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Summary of Coronavirus Relief Act (H.R.133) 12-27-2020
Additional refundable tax credit
The Act provides a refundable tax credit in the amount of $600 per eligible family member (Sec. 6428A). The credit is $600 per taxpayer ($1,200 for married taxpayers filing jointly), in addition to $600 per qualifying child.
The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married taxpayers filing jointly) at a rate of $5 per $100 of additional income.
Deductibility of PPP-funded expenses
Effective as of the date of enactment of the CARES Act, the Act clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan.
Deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and the tax basis and other attributes of the borrower's assets will not be reduced as a result of the loan forgiveness. The forgiveness will be treated as tax-exempt income for the purposes of the stock basis increase for PPP recipients that are partnerships or S corporations.
- Sec. 213(f) reduction in medical expense deduction floor, which allows individuals to deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income (previously 10%)
- Sec. 139B gross income exclusion for certain benefits provided to volunteer firefighters and emergency medical responders.
5-year extensions (through 2025):
- Sec. 45S employer credit for paid family and medical leave (note this credit is different than the payroll tax credits for paid sick and family leave)
- Sec. 51 work opportunity credit
- Sec. 108(a)(1)(E) gross income exclusion for discharge of indebtedness on a principal residence; note that the amount of exclusion is lowered to $750,000 ($375,000 for married individuals filing separately) from $2 million ($1 million for married individuals filing separately)
- Sec. 127(c)(1)(B) exclusion for certain employer payments of student loans
2-year extensions (through 2022):
- Sec. 25D residential energy-efficient property credit (the Act also makes qualified biomass fuel property expenditures eligible for the credit)
- Sec. 48 energy investment tax credit for solar and residential energy-efficient property
1-year extensions(through 2021):
- Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles
- Sec. 35 health coverage tax credit
- Sec. 163(h) treatment of qualified mortgage insurance premiums as qualified residence interest
CARES Act extensions and related provisions
Educator expenses for protective equipment: The Act requires the Treasury to issue regulations or other guidance providing that the cost of personal protective equipment and other supplies used for the prevention of the spread of COVID-19 is treated as an eligible expense for purposes of the Sec. 62(a)(2)(D)(ii) educator expense deduction (currently $250). The regulations or guidance will apply retroactively to March 12, 2020.
Payroll tax credits: The Act extends the refundable payroll tax credits for paid sick and family leave, enacted in the Families First Coronavirus Response Act, P.L. 116-127, through the end of March 2021. It also modifies the payroll tax credits so that they apply as if the corresponding employer mandates were extended through March 31, 2021. The Act also allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit.
Employee retention tax credit modifications: The Act extends the CARES Act employee retention tax credit (ERTC) through June 30, 2021. It also expands the ERTC and contains technical corrections. A noteworthy modification provides that employers who receive PPP funds may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds.
Deferral of employees' portion of payroll tax: The Act extends the repayment period through Dec. 31, 2021 on employees' share of certain payroll taxes deferred from Sept. 1, 2020 through Dec. 31, 2020 through Dec. 31, 2021.
Miscellaneous tax provisions
Temporary allowance of full deduction for business meals: The Act temporarily allows a 100% business expense deduction for meals (rather than the current 50%) if the expense is for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022.
Certain charitable contributions deductible by non-itemizers: The Act extends and modifies the $300 charitable deduction for non-itemizers for 2021 and increases the maximum amount that may be deducted to $600 for married couples filing jointly. Note that for tax year 2020, $300 is the maximum allowed per tax return, regardless of filing status.
Education expenses: The Act repeals the Sec. 222 deduction for qualified tuition and related expenses but in its place increases the phase-out limits on the lifetime learning credit (so the phase-out limits match the American opportunity credit), effective for tax years beginning after Dec. 31, 2020.
Depreciation of certain residential rental property over 30-year period: The Act provides that the recovery period applicable to residential rental property placed in service before Jan. 1, 2018 and held by an electing real property trade or business is 30 years.
Temporary special rules for health and dependent care flexible spending arrangements: The Act allows taxpayers to roll over unused amounts in their health and dependent care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022. This provision also permits employers to allow employees to make a 2021 midyear prospective change in contribution amounts.
Disaster tax relief
Use of retirement funds for disaster mitigation: The Act allows residents of qualified disaster areas (as defined in the Act) to take a qualified distribution of up to $100,000 from a retirement plan or individual retirement account (IRA) without penalty. Amounts withdrawn are included in income over three years or may be re-contributed to the plan. The Act also increases the allowable amount of a loan from a retirement plan to $100,000 (from $50,000) if the loan is made due to a qualified disaster and meets various other requirements.
Employee retention credit for disaster zones: The Act allows a tax credit of 40% of wages (up to $6,000 per employee) to employers who conducted an active trade or business in a qualified disaster zone (as defined in the Act). The credit applies to wages paid without regard to whether the employee performed any services associated with those wages.
SECURE ACT Impacts Retirement Plan Provisions
On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (HR 1865). This bill includes the terms of the Setting Every Community Up for Retirement Enhancement, otherwise known as the SECURE Act. The SECURE Act impacts many areas of employee benefit program taxation. Following are the highlights of some of the key provisions, with effective dates.
Impact on Individuals
Required minimum distributions from tax-qualified retirement programs can now begin on April 1 of the year after the participant attains age 72, instead of age 70½. This applies to participants who attain age 70½ after December 31, 2019, and applies to both qualified plans and individual retirement accounts (IRAs).
Individuals can now contribute to an IRA at any age; prior law prohibited individuals from contributing after age 70½. The new rule is effective for taxable years beginning after December 31, 2019.
Non-spousal beneficiaries of deceased participants must now completely withdraw account balances by the end of the tenth year following the participant's death. This applies to both qualified plans and IRAs, and has the effect of ending the "stretch IRA" methodology of deferring distributions to non-spousal beneficiaries. This is effective for deaths after 2019.
Participants can take a penalty-free withdrawal of up to $5000 from a retirement program (including IRAs, 403(b) plans, 457 plans and 401(a) plans) during the one-year period following the birth or adoption of a child. The distribution will not be subject to the 10% excise tax for early distributions. This provision is effective for distributions made after December 31, 2019; plan amendments will be required.
Pension plans, money purchase pension plans and governmental 457(b) plans may now allow participants to take in-service distributions beginning at age 59½, instead of the current 70½. This will be effective for plan years beginning after December 31, 2019; plan amendments will be required.
Impact on Employers/Plan Sponsors
The tax credit available to small employers who start a tax-qualified retirement plan has been increased from $500 to a maximum of $5,000 (depending on the number of employees). This change will be effective for employer taxable years beginning after December 31, 2019.
Small employer 401(k) plans that begin to use automatic participant enrollment will be entitled to a $500 per year tax credit for three years. This provision will be effective for employer taxable years beginning after December 31, 2019.
For 401(k) or 403(b) plans that use automatic enrollment and escalation, the escalation percentage is increased from 10% to 15% of compensation for years after the first year in which a participant is enrolled; the first year of enrollment percentage cannot exceed 10%. This provision will be effective for employer taxable years beginning after December 31, 2019; plan amendments will be required.
401(k) plans will no longer be required to provide annual "safe harbor notices" to participants, although newly enrolled participants will be required to receive a notice. This will be effective for plan years beginning after December 31, 2019.
Non-collectively bargained 401(k) plans will need to allow employees who have either one year of service (1,000 hours) or three consecutive years of 500 hours of service to participate in the plan. This will be effective for plan years beginning after December 31, 2020; plan amendments will be required.
Tax Cuts and Jobs Act
Selected items that impact the tax on individuals for tax years 2018 through 2025:
- Maximum tax rate is reduced to 37%.
- Standard deduction is increased to $24,000 for married and $12,000 for single - adjusted annually for inflation.
- Personal exemptions are repealed at all income levels.
- Individual deduction for state and local taxes for income, sales and property is limited in the aggregate to $10,000 for married and single filers, $5,000 for married filing separately filers
- Most miscellaneous itemized deductions that were subject to the 2% of adjusted gross income floor will no longer be allowed. Common examples of these expenses are tax preparation fees, investment expenses, union dues and employee's unreimbursed business expenses.
- Interest deduction on a home equity loan is limited to a maximum $100,000 loan used to buy or substantially improve a qualified residence of the taxpayer. The interest on a home equity loan for any other purpose will not be deductible.
- Maximum mortgage acquisition debt is limited to $750,000 ($375,000 for married persons filing separately) for deductible interest.
- Child tax credit for each qualified child is increased to $2,000 and the phase-out of this credit begins at $110,000 for single filers and $400,000 for married filers. A partial credit is allowed for certain non-child dependents.
- $10,000 per year of Section 529 plan funds may be used for elementary or secondary school tuition.
- Personal casualty losses are nondeductible unless attributable to a federally declared disaster.
- Alimony will not be deductible by the payor or includible by the recipient for post-2018 divorces.
- Charitable deduction is denied for contribution to a college or university in exchange for athletic event seating rights.
- Moving expense deduction is eliminated except for certain armed forces members.
- The ACT repeals the ability to re-characterize one kind of IRA contribution as another, for example, to designate a traditional contribution as a Roth contribution or vice-versa.
You can deduct capital losses to the extent of any realized capital gain on a dollar-for-dollar basis. Once you've offset all your capital gains, you can deduct capital losses against other taxable income up to a total of $3,000 per year ($1,500 for a married person filing separately). Any unused capital losses are carried forward for deduction in later tax years subject to the same limits.
- To the extent possible, time investment gains and losses to avoid large capital loss carryovers that will take several years to deduct.
Save taxes by shifting income
You may give up to $15,000 of cash or other property to each of any number of individuals annually without federal gift tax. Married couples that agree to "split" their gifts can give $30,000 per recipient annually.
Tax-deferred retirement savings plan
An employer's 401(k) tax-deferred retirement savings plan (e.g. a 403(b) or SIMPLE plan) may offer you a convenient way to save toward your retirement. You don't pay taxes immediately on the salary you defer to your plan account. Income taxes aren't due until you receive distributions from the plan. Your account's investment earnings - interest, dividends, and capital gains - also are tax deferred. With no taxes taken out, your savings have a chance to grow and compound much faster.
STATE OF CONNECTICUT NEWS
Pension and Annuity Income
Increase to Subtraction Modification of Pension and Annuity Income For the taxable year beginning on January 1, 2021, the subtraction modification of pension and annuity income is increased to 42% of any pension or annuity income received for the taxable year.
Property Tax Credit Limitation
The property tax credit eligibility requirements and amount remain the same. To qualify for the property tax credit, you, or your spouse if married filing jointly, must be 65 years of age or older by the end of the taxable year, or you must have claimed at least one dependent on your federal income tax return. The maximum property tax credit amount remains at $200. The phase-out thresholds for all filing statuses remain the same as the 2019 levels.
Income Tax Exemption for Teachers' Pensions
For the taxable year, a taxpayer is allowed a subtraction modification of 25% of the income received from the Teachers' Retirement System when calculating Connecticut Adjusted Gross Income (AGI). This modification applies only to the extent that such income has been properly included in the federal AGI for the taxable year.
Increase of Thresholds for Determining the Amount of Social Security Benefits Exempt From Connecticut Income Tax
For taxable years beginning on or after January 1, 2019, the adjusted gross income thresholds for determining the amount of Social Security benefits excluded from Connecticut income tax are revised as follows:
|Federal Filing Status
|(Form CT-1040, Line 1)
|Single or Married Filing Separately
|Less than $75,000
|100% of the Social Security benefits included in Federal AGI
|Married Filing Jointly, Head of Household, Qualifying Widow(er)
|Less than $100,000
|100% of the Social Security benefits included in Federal AGI
Using A 529 Plan To Pay Student Loans
529 plan account owners may now withdraw up to $10,000 tax-free for payments toward qualified education loans. However, there is no double-dipping when it comes to federal education tax benefits. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.
The $10,000 limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. For example, a parent with three children may take a $10,000 distribution to pay student loans for each child, for a total of $30,000.
The law provides a new way for grandparents to help a grandchild pay for college without affecting financial aid eligibility. Normally, distributions from a grandparent-owned 529 plan are reported as untaxed income on a student's Free Application for Federal Student Aid (FAFSA). A student's financial aid package may be reduced by up to 50% of the value of untaxed income. For example, if a grandparent withdraws $10,000 from their 529 plan to pay a grandchild's college expenses, it could reduce the grandchild's financial aid eligibility by as much as $5,000.
Now, grandparents are able to avoid this negative impact if they wait to take a 529 plan distribution until after the grandchild graduates to pay down their student loans. Assets held in a grandparent-owned 529 plan do not affect financial aid, and since the 529 plan distribution was taken after the student graduated, there is nothing to report on the FAFSA.
Using A 529 Plan To Pay For Apprenticeship Programs
It's impossible to predict what path a child will decide to take. Parent may open a 529 plan when their child is very young, only to find out years later that the child isn't going to attend a traditional college. 529 plans can be used to pay for any eligible post-secondary institution, including trade schools and vocational programs. But, prior to the SECURE Act, costs of apprenticeship programs were not considered qualified 529 plan expenses.
Apprenticeship programs provide on-site training to prepare workers for careers in various fields, such as manufacturing, health care, information technology and construction. Students who are pursuing an apprenticeship may use tax-free 529 plan distributions to pay for fees, textbooks, supplies and equipment required for a registered apprenticeship.