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2 More Ways Parents Are Benefitting from the American Rescue Plan Act

Medical Expenses, Personal Finance, Taxes / By

When you think back on this spring, you may fondly recall a substantial deposit made to your bank account by the federal government (if you were eligible). Economic Impact Payments were a focal point of the American Rescue Plan Act (ARPA), signed into law in March, and the payments were even larger for parents with dependent children. But ARPA contains two other provisions that benefit parents:

1. Child credit expansion and advance payments. 

For 2021, this refundable tax credit has been increased from $2,000 to $3,000 per child — $3,600 for children under six years of age. In addition, qualifying children now include 17-year-olds.

The child credit is subject to modified adjusted gross income (AGI) phaseout rules and begins to phase out when MAGI exceeds:

  • $400,000 for married couples who file a joint return, and
  • $200,000 for other taxpayers.

The increased credit amount ($1,000 or $1,600) is subject to lower income phaseouts than the ones that apply to the first $2,000 of the credit. The increased amount begins to phase out when MAGI exceeds:

  • $150,000 for joint filers,
  • $112,500 for heads of household, and
  • $75,000 for other taxpayers.

ARPA also calls for the IRS to make periodic advance payments of the child credit totaling 50% of the estimated 2021 credit amount. The IRS has announced the payments will begin on July 15, 2021. They’ll then be made on the 15th of each month (unless the 15th falls on a weekend or holiday).

Recipients will receive the monthly payments through direct deposit, paper check or debit cards. The IRS says that it is committed to maximizing the use of direct deposit.

2. Child and dependent care break increases. 

For 2021, the amount of qualifying expenses for the refundable child and dependent care credit has been increased to:

  1. $8,000 (from $3,000) if there’s one qualifying care individual; and
  2. $16,000 (from $6,000) if there are two or more such individuals.

The maximum percentage of qualifying expenses for which credit is allowed has been increased from 35% to 50%. So the credit ultimately is worth up to $4,000 or $8,000. But the credit is subject to an income-based phaseout beginning at household income levels exceeding $125,000.

The amount you can contribute to a child and dependent care Flexible Spending Account (FSA, also sometimes referred to as a “dependent care assistance program”) also has been increased. For 2021, it’s $10,500 (up from $5,000 for 2020). The FSA pays or reimburses you for these expenses. But you can’t claim a tax credit for expenses paid by or reimbursed through an FSA.

The Tax Treatment of Start-up Expenses

Business, Taxes / By

With the economy improving, many business owners and entrepreneurs may decide to launch new enterprises. If you’re among them, be aware that the way you handle some of your initial expenses can make a large difference in your tax liability.

General Rules

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one. Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins.

As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

In addition, no start-up deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine whether a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Applicable Expenses

In general, start-up expenses include all amounts you spend to investigate creating or acquiring a business, launching the enterprise, or engaging in a for-profit activity while anticipating the activity will become an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking Ahead

If you have start-up expenses that you’d like to deduct this year, record keeping is critical. Contact Maggart about your start-up plans. We can help with the tax and other aspects of your new business.

3 Things to Know After Filing Your Tax Return

Business, Personal Finance, Records, Taxes / By

Given that it’s after April 15, normally most people would have filed their income tax return by now. But with the deadline for filing 2020 individual returns pushed out to May 17, you might not have filed yours quite yet. Or you might be taking advantage of extending your return to Oct. 15. Whenever you file, here are three important things to keep in mind afterwards:

1. You can check on your refund. 

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

2. You can file an amended return if you forgot to report something. 

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. But if you filed before the deadline (without regard to extensions), you typically have until three years from the deadline to file an amended return.

There are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

3. You can throw out some old tax records. 

You should keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return.

That means you can probably dispose of most tax-related records for the 2017 tax year and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.) However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep actual tax returns indefinitely so you can prove to the IRS that you filed legitimately. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

Keep records associated with retirement accounts until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (Keep these records for six years if you want to be extra safe.)

Our CPAs are always available.

Contact the Maggart team if you have further questions about your refund, filing an amended return, or record retention. We’re here all year!

Can Your Business Benefit from the Enhanced Employee Retention Credit?

Business, Employment, Taxes / By

Over the course of the COVID-19 pandemic, many businesses have had to shut down or reduce operations, causing widespread furloughs and layoffs. Fortunately, employers that have kept workers on their payrolls may be eligible for a refundable employee retention credit. Three laws have created, extended and enhanced the credit.

The Original Law

The CARES Act created the employee retention credit in March of 2020. The credit originally:

  • Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
  • Was subject to an overall wage cap of $10,000 per eligible employee, and
  • Was available to eligible large and small employers.

The credit covered wages paid from March 13, 2020, through Dec. 31, 2020.

What’s Changed

The Consolidated Appropriations Act (CAA), signed into law in December of 2020, extended the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021. And now the American Rescue Plan Act (ARPA), signed into law on March 11, has extended it again through Dec. 31, 2021.

In addition, for the first two quarters of 2021, the CAA increased the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter. And it increased the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules). Because of the ARPA extension, these higher wage ceilings now apply to all four quarters of 2021.

Substantial Tax Savings

Additional rules and limits apply to the employee retention credit, and these are just some of the changes made to it. But the potential tax savings can be substantial. Contact your tax advisor at Maggart for more information about this tax saving opportunity.

ARPA Provides More Than Just Direct Payments to Taxpayers

Business, Employment, Personal Finance, Taxes / By

On March 11, another round of COVID-19 relief legislation was signed into law. The American Rescue Plan Act (ARPA) includes funding for individuals, businesses, and state and local governments, but also some significant tax-related provisions.

ARPA extends and expands some tax provisions in the CARES Act and the Consolidated Appropriations Act (CAA) and also includes some new tax-related provisions.

A Quick Look

Here’s a quick look at some of the tax provisions that may affect you:

Individuals

  • Recovery rebates of up to $1,400 for singles and heads of households and $2,800 for married couples filing jointly — plus $1,400 per qualifying dependent (including adult dependents) — subject to adjusted gross income (AGI) phaseouts starting at $75,000 for singles, $112,500 for heads of households and $150,000 for joint filers and ending at $80,000, $120,000 and $160,000, respectively
  • Increased Child credit, including advance payments of part of the credit later this year
  • Expanded child and dependent care tax credit
  • Tax-free treatment of forgiven student loan debt
  • Exclusion from gross income of the first $10,200 in unemployment benefits received

Businesses & Other Employers

  • Extended and expanded tax credits for retaining employees, through Dec. 31, 2021
  • Extended and modified payroll tax credits for paid sick and family leave, through Sept. 30, 2021
  • Extended excess business loss limitation, through Dec. 31, 2026
  • Expansion of the Section 162(m) limits on the tax deduction public companies can take for executive compensation to cover the CEO, the CFO and the five next highest paid employees, beginning in 2027

How Will You Benefit?

This is just a brief overview of the tax-related provisions of ARPA. Additional rules and limits apply. Contact your tax advisor at Maggart for more details on these provisions and how you might benefit.

How the Consolidated Appropriations Act Affects Education Funding

College Savings, Personal Finance, Taxes / By

The Consolidated Appropriations Act (CAA), signed into law late last year, contains a multitude of provisions that may affect individuals. For example, if you’re planning to fund a college education or in the midst of paying for one, the CAA covers two important areas:

1. Student Loans 

The CARES Act temporarily halted collections on defaulted loans, suspended loan payments and reduced the interest rate to zero through September 30, 2020. Subsequent executive branch actions extended this relief through January 31, 2021. The CAA leaves in place that expiration date.

Also under the CARES Act, employers can provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The payment can be made to the employee or the lender. The CAA extends the exclusion through 2025. The longer term may make employers more willing to offer this benefit.

2. Tax Credits 

Qualified taxpayers generally can claim an education tax break with the American Opportunity credit and the Lifetime Learning credit. Previously, though, the two credits were subject to different income phaseout rules, with the American Opportunity credit available at a greater modified adjusted gross income (MAGI) than the Lifetime Learning credit. In addition, before the new law, there was a higher education expense deduction for qualified tuition and related expenses that taxpayers could opt to claim instead of the credits.

The CAA applies the higher American Opportunity credit phaseouts to the Lifetime Learning credit, effective for tax years beginning after December 31, 2020. The credits will phase out beginning at MAGIs of $80,000 for single filers and ending at $90,000. For joint filers, they will begin to phase out at MAGIs of $160,000 and disappear at $180,000. The new law also eliminates the higher education expense deduction for 2021 and beyond.

The Details of Claiming the Home Office Deduction

Employment, Personal Finance, Taxes / By

Many people have found themselves working from home during the COVID-19 pandemic. If you’re one of them, you might wonder, “Can I claim the home office deduction on my 2020 tax return?”

The short answer is: Only if you’re self-employed. Employees can no longer claim home office expenses, and even self-employed taxpayers must follow strict rules to claim a deduction.

Copious Write-offs

If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.

Alternatively, you can use the simplified method for claiming the deduction — $5 per square foot for up to 300 square feet. Although you won’t be able to depreciate the portion of your home that’s used as an office, you can claim mortgage interest, property taxes and casualty losses as an itemized deduction to the extent otherwise allowable, without needing to apportion them between personal and business use of the home.

Deduction Tests

You can deduct your expenses if you meet any of these three tests:

  1. Principal place of business. You’re entitled to home office deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests. You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements. You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.
  2. Meeting place. You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients, or customers. The patients, clients, or customers must physically come to the office.
  3. Separate structure. You’re entitled to home office deductions for a home office, used exclusively and regularly for business, that’s located in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio, or workshop.

You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.

Limitations Apply

The amount of home office deductions for self-employed taxpayers is subject to various limitations. Proper planning is key to claiming the maximum deduction for your home office expenses. Contact us if you’d like to discuss your situation.

Why the New Child Tax Credit Is so Valuable

Personal Finance, Taxes / By

If you’re a parent, or soon will be, you’re no doubt aware of how expensive it is to pay for food, clothes, activities and education. Fortunately, the federal child tax credit is available to help many taxpayers with children under the age of 17, and there’s a dependent credit for those who are eligible with older children.

An Expanded Tax Break

Before the Tax Cuts and Jobs Act (TCJA) kicked in, the child tax credit was $1,000 per qualifying child. But it was reduced for eligible married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers).

Starting with the 2018 tax year, and applying through the 2025 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. It also created a $500 credit per dependent who isn’t a qualifying child under 17. There’s no age limit for the $500 credit, but IRS tests for dependency must be met.

The TCJA also substantially increased the thresholds at which the credit begins to phase out. Starting with the 2018 tax year, 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 other taxpayers. So, many taxpayers who were once ineligible for the credit because their AGI was too high are now eligible to claim it.

SSN Requirement

In order to claim the child tax credit for a qualifying child, you must include the child’s Social Security number (SSN) on your tax return. Under previous law, you could instead use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).

If a qualifying child doesn’t have an SSN, you won’t be able to claim the $2,000 credit. However, you can claim the $500 dependent credit for that child using an ITIN or an ATIN. The SSN requirement doesn’t apply for non-qualifying-child dependents but, if there’s no SSN, you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.

Don’t Miss Out on the Child Tax Credits

The changes made by the TCJA generally increase the value of these credits and widen their availability to more taxpayers. Please contact Maggart for further information or ask about it when we prepare your tax return.

What 2020 Borrowers Need to Know About PPP Loans in 2021

Business, Employment, Taxes / By

Almost a year ago, the Paycheck Protection Program (PPP) was launched in response to the COVID-19 crisis. If your company took out such a loan, you’re likely curious about the tax consequences — particularly for loans that have been forgiven — and also about the launch of “second-draw” PPP loans.

Forgiveness Criteria

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of various costs incurred and payments made during the covered period. These include payroll costs, interest (but not principal) payments on any covered mortgage obligation (for mortgages in place before February 15, 2020), payments for any covered rent obligation (for leases that began before February 15, 2020), and covered utility payments (for utilities that were turned on before February 15, 2020). Also eligible are covered operations expenditures, property damage costs, supplier costs and worker protection expenses.

Your covered period would normally have been the 24-week period beginning on the date you took out the loan (ending no later than December 31, 2020, if that was before the expiration of the 24-week period). If you received a PPP loan before June 5, 2020, you could elect a shorter 8-week covered period. If you didn’t elect the 8-week period and instead used the longer 24-week period, you had to maintain payroll levels for the full 24 weeks to be eligible for loan forgiveness. If you didn’t make an election, the 24-week period applies.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered lease obligation or make covered utility payments.

Debt Cancellation & Deductibility

The reduction or cancellation of indebtedness generally results in cancellation of debt 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) won’t generally be reduced on account of this exclusion.

The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. The IRS took the position that these expenses were not deductible. However, under the Consolidated Appropriations Act (CAA), enacted at the end of 2020, expenses paid from the proceeds of PPP loans are deductible.

“Second-Draw” PPP Loans

Under the CAA, eligible businesses may be able take out so-called “second-draw” PPP loans. These loans are primarily intended for beleaguered small businesses with 300 or fewer employees that have used up, or will soon use up, the proceeds from initial PPP loans. The maximum second-draw loan amount is $2 million, and only one such loan can be taken out.

To qualify for a second-draw loan, a business must demonstrate at least a 25% decline in gross receipts in any quarter of 2020 as compared to the corresponding quarter in 2019. Qualifying businesses can generally borrow up to 2.5 times their average monthly payroll costs for either the one-year period before the date on which the loan is made or calendar year 2019. The application deadline is March 31, 2021.

Any PPP Tax Questions?

A PPP loan may complicate your company’s 2020 income tax filing, but a second draw could provide a much-needed influx of cash. Please contact Maggart with any questions you might have.

6 Key Tax Q&As for 2021

Personal Finance, Retirement, Taxes / By

Right now, you may be more concerned about your 2020 tax bill than you are about how to handle your personal finances in the new year. However, as you deal with your annual tax filing, it’s a good idea to also familiarize yourself with pertinent amounts that may have changed for 2021.

Not all tax figures are adjusted for inflation and, even if they are, they may be unchanged or change only slightly each year because of low inflation. In addition, some tax amounts can only change with new tax legislation. Here are six commonly asked (and answered) Q&As about 2021 tax-related figures:

1. How much can I contribute to an IRA for 2021? 

If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2020.)

2. I have a 401(k) plan through my job. How much can I contribute to it? 

For 2021, you can contribute up to $19,500 to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older. (These amounts are also the same as they were for 2020.)

3. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? 

In 2021, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners and other domestic employees is increasing to $2,300 from $2,200 for 2020.

4. How much do I have to earn in 2021 before I can stop paying Social Security tax on my salary? 

The Social Security tax wage base is $142,800 for 2021, up from $137,700 for 2020. That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

5. What’s the standard deduction for 2021? 

The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by significantly increasing the standard deduction and reducing or eliminating various itemized deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800 for 2020). For single filers, the amount is $12,550 (up from $12,400) and, for heads of households, it’s $18,800 (up from $18,650).

So, if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t benefit from itemizing for 2021.

6. How much can I give to one person without triggering a gift tax return in 2021? 

The gift tax annual exclusion for 2021 is $15,000, unchanged from last year. This amount is only adjusted in $1,000 increments, so it typically increases only every few years.

These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact our team at Maggart.