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End of Year: Tax Law Changes

Dec 10, 2020 8:15:00 AM / by CSI Accounting Staff posted in small business taxes, small business bookkeeping, small business accounting

Brian Paulson, the owner of CSI Accounting & Payroll, has put together some end-of-year planning tips.

He writes, "Everything we do is focused on the core belief that we succeed in life by helping others succeed. This letter is one complimentary piece of our intense planning and research effort throughout the year to help in your success. Feel free to share it with anyone you know who could benefit."

This section covers tax law changes in 2020. Tax laws are subject to change, of course, but this year has presented several transformations.

Blog - Tax Law ChangesCharitable Contributions

There is a new $300 charitable contributions deduction for those who take the standard deduction, but it is only available in 2020. It is per return, so a married couple gets the same $300 deduction as a single person -  nobody ever said tax law was fair!

Remember, you must have receipts for any charitable deduction; it no longer works to say you give $10 cash each week to church. The IRS says no receipt, no deduction.

Energy Credits

The $500 residential energy credit for energy efficient improvements made to your home, such as insulation, windows, doors, and more, is back. However, it also expires at the end of 2020. It reminds Brian of the promotion for the McRib sandwich; "it just keeps expiring and coming back." The credit is 10% of what you spend, and it is limited to $500 in your lifetime. If you took the credit in the past, you don’t get it again.

The credit for solar energy and ground source heating systems does not expire at the end of 2020, but it drops from 30% of the cost to 26% for 2020. This credit drops again to 22% in 2021 and ends at the end of 2021.

Other Deductions Extended for 2020 Only

The deduction for mortgage insurance premiums is back. Medical expenses are again limited to those that exceed 7.5% of your income, which also has a 10% limit after this year. You have the option of deducting tuition and fees if it is better than the tuition tax credits.

Tax Credit for Employers Who Start a 401k Plan

Starting in 2020, employers get a tax credit of $250 per eligible employee up to a maximum credit of $5,000. There is also a $500 credit for employers who have an existing plan and add an auto enrollment feature.

The idea to automatically enroll every new employee in the plan unless they opt out is a great idea to force people to start to save for their retirement. Unfortunately, there are big penalties for the employer if they miss enrolling someone or forget to bump their contribution on the annual renewal date, so be careful.

Kiddie Tax

The unearned income of children will once again be taxed at the parent’s tax rate instead of at the trust tax rates. This applies to any dependent under age 18 and extends to age 24 for students.

New Rules for 529 College Savings Plans

Withdrawals from 529 plans can now pay for certain apprenticeship programs, and up to $10,000 can be withdrawn tax free one time per student to pay off student loans.

The $1200 Stimulus Payment

Most people got a $1,200 stimulus payment during the COVID shutdown. It was actually an advance against a 2020 tax return credit. That means if you did not get the check and you are entitled to it, you will get that credit on your 2020 tax return. However, it also means you must report the unreceived credit so you don’t apply for it again when you file your tax return.

The good news is if you received a credit, you may not have to pay it back. The bad news is you will need to report the actual tax credits you did receive to your tax preparer.

Changes to Retirement Accounts

Under the old rules, you had to start withdrawing money from your retirement accounts at age 70 ½ , but now it is age 72. Additionally, you previously could no longer make IRA contributions once you reached age 70 ½, but now you can contribute as long as you have earned income. Brian remarks, "You never knew getting old would be so good!"

Under the old rules, if you inherited an IRA from someone, you got to spread the withdrawals out over your life expectancy. This was often referred to as a stretch IRA. Congress was looking for ways to pay for all the stimulus money this year, and their answer was to change inherited IRAs to be withdrawn over 10 years. You can take it all at once in the 10th year or spread it out, but it must be completely withdrawn in 10 years.

There are some exceptions who get to keep the old stretch rules, such as a spouse or a dependent within 10 years of the age of the decedent, anyone who inherited an IRA from an individual who died before 2020, or allowing a stretch for benefits paid to a special needs trust to support a disabled person.

Self-Employed COVID Sick and Emergency Leave Tax Credit

One of the laws passed during the COVID crisis reimbursed employers 100% of an employee’s wages if they had COVID or 2/3 of the wages if they were off to care for a family member. That law has been extended to self-employed individuals and partners.

If the business owner meets the sick or emergency leave criteria, there is a reimbursement by claiming the credit on your personal income tax return. This is done on new form 7202 and the calculation of the credit is based on your self-employment income for the year.

Penalty-Free Withdrawal From IRA

Anyone can now withdraw $5,000 penalty-free from an IRA for the birth or adoption of a child. You can also recontribute the money back into the IRA.

In addition, you can withdraw $100,000 from your retirement accounts for coronavirus-related distributions without penalty and the tax on the withdrawal can be paid over three years. If you recontribute the funds within the three years, it will simply be treated as a rollover and not taxed.

A Refresher on Meals and Entertainment

Many still want to deduct business entertainment expenses, but those deductions are gone for good. However, the IRS came out with proposed rules to clarify whether meals are partially or fully deductible as a business expense.

The cost of food and beverage as part of a holiday party is 100% deductible because it is a recreational, social, or similar activity provided for non-highly compensated employees. On the other hand, if the employer provides free drinks and snacks in a break room for all employees, that is only 50% deductible because it is not a recreational, social, or similar activity. "Who lays awake at night and thinks this stuff up?" wonders Brian.

Want to learn more?

If you have any questions, please click on the button below. We would love to help address your end-of-year concerns. We may even be able to help save you time and money through our monthly accounting services... so you won't have to do catch-up work during the holidays ever again!



CSI Accounting Staff

Written by CSI Accounting Staff

This article was composed by a member of our staff who interviewed our experts to get the facts straight. Any uncited information found here came straight from a knowledgeable accountant or payroll specialist.