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New Stimulus Law Grants 8 Tax Breaks for 1040 Filers

New Stimulus Law Grants 8 Tax Breaks for 1040 Filers

As you doubtlessly know, Congress recently passed a massive new stimulus bill that was enacted into law on December 27, 2020. Most of the public’s attention has been focused on the bill’s authorization of additional stimulus checks and new PPP loans and other aid targeted to struggling businesses.

But Form 1040 American taxpayers who are not in business are struggling as well. The stimulus bill contains a hodgepodge of eight new or extended tax breaks intended to help Form 1040 taxpayers. Are you looking for a Columbia Maryland CPA to help you make sense of these tax breaks? Read on to get our take on these new laws.

None of these tax breaks are earthshaking by themselves, but together they add up to a nice tax present for COVID-19-weary Americans.

1. Enlarged Universal Charitable Contribution Tax Deduction

Ordinarily, charitable contributions are deductible only if you itemize your personal deductions on IRS Schedule A instead of taking the standard deduction.

In the past, about 30 percent of taxpayers itemized. Today, only about 10 percent itemize because the Tax Cuts and Jobs Act roughly doubled the standard deduction. Do you claim your deductions correctly? Our Accounting Firm In Columbia, MD can help you claim appropriate deductions.

Today the vast majority of individual taxpayers don’t get any tax benefit from charitable contributions. The Coronavirus Aid, Relief, and Economic Security (CARES) Act attempted to ameliorate this state of affairs and thereby help struggling charities that rely on donations. It added a new $300, universal, above-the-line charitable deduction for cash contributions by non-itemizers to tax-qualified charities during 2020. I am a professional Tax Accountant in Columbia MD that can help you claim this benefit.

Unfortunately, this deduction came with a marriage penalty: it was the same for single and joint filers.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends this deduction to 2021 and eliminates the marriage penalty: the deduction is $600 for married non-itemizers who file jointly, but for 2021 only.

Interestingly, the new law also adds a special 50 percent penalty for taxpayers who cheat by taking this deduction without actually making the cash contributions they claim on their return. A Columbia Maryland CPA can help you prepare your tax statement appropriately, so you don’t get penalized.

2. Extension of CARES Act Elimination of AGI Limit on Charitable Contributions

Under regular tax rules, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to 60 percent of the taxpayer’s adjusted gross income (AGI). The CARES Act increased this deduction to 100 percent of AGI for cash deductions to qualified charities (not including donor-advised funds). But this increase was for 2020 only.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends this 100 percent of AGI charitable deduction to 2021

3. Lengthened Payroll Tax Deferral Repayment Period

Back in August, President Trump signed an executive order allowing employers to defer withholding the employee portion of the Social Security tax due for September through December 2020. The deferred amount would then be withheld from the employees’ pay during January through April 2021.

The idea was to increase employee take-home pay during these months (the employee Social Security payroll tax is 6.2 percent of up to $137,700 in wages during 2020).

Compliance with the order was purely voluntary, and few private employers took advantage of the deferral. But the tax deferral was made mandatory for most federal and military employees.

The COVID-related Tax Relief Act of 2020 allows employees who had their Social Security taxes deferred to pay them back by December 31, 2021, instead of by April 30. Payments are to be made ratably during these months.

This will give these employees a bit more take-home pay during January through April, but a bit less for the remainder of the year.

Are you a business that needs help figuring this out? I’m a Small Business Accountant Columbia MD that can help you.

4. 7.5 Percent AGI Floor for Medical Expense Deduction Made Permanent

Medical expenses are deductible as a personal itemized deduction only if, and to the extent, they exceed a percentage of the taxpayer’s AGI.

For several years, this AGI floor has fluctuated between 10 percent and 7.5 percent of AGI. The rate is 7.5 percent of AGI for 2020, and before the new law, it was scheduled to go up to 10 percent for 2021and later.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 makes the 7.5 percent of AGI floor permanent.

This makes it a bit easier for taxpayers who itemize to deduct their medical expenses.

5. Flexible Spending Account Carryovers

Under regular tax rules, employees who have health flexible spending accounts (FSAs) may carry over a maximum of $550 of unused funds in the account to use the following year.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows employees to carry over any unused 2020 balances in their health FSAs to 2021. Moreover, any remaining balance at the end of 2021 may be carried over to 2022.

Note:  Employers are not required to allow such carryovers in their FSA plan; it’s purely voluntary for the employer. Are you an employer in need of a Small Business Accountant in Columbia MD to help you manage your books? Please get in touch today

6. Earned Income Tax Credit and Child Tax Credit

Two of the most important federal programs that benefit the working poor are the earned income tax credit (EITC) and the child tax credit (CTC). The EITC and the CTC are based on a taxpayer’s family size and earned income. The more earned income, the larger the credits, subject to maximum limits.

But due to the COVID-19 pandemic, the earned income of many low-income taxpayers declined dramatically during 2020. This would ordinarily result in a reduction in their EITC and CTC credits—up to an 80 percent decrease for some taxpayers.

For purposes of the EITC and the CTC only, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 permits taxpayers to substitute their earned income for 2019 if it is greater than their earned income for 2020.This will result in larger tax credits for these low-income taxpayers. Do you need help claiming EITC and CTC correctly? I’m a professional Tax Accountant in Maryland that can help you claim your deductions as per law.

7. Educator Expense Deduction Includes PPE

Teachers of kindergarten through grade 12 may take an above-the-line deduction of up to $250 for books, supplies, and other equipment they purchase with their own money for use in the classroom.

The COVID-related Tax Relief Act adds to this deduction expenses for personal protective equipment (PPE), disinfectant, and other supplies used to prevent the spread of COVID-19. Only PPE and supplies purchased after March 12, 2020, qualify. The deduction remains a maximum of $250.

Note that the educator expense deduction is not available for homeschoolers, including parents who are teaching their children at home during the pandemic. It’s only for professional educators who work at least 900 hours during the school year.

8. Goodbye, Tuition and Fees Deduction—Hello, Expanded Lifetime Learning Credit

The tax code contains a bewildering array of deductions and credits for higher education, including the American opportunity tax credit, the lifetime learning credit, and the tuition and fees deduction.

The tuition and fees deduction is being allowed to expire at the end of 2020.17 In its place, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 is making the lifetime learning credit available to more taxpayers by increasing the phase-out range for the credit.

The 2020 lifetime learning credit phase-out range is $59,000 to $69,000 for single filers, and $118,000 to $138,000 for joint filers. Beginning in 2021, the lifetime learning credit phase-out range will be $80,000 to $90,000 for single filers, and $160,000 to $180,000 for joint filers.18 This is the same as the American opportunity tax credit phase-out range.

The main purpose here seems to be to simplify the tax code by reducing the number of education-related tax benefits taxpayers have to deal with.

Also, the lifetime learning credit is better than the tuition and fees deduction because it’s a tax credit, not a deduction. Unlike a deduction, which only reduces your taxable income, a credit is a dollar-for-dollar reduction in tax.

The lifetime learning credit offers a credit of 20 percent of up to $10,000 in education expenses, for a maximum credit of $2,000.

The tuition and fees deduction allows you to deduct a maximum of $4,000 above the line ($2,000 if your AGI is over $65,000 if single, or over $130,000 for joint filers). Even if you were in the top bracket (37 percent), a $4,000 deduction would save only $1,480 in tax (but you can’t qualify for this deduction at all if your income is high enough to be in the 37 percent bracket).

These laws can feel a bit complicated to understand. Don’t miss out on deductions and credits, allow our Columbia Maryland CPA firm to help you. We’re specialists in Tax Preparation, Small Business Accounting, Dental Accounting and acting as CPA For Doctors in Maryland.

Key Takeaways

The new stimulus law contains eight new tax breaks that enable you as an individual taxpayer to do the following:

  1. Deduct cash contributions to charity if you don’t itemize.
  2. Deduct up to 100 percent of your AGI as a charitable deduction.
  3. Lengthen to one year the time you have to repay your employee 2020 Social Security taxes if you had them deferred.
  4. Deduct medical expenses that exceed 7.5 percent of your AGI in 2021.
  5. Carry over unused flexible savings account funds to next year.
  6. Use your 2019 income to qualify for the EITC and/or CTC if you’re a lower-income taxpayer.
  7. Deduct out-of-pocket expenses for PPE if you’re a teacher.
  8. Take advantage of the lifetime learning credit if you’re a higher-income taxpayer in 2021

Please feel free to contact our Accounting Firm In Maryland. We’re here to help you. Contact us today.

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Business Tax Services

2020 Last-Minute Vehicle Purchases to Save on Taxes

Here’s an easy question: Do you need more 2020 tax deductions? If yes, continue on.

Next easy question: Do you need a replacement business vehicle?

If yes, you can simultaneously solve or mitigate both the first problem (needing more deductions) and the second problem (needing a replacement vehicle), but you need to get your vehicle in service on or before December 31, 2020.

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2020. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.

Now that you have the basics, let’s get to the tax deductions.

1. Buy a New or Used SUV, Crossover Vehicle, or Van

Let’s say that on or before December 31, 2020, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:

  1. The ability to elect bonus depreciation of 100 percent (thanks to the Tax Cuts and Jobs Act)
  2. The ability to select Section 179 expensing of up to $25,900
  3. MACRS depreciation using the five-year table
  4. No luxury limits on vehicle depreciation deductions

Example. On or before December 31, 2020, you buy and place in service a qualifying used $50,000 SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2020 is $45,000.

2. Buy a New or Used Pickup

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2020, then this newly purchased vehicle gives you four big benefits:

  1. Bonus depreciation of up to 100 percent
  2. Section 179 expensing of up to $1,040,000
  3. MACRS depreciation using the five-year table
  4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

  • a GVWR of more than 6,000 pounds, and
  • a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for either expensing of up to the $25,900 SUV expensing limit or 100 percent bonus depreciation.

Takeaways

The TCJA made it much easier to find big deductions on your new or used vehicle purchase:

  • If your new or used vehicle has a GVWR greater than 6,000 pounds, then you can write off 100 percent of your business cost with bonus depreciation if you both buy it and place it in service on or before December 31, 2020.
  • If your new or used vehicle has a GVWR of 6,000 pounds or less, then with a purchase price of $58,100 or more, you can write off up to $18,100 in 2020 if you buy it and place it in service on or before December 31, 2020.

Example. You place in service a business SUV with a GVWR of 6,500 pounds and with a business cost of $100,000. You can immediately write off $100,000 using bonus depreciation. If this vehicle were depreciation limited because it failed the weight test, your maximum first-year write-off would be $18,100.

Don’t forget to drive your new vehicle for at least one business mile on or before December 31, 2020, to ensure it meets the “placed in service” requirement.

Sigma Accountant’s blog is intended for educational purposes and provides general information about tax accounting, business related topics. It is not intended to provide professional advice. By using this blog site, you understand that there is no CPA/client relationship between you and Sigma Accountants or its employees. The blog and website, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for competent counsel from a qualified advisor.

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Business Tax Preparation Service

5 Last-Minute Year-End Tax Strategies for Marriage, Kids, and Family

If you are thinking of getting married or divorced, you need to consider December 31, 2020, in your tax planning.

Here’s another planning question: Do you give money to family or friends (other than your children, who are subject to the kiddie tax)? If so, you need to consider the zero-taxes planning strategy.

And now, consider your children who are under age 18. Have you paid them for the work they’ve done for your business? Have you paid them the right way?

Here are five strategies to consider as we come to the end of 2020.

1. Put Your Children on Your Payroll

If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you absolutely need to consider having that child on your payroll. Why?

  • First, neither you nor your child would pay payroll taxes on the child’s income.
  • Second, with a traditional IRA, the child can avoid all federal income taxes on up to $18,400 in income.

If you operate your business as a corporation, you can still benefit by employing the child even though both your corporation and your child suffer payroll taxes

2. Get Divorced after December 31

The marriage rule works like this: you are considered married for the entire year if you are married on December 31.

Although lawmakers have made many changes to eliminate the differences between married and single taxpayers, in most cases the joint return will work to your advantage.

Warning on alimony! The Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018:

  • Under the old rules, the payor deducts alimony payments and the recipient includes the payments in income.
  • Under the new rules, which apply to all agreements executed after December 31, 2018, the payor gets no tax deduction and the recipient does not recognize income.

3. Stay Single to Increase Mortgage Deductions

Two single people can deduct more mortgage interest than a married couple.

If you own a home with someone other than a spouse, and you bought it on or before December 15, 2017, you individually can deduct mortgage interest on up to $1 million of a qualifying mortgage.

For example, if you and your unmarried partner live together and own the home together, the mortgage ceiling on deductions for the two of you is $2 million. If you get married, the ceiling drops to $1 million.

If you bought your house after December 15, 2017, then the reduced $750,000 mortgage limit from the TCJA applies. In that case, for two single people, the maximum deduction for mortgage interest is based on a ceiling of $1.5 million.

4. Get Married on or before December 31

Remember, if you are married on December 31, you are married for the entire year.

If you are thinking of getting married in 2020, you might want to rethink that plan for the same reasons that apply in a divorce (as described above). The IRS could make big savings available to you if you get married on or before December 31, 2020.

You have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. But a quick trip to the courthouse may save you thousands.

5. Make Use of the 0 Percent Tax Bracket

In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24.

But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?

If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $40,000 in taxable income and to a married couple with less than $80,000 in taxable income.

If the parent or other loved one is in the 0 percent capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.

Example. You give Aunt Millie shares of stock with a fair market value of $20,000, for which you paid $2,000. Aunt Millie sells the stock and pays zero capital gains taxes. She now has $20,000 in after-tax cash to spend, which should take care of things for a while.

Had you sold the stock, you would have paid taxes of $4,284 in your tax bracket (23.8 percent times the $18,000 gain).

Of course, $5,000 of the $20,000 you gifted goes against your $11.4 million estate tax exemption if you are single. But if you’re married and you made the gift together, you each have a $15,000 gift-tax exclusion, for a total of $30,000, and you have no gift-tax concerns other than the requirement to file a gift-tax return that shows you split the gift.

Takeaways

If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you absolutely need to consider having that child on your payroll. Why?

  • First, neither you nor your child would pay payroll taxes on the child’s income.
  • Second, with a traditional IRA, the child can avoid all federal income taxes on up to $18,400 in income.

If you operate your business as a corporation, you can still benefit by employing the child even though you and the child have to pay payroll taxes.

If you are getting divorced or married, make sure to consider the mortgage ceiling available to singles co-owning homes as well as the post-TCJA alimony rules. Keep December 31 front of mind. If you are married on that date, you are married for the year, and being married affects your taxes.

To know for sure what dollar effect marriage has, positive or negative, run the numbers through a tax return or have your tax professional do this for you.

The fifth strategy in this blog asked you to look at family and friends to whom you give money and explained how, in the right circumstances, you can give those recipients stock and have them take advantage of their zero capital gains tax bracket.

Sigma Accountant’s blog is intended for educational purposes and provides general information about tax accounting, business related topics. It is not intended to provide professional advice. By using this blog site, you understand that there is no CPA/client relationship between you and Sigma Accountants or its employees. The blog and website, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for competent counsel from a qualified adviser.

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