How Year-End Legislation May Affect Tax Season
In late 2020, Congress passed the Consolidated Appropriations Act, which included many tax provisions and extenders as well as additional COVID-19 stimulus relief.
For example, the ability to deduct up to $300 in charitable contributions if the taxpayer doesn’t itemize has been extended for an additional year. The business meal deduction has been increased from 50% to 100% through the end of 2022. The act also extended the repayment period through Dec. 31, 2021, for employers that opted to defer employee payroll taxes in the latter part of 2020. (1)
As we approach tax season, it could be beneficial to get up-to-date on provisions that may apply to your filing this year. We’re noting just a few here. We recommend you work with a qualified tax professional to understand the opportunities that may benefit you and ensure your taxes are filed accurately and on time. If you would like to learn how insurance products may help you create tax-efficient strategies moving forward, please feel free to reach out to our office.
One of the tax provisions the appropriations bill made permanent was the lower medical expense deduction floor. This means taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income — down from 10%. However, the bill also extended some tax provisions for another two years, including the residential energy-efficient property credit. (2)
Speaking of energy efficiency, other credits extended for one year include the qualified fuel cell rules for alternative motor vehicles, the alternative fuel refueling property credit, and the credit for two-wheeled plug-in electric vehicles. (3)
Penalty-free distributions from qualified retirement plans for COVID-related reasons expired at the end of 2020. However, the act offers a similar option for non-coronavirus-related disasters, such as wildfires and hurricanes. If a taxpayer is affected by any type of federally declared disaster, he may withdraw up to $100,000 from a qualified plan or IRA through June 25, 2021. Similar to the COVID-related withdrawal rules, disaster-related distributions are exempt from the 10% early withdrawal penalty that normally applies but are subject to ordinary income tax treatment. Taxpayers can repay the distribution over a three-year period with no tax implications. (4)
Note that individual COVID relief payments paid out by the Treasury are not taxable. However, eligible taxpayers who did not receive the full amount of last year’s two distributions can claim the missing amount as a Recovery Rebate Credit when they file their 2020 taxes this year. (5)
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1 Gordon Gray. American Action Forum. Dec. 22, 2020. “Major Tax Policy Changes in the Consolidated Appropriations Act.” https://www.americanactionforum.org/insight/major-tax-policy-changes-in-the-consolidated-appropriations-act/. Accessed Feb. 4, 2021.
2 Alistair M. Nevius. Journal of Accountancy. Dec. 27, 2020. “Many tax provisions appear in year-end coronavirus relief bill.” https://www.journalofaccountancy.com/news/2020/dec/tax-provisions-in-covid-19-relief-bill-ppp-and-business-meal-deductibility.html. Accessed Feb. 4, 2021.
3 KPMG. Dec. 29, 2020. “United States – President Signs COVID-19 Relief Legislation, Tax Provisions Enacted.” https://home.kpmg/xx/en/home/insights/2020/12/flash-alert-2020-514.html. Accessed Feb. 4, 2021.
4 Robert Bloink and William H. Byrnes. ThinkAdvisor. February 02, 2021. “Year-End Stimulus: What Changed for Retirement Plan Participants.” https://www.thinkadvisor.com/2021/02/02/year-end-stimulus-what-changed-for-retirement-plan-participants/. Accessed Feb. 4, 2021.
5 IRS. Jan. 12, 2021. “IRS ready for the upcoming tax season; last-minute changes to tax laws included in IRS forms and instructions.” https://www.irs.gov/newsroom/irs-ready-for-the-upcoming-tax-season-last-minute-changes-to-tax-laws-included-in-irs-forms-and-instructions. Accessed Feb. 4, 2021.