2020 was a roller coaster of a year with markets starting strong only to be disrupted by COVID-19, resulting in the fastest drop to a bear market in history. Even amidst widespread shutdowns, protests, and a presidential election, the market rebounded and once again reached all-time highs. With many fast-paced changes still underway, let’s take a look at what we know for now and what shifts we may see in the near future.
A second Coronavirus Stimulus package was approved (Consolidated Appropriations Act of 2021) late December.
Here is a brief look at some of what is inside:
Stimulus Checks: Direct payments of $600 per eligible individual. Eligible individuals include taxpayer(s) and their children (age 16 and under) that meet the income thresholds. The adjusted gross income threshold is $75,000 for single filers, $150,000 for joint filers, and $112,500 for head of household.
Unemployment Benefits: Those claiming unemployment benefits will receive a $300 weekly increase from the federal government through March 14th. The Pandemic Unemployment Assistance program which allowed gig workers and self-employed people impacted by coronavirus to claim unemployment was extended. The original 39 weeks is extended by 11 weeks. The Pandemic Emergency Unemployment Compensation program that provides benefits to those who exhaust their regular state benefits was extended by 11 weeks.
Paycheck Protection Program (PPP): The act reopens PPP and makes revisions and clarifications. Businesses who did not receive funds in the initial round are now eligible and a second round of funding is available to certain businesses. In general, businesses need to have fewer than 300 employees and have experienced a 25% drop in quarterly revenue from any quarter in 2020 compared to the same quarter in 2019. There are some exceptions to these rules for businesses engaged in accommodation and food services.
The IRS was taking the position that PPP funds used to pay for allowable expenditures were no longer tax deductible. The act clarifies that expenses paid for with PPP funds that are normally tax deductible will still be tax deductible. The act also streamlines and simplifies forgiveness procedures.
Payroll Tax Deferral: Employers who were deferring payment of payroll taxes have received an extension through April 30th, 2021 to repay.
Rental Assistance: Eviction protections were extended through January 31st, 2021 and $25 billion in rental assistance for individuals was provided.
Vaccine Funding: $20 billion was allocated for vaccines so they can be available at no charge to those who need it.
“Permanent” AGI threshold for Medical Expense Deduction: All taxpayers must now only reach 7.5% of AGI threshold to be able to itemize medical expenses above the threshold.
CARES Act Above the line Charitable Contribution expanded: The CARES Act created a 2020 only $300 above the line (don’t have to itemize) charitable deduction for both single and married filers. This has been extended through 2021 and expanded to allow a $600 deduction for married filers in 2021.
The CARES Act provision allowing the ability to deduct charitable cash contributions up to 100% of AGI has been extended through 2021 as well.
Simplifications to Higher Education Deductions/Credits: The Tuition and Related Expenses deduction is no more in 2021, but this act increases the AGI phaseout for the Lifetime Learning Credit and aligns it with the American Opportunity Tax Credit phaseout range. $80,000-$90,000 for single filers and $160,000-$180,000 for joint filers.
No RMD Waiver: The CARES act allowed for a waiver of Required Minimum Distributions (RMDs) in 2020. This has not been extended to 2021.
A Look Ahead
Above is what we know, but what else should we potentially keep an eye out for in the future? At Financial Plan we don’t try to predict the future, but that doesn’t mean we aren’t keeping an eye on the landscape. We can review President-elect Biden’s tax plan for clues. With the Georgia senate runoff race going to the Democrats, it gives the opportunity to control the House, Senate (split seats with Vice-President elect Harris as the tiebreaker) and Oval Office. This is the recipe needed for sweeping legislation change.
President-elect Biden’s income tax plan focuses on corporate taxation, higher earning individuals, and estate/gift tax changes. It should be noted these are still only concepts and have a long way to go to become law.
- Proposed increase of the corporate tax rate from 21% to 28%.
- Would create a minimum tax on corporations with profits of $100m or higher.
- Would double the Global Intangible Low Tax Income (GILTI) from 10.5% to 21% on foreign subsidiaries of US firms. This tax was designed to encourage US corporations to return to the US.
Individual Income Tax:
- Proposed to increase the top tax bracket from 37% to 39.6%.
- Tax long term capital gains and qualified at ordinary income tax rates of the individual on income above $1 million. This would result in the need for planning around selling real estate and businesses to avoid a large spike. It could also change asset location strategies for high earners.
- Reduce itemized deduction opportunities for those with taxable income above $400k. This includes capping the benefit of itemized deductions at 28% and restoring the Pease limitations.
- Proposed a 12.4% percent Social Security payroll tax on income above $400,000. Currently the social security wage base stops at $142,800 for 2021 so there would be a gap between the current wage base and the proposed tax.
- 26% retirement plan credit instead of the current tax deduction. Regardless of income if you save in a retirement plan you would receive a 26% credit, so people in lower tax brackets would be encouraged to save. People in a higher tax bracket may not want to save and receive a 26% credit if they believe they will have to withdrawal at higher income tax rates later. This could push more high earners to Roth savings or business owners may shift to plans with a higher employer contribution which would reduce income.
Estate and Gift Tax Changes:
- Revert the Federal Gift and Estate tax exemption to 2009 levels. This exemption level was $3.5m and a 45% tax rate.
- Proposed to eliminate the step up in basis at death. This is big. A step up in cost basis allows an inheritor to receive a new cost basis at the date of death and sell tax free. Without this, when large assets transition via death of the owner (businesses, land, etc.) there could be a massive tax liability. Combining this with changes to the capital gain tax on income over $1m (often generated on a business or real estate sale) could leave the beneficiaries in a difficult situation without proper planning.
Although none of this is law, understanding how this may impact you could influence planning decisions in 2021. If we see a comprehensive tax package, the implementation date will also impact strategies. If it is applied retroactively there may not be an opportunity to plan.