakers, particularly those representing higher tax states like New York and California, have been pressing to increase the limit or completely eliminate it

Next Steps?

It is uncertain when Congress may take up the process of proposing legislation carrying out the American Families Plan. President Biden has indicated his willingness to negotiate on any proposals he makes. However, the chilly reception to his American Jobs Plan does not indicate a smooth process to get a vote on a legislative package for the infrastructure proposal, let alone passage with razor-thin majorities in both chambers of Congress. With many lawmakers indicated that they want to work on infrastructure before moving on to other proposals, the process from proposal to law could stretch out for months.

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) (P.L. 117-2).

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) ( P.L. 117-2).

Unemployment compensation is taxable income, but the ARP excludes $10,200 in unemployment compensation from the income used to calculate the amount of taxes owed. The $10,200 per person exclusion applies to taxpayers who are single or married filing jointly, with modified adjusted gross income of less than $150,000. The $10,200 is the amount of income exclusion, not the amount of the refund itself.

The IRS has identified over 10 million taxpayers who filed their tax returns prior to the ARP becoming law in March, and is reviewing past returns to determine the correct taxable amount of unemployment compensation and tax. This could potentially result in a refund, reduced balance due, or with no refund being owed.

The first phase of adjustments is being made for single taxpayers who had the simplest tax returns, such as those filed by taxpayers who did not claim children or any refundable tax credits. Notices explaining the corrections will be sent to taxpayers, and are expected to reach them within 30 days of the correction being made.

The IRS stated that it will issue refunds by direct deposit to taxpayers who provided their bank account information on their returns. Alternatively, refunds will be mailed as a paper check to the taxpayer’s address of record.

These refunds will be subject to normal offset rules, such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or certain federal nontax debts, such as student loans. The IRS will send separate notices to those taxpayers whose refunds could be offset to settle unpaid debts.

Further, corrections to any Earned Income Tax Credit (EITC) without qualifying children and the recovery rebate credit are being made automatically as part of this process. However, some taxpayers may be eligible for certain income-based tax credits that were not claimed on their original return. The IRS also reminded taxpayers to file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

The IRS had initially determined that businesses whose PPP loans were forgiven or expected to be forgiven could not deduct business expenses paid for by the loan. However, the Consolidated Appropriations Act of 2021 ( P.L. 116-260), enacted on December 27, 2020, subsequently permitted taxpayers to deduct these expenses.

Safe Harbor Eligibility

To be eligible for the safe harbor, the taxpayer must have received an original PPP covered loan and filed a federal income tax return or information return for the 2020 tax year on or before December 27, 2020. The taxpayer must have paid or incurred original eligible expenses during the taxpayer’s 2020 tax year that the taxpayer did not deduct because:

• the expenses resulted in forgiveness of the original PPP covered loan; or
• the taxpayer reasonably expected at the end of the 2020 tax year that the expenses would result in forgiveness.

Electing the Safe Harbor

A taxpayer elects the safe harbor by attaching a statement to a timely, including extensions, federal income tax return or information return for the taxpayer’s first tax year following the 2020 tax year in which the original eligible expenses were paid or incurred. The statement must include:

• the taxpayer’s name, address, and social security number or taxpayer identification number;
• a statement that the taxpayer is applying the safe harbor provided by section 3.01 of Revenue Procedure 2021-20;
• the amount and date of disbursement of the taxpayer’s original PPP loan; and
• a list, including descriptions and amounts, of the original eligible expenses.

Certain Expenses and Loans Not Covered

The safe harbor applies only to original eligible expenses, and not to additional expenses that were added by the Consolidated Appropriations Act. The safe applies only to original PPP loans. It does not apply to PPP second draw loans.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit. Under the procedures:

• individuals who are not required to file returns for 2020 can use a simplified federal income tax return filing procedure; and
• individuals with zero adjusted gross income (AGI) for 2020 can file electronic returns by entering "$1" in several fields.

Simplified Return Procedures

Individuals may file simplified 2020 returns electronically or on paper if they have not filed and are not required to file 2020 returns. The simplified procedures apply to Forms 1040, 1040-SR and 1040-NR.

The individual should write "Rev. Proc. 2021-24" at the top of a paper return. The procedure includes detailed instructions for providing identification, income and direct deposit information.

Zero AGI

Many filing systems for electronic returns will not accept returns that report zero AGI. To file an electronic return, in addition to all other information required to be entered on Form 1040, Form 1040-SR, or Form 1040-NR, an individual with no AGI should report:

• $1 as taxable interest on line 2b of the form;
• $1 as total income on line 9 of the form; and
• $1 as AGI on line 11 of the form.

Filers of Form 1040-NR with no AGI should also report $1 as itemized deductions on lines 7 and 8 of Schedule A (Form 1040-NR) and line 12 of Form 1040-NR.

Returns Must Be Accurate

Simplified returns and zero-AGI electronic returns are federal income tax returns for all purposes. Thus, the individual must properly sign the return under penalties of perjury. The returns must also provide accurate information. However, the IRS will not challenge the accuracy of income items reported by taxpayers using these special procedures.

Individuals Who Filed 2020 Returns

Individuals who have already filed their 2020 returns do not have to do anything further to:

• receive advance child credit payments for an eligible child shown on that return;
• receive a third-round Economic Impact Payment (EIP) for the 2021 recovery rebate credit that is attributable to a dependent shown on that return; or
• claim a previously claimed 2020 recovery rebate credit and additional 2020 recovery rebate credit for themselves and for each eligible qualifying child.

Similarly, an individual who filed a federal income tax return for 2019, including by entering information in the "Non-Filers: Enter Information Here" tool on the IRS website, also do not need to file any additional forms of contact the IRS in order to receive advance child credit payments for a qualifying child shown on that return. An individual who did not receive EIPs for the full amount of the 2020 Recovery Rebate Credits may claim them by filing a 2020 federal income tax return.

U.S. Territory Residents

The simplified return and zero-AGI procedures do not apply to residents of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, or the U.S. Virgin Islands.

• Residents of Puerto Rico may be eligible to claim the child tax credit from the IRS under procedures to be announced at a later date, but they are not eligible to receive advance child tax credit payments.
• Residents of other U.S. territories should contact their local territory tax agency for additional information about the child tax credit and advance child tax credit payments, third-round economic impact payments, the 2020 recovery rebate credit, and the additional 2020 recovery rebate credit.

The IRS has provided guidance for employers, plan administrators, and health insurers regarding the new credit available to them for providing continuation health coverage to certain individuals under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) during the COVID-19 (Coronavirus) emergency.

The IRS has provided guidance for employers, plan administrators, and health insurers regarding the new credit available to them for providing continuation health coverage to certain individuals under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) during the COVID-19 (Coronavirus) emergency.

COBRA provides eligible former employees, retirees, spouses, former spouses, and dependent children with the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees. It also covers employee organizations or federal, state or local governments. State mini-COBRA laws often provide similar benefits for insured small employers not subject to Federal COBRA.

The American Rescue Plan Act ( P.L. 117-2) provided a temporary 100% reduction in the premium that individuals would have to pay when they elect COBRA continuation health coverage following a reduction in hours or an involuntary termination of employment. The new law provides a corresponding tax credit for the entities that maintain group health plans, such as employers, multiemployer plans, and insurers. The 100% reduction in the premium and the credit are also available with respect to continuation coverage provided for those events under comparable state laws, sometimes referred to as "mini-COBRA."

Under the new law, COBRA premium assistance is available to eligible individuals as of the first period of coverage beginning on or after April 1, 2021, and will not be available for periods of coverage beginning after September 30, 2021. For each Assistance Eligible Individual, COBRA premium assistance does not extend beyond the period of COBRA continuation coverage in the event that the period ends prior to September 30, 2021. If an individual receiving premium assistance becomes eligible for coverage under any other group health plan or for Medicare, the premium assistance period ends.

Example: On April 1, 2021, the individual’s employment is terminated, and the individual becomes a qualified beneficiary. The individual elects COBRA continuation coverage and becomes an Assistance Eligible Individual with COBRA continuation coverage beginning on April 1, 2021, the date the individual lost coverage. On July 1, 2021, the individual becomes eligible for coverage under a group health plan sponsored by the employer of the individual’s spouse and ceases to be an Assistance Eligible Individual. The individual ceases COBRA continuation coverage as of July 1, 2021, and enrolls in coverage in the group health plan sponsored by the employer of the individual’s spouse. On August 1, 2021, the individual’s spouse has an involuntary termination of employment, and as a result the individual and spouse lose coverage. The individual and spouse become qualified beneficiaries due to the loss of coverage and elect COBRA continuation coverage with the plan sponsored by the spouse’s employer. The individual and spouse become Assistance Eligible Individuals with respect to COBRA continuation coverage as of August 1, 2021.

In Notice 2021-31, the IRS has provided information regarding the calculation of the credit, the eligibility of individuals, the premium assistance period, and other information vital to employers, plan administrators, and insurers to understand the credit.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

ARP tax credits are available to eligible employers that pay sick and family for leave from April 1, 2021, through September 30, 2021. Under the Act, eligible employers include any business, including tax-exempt organizations with fewer than 500 employees who are not able to work or telework due to reasons related to COVID-19, including needing to recover from any injury, disability, illness or condition related to the vaccinations.

The IRS has informed taxpayers that the paid leave credits under the ARP are tax credits against the employer’s share of the Medicare tax. The tax credits are refundable, and the employer is entitled to payment of the full amount of credits if it exceeds the employer’s share of the Medicare tax. The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons, for up to two weeks at 100 percent of the employee’s regular rate of pay. Further, the tax credit for paid family leave wages is equal to the family leave wages paid for up to twelve weeks, at 2/3rds of the employee’s regular rate of pay. Importantly, the amount of these tax credits increases according to allocable health plan expenses and contributions for certain collectively bargained benefits, as well as the employer’s share of social security and Medicare taxes paid on the wages.

Eligible employers are recommended to report their total paid sick and family leave wages, health plan expenses and collectively bargained contributions, including their share of social security and Medicare taxes on the paid leave wages for each quarter on their federal employment tax return. Form 941, Employer’s Quarterly Federal Tax Return, can be used to report income tax and social security and Medicare taxes withheld from employee wages.

Further, in anticipation of claiming the credits on the Form 941, eligible employers can retain the federal employment taxes that they otherwise would have deposited, including federal income tax withheld, the employees’ share of social security, Medicare taxes and their share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If, however, an eligible employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages, the eligible employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will then have to account for the amounts received as an advance when they file Form 941, Employer's Quarterly Federal Tax Return, for the relevant quarter. Finally, self-employed individuals may claim comparable tax credits on their individual Form 1040, U.S. Individual Income Tax Return.

The IRS has reminded taxpayers who owe 2020 taxes that there are different ways to pay their taxes online, including payment options for many people who cannot pay in full.

The IRS has reminded taxpayers who owe 2020 taxes that there are different ways to pay their taxes online, including payment options for many people who cannot pay in full.

The IRS stated that the most important thing that taxpayers with a tax bill should do is file a return by the May 17 due date, even if they cannot pay in full, or request a six-month extension to avoid higher penalties for failing to file on time. The IRS emphasized that even though automatic tax filing extensions are available, these extensions do not change the payment deadline.

Further, interest, plus the much smaller late-payment penalty, will apply to any payments made after May 17. Normally, the late-payment penalty is one-half-of-one percent (0.5%) per month. The interest rate, adjusted quarterly, is currently 3% per year, compounded daily.

The IRS urges taxpayers to use Direct Pay, which is the fastest and easiest way to pay a personal tax bill. In addition, the IRS has noted that online payment plans are processed more quickly than requests submitted with electronically-filed tax returns.

There are two main types of online payment plans:

• Short-term payment plan: The payment period is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties and interest. A 180-day payment plan is also possible, but is only available by calling or writing the IRS.
• Long-term payment plan ( "installment agreement"): Payments are made monthly, and the amount owed must be less than $50,000 in combined tax, penalties and interest. If the IRS approves an installment agreement, a setup fee normally applies, but low-income taxpayers may qualify to have the fee waived or reimbursed. In addition, for anyone who filed their return on time, the late-payment penalty rate is cut in half while an installment agreement is in effect. This means that the penalty accrues at the rate of one-quarter-of-one percent (0.25%) per month, instead of the usual one-half-of-one percent (0.5%) per month.

Taxpayers who do not qualify for an online payment agreement may still be able to arrange to pay in installments. If the IRS determines a taxpayer is unable to pay, it may delay collection until their financial condition improves. Taxpayers can request a delay by calling the phone number on their IRS notice or 800-829-1040.

Some taxpayers can qualify to settle their tax bill for less than the full amount due through an offer in compromise. Though there is typically a $205 non-refundable application fee, it is generally waived for low-income taxpayers, and for offers based on doubt as to liability. The Offer in Compromise Pre-Qualifier tool can help determine eligibility for anyone interested in applying.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS advises taxpayers to do the following:

• Secure key documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space. Keep duplicates of these documents with a trusted person outside the area of the taxpayer. Scan these documents for backup storage on electronic media such as a flash drive.
• Take current photos or videos of a home or business’s contents, especially expensive and high value items. The IRS disaster-loss workbooks in IRS Pub. 584-B can help individuals and businesses compile lists of belongings or business equipment.
• Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
• Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. Taxpayers who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.

Dependent care assistance benefits carryovers and extended claims period amounts that would have been excluded from income if used during the preceding tax year will remain excludable in tax years ending in 2021 and 2022. In addition, these benefits will not be taken into account in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

Dependent care assistance benefits carryovers and extended claims period amounts that would have been excluded from income if used during the preceding tax year will remain excludable in tax years ending in 2021 and 2022. In addition, these benefits will not be taken into account in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

Dependent Care Assistance Exclusion

Employees may exclude amounts their employer pays or incurs for dependent care assistance benefits if furnished pursuant to a dependent care assistance program. For 2020, the exclusion could not exceed $5,000, $2,500 if married filing separately (for 2021 only, increased to $10,500, $5,250 if married filing separately). Unused benefits may be used during a 2 1/2 month grace period following the plan year’s end. However, if the sum of the benefits used in the tax year (including unused benefits used during a grace period that falls in the tax year) exceeds the limitation, the excess is taxable.

Carryovers and Extensions

Beyond the grace period, carryovers of unused dependent care assistance program amounts generally are not permitted. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) allowed employers to amend their plans to permit carryovers to plan years ending in 2021 and 2022, or to extend the permissible period for incurring claims to plan years over the same period.

Under Notice 2021-15, I.R.B. 2021-10, 898, if an employer adopts the carryover or the extended period, the annual limits apply to amounts contributed for a year, and not to amounts reimbursed or otherwise available for reimbursement.

Notice 2021-26 clarifies that dependent care assistance program benefits that would have been excluded from income if used during the tax year ending in 2020 or 2021, remain eligible for exclusion from the participant’s gross income, and are disregarded in applying the limits for the employee's subsequent tax years when they are carried over from a plan year ending in 2020 or 2021 or permitted to be used pursuant to an extended claims period.

Notice 2021-26 also provides examples illustrating the possible tax consequences of electing $10,500 in benefits for a plan year beginning in 2021 but ending in 2022.

The Treasury Department has released a statement discussing investment in the IRS and improving tax compliance. 

The Treasury Department has released a statement discussing investment in the IRS and improving tax compliance. While roughly 99 percent of the taxes due on wages are remitted to the IRS, compliance across other forms of income is substantially less, because the IRS has had difficulty verifying whether income from unverified sources is properly reported. The Treasury states that noncompliance is concentrated at the top of the distribution: according to a recent study, the top one percent failed to report 20 percent of their income, and failed to pay nearly $175 billion in taxes owed annually.

The Treasury states that lower levels of compliance not only negatively impact tax progressivity, but also lower tax revenue and deteriorate the country’s fiscal position. If left unaddressed, the difference between taxes owed to the government and taxes actually paid will total approximately $7 trillion in the next 10 years. This massive gap in revenue would mean that policymakers must choose between higher taxes elsewhere in the tax system, lower spending on fiscal priorities, or rising budget deficits. This tax gap has many underlying causes, with insufficient resources being at the forefront. In addition, budget cuts over the past decade have resulted in an IRS that lacks the capacity to address sophisticated tax evasion efforts. Over this period, audit rates for taxpayers making over $1 million in income have fallen by almost 80 percent.

To ensure a fair and effective tax system, the Treasury says that a robust and sustained investment in the IRS is necessary. The IRS requires access to 21st century technology and to better information, so that it can target its efforts at offenders while helping compliant taxpayers avoid unnecessary and costly audits. Importantly, this investment will also put the IRS in a position to provide taxpayers with timely answers to questions.

The Treasury has listed some considerations that provide the basis for a series of proposals in the American Families Plan (AFP). The AFP intends to overhaul tax administration and provide the IRS with the resources and information it needs to address tax evasion. These reforms are expected to generate an additional $700 billion in tax revenue over the course of a decade. The reforms are expected to:

• Provide the IRS with necessary resources to stop sophisticated tax evasion. A key component of this initiative is the provision of a sustained, multi-year stream of funds to help the IRS tackle costly tax evasion.
• Provide the IRS with more complete information on third parties. When the IRS has information from third parties, income is accurately reported, and taxes are fully paid. Importantly, this proposal intends to provide additional information to the IRS without an increased burden on taxpayers. It leverages the information that financial institutions have about account holders, requiring that they add to their regular, annual reports information about aggregate account outflows and inflows.
• Overhaul outdated technology to help IRS identify tax evasion, by providing the IRS with resources to modernize its technological infrastructure.
• Improve taxpayer service and deliver tax credits. Service enhancement will improve the ability of the IRS to communicate with taxpayers securely and promptly. The proposal would also include the necessary resources to ensure that the IRS efficiently delivers credits to families and workers, including newly expanded child tax credits and child and dependent care tax credits.
• Regulate paid tax preparers by providing the IRS with legal authority to implement safeguards in the tax preparation industry. This includes stiffer penalties for unscrupulous or "ghost preparers" who fail to identify themselves on tax returns and defraud taxpayers.

Michael Jackson’s image and likeness, as well as his interests in two trusts—one trust (NHT II) that held his interest in the Sony/ATV Music Publishing, LLC, and one trust (NHT III) that held Mijac Music—were valued for estate tax purposes.

Michael Jackson’s image and likeness, as well as his interests in two trusts—one trust (NHT II) that held his interest in the Sony/ATV Music Publishing, LLC, and one trust (NHT III) that held Mijac Music—were valued for estate tax purposes.

Image and Likeness

The estate claimed that the decedent’s image and likeness was valued at about $2,000. However, at trial, the estate brought in additional experts and increased the value to about $3 million. This amount was based on a 10-year revenue projection, which examined pre-death revenue, post-death rights, and growth and decline rates using pre-death marketability and a potential post-death boom. An estimate of expenses incurred in administering the image and likeness and expenses related to rehabilitation of the decedent’s image reduced the revenue stream. As a result, the Tax Court determined that the date-of-death value of the decedent’s image was $4.1 million.

Interest in Sony/ATV

In the years prior to his death, the decedent had borrowed against his interest in the Sony/ATV company. The company was valued using the discounted cash flow method. After finding the value of the company as a whole, a discount for lack of control was applied to one-half of that amount to reflect the decedent’s 50-percent interest. Because of the debt secured by the interest, however, the Tax Court determined that the date-of-death value of NHT II was zero.

Interest in Mijac Music

The major asset of NHT III was Mijac Music, which owned compositions from many artists, including the decedent. The decedent also assigned the income he earned from his writer’s share of certain performance revenue to NHT III. The discounted cashflow analysis was used again and the court determined the revenue streams of Mijac Music and the writer’s share of revenue. After subtracting the trust’s liabilities from the revenue, the Tax Court determined the value of NHT III was $107 million.

No Penalties

Although the values differed widely, the estate was not liable for accuracy-related penalties. Its reliance on the appraisal values was reasonable.