7 COVID-19 tax relief measures that will expire at the end of the year unless Congress takes action

0
37
7 COVID-19 tax relief measures that will expire at the end of the year unless Congress takes action


As the COVID-19 crisis took hold, our beloved elected representatives in Washington, D.C. enacted a bevy of temporary federal tax relief measures to mitigate the economic damage. Those measures certainly helped, but COVID-19 is still with us, and the economic fallout continues.

Will the new Congress extend temporary tax relief measures into 2021? Time will tell. Here’s the list of the most-important COVID-19 tax relief provisions that will expire at year-end and my take on whether they will be extended into 2021.

See also: Many tax breaks expire at the end of the year — but these 8 will probably be renewed

Borrow $100,000 from your IRA and pay it back three years later with no tax consequences

IRA owners who have been adversely affected by the coronavirus pandemic are eligible to take tax-favored coronavirus-related distributions from their IRAs during 2020, but only during 2020. Let’s call these distributions CVDs. They can add up to as much as $100,000. You can recontribute a CVD back into your IRA within three years of the withdrawal date and treat the withdrawal and later recontribution as a totally tax-free rollover.

In effect, the CVD drill allows you to borrow up to $100,000 from your IRA(s) and recontribute (repay) the amount(s) any time up to three years later with no federal income tax consequences when all is said and done. And there are no limitations on what you can use CVD funds for during the three-year period. If you’re cash-strapped, you can use the money to pay the bills and recontribute later when your financial situation has improved. You can help your adult kids out. You can pay down your HELOC. Whatever.

However, there are awkward interim tax consequences if you take advantage of this deal. See this previous Tax Guy for more details.

Extension prospects: Dim.

Suspension of retirement account required minimum distributions (RMDs)

In normal times, you must begin taking annual required minimum distributions (RMDs) from traditional IRAs and tax-deferred retirement plan accounts after you reach age 72 (or age 70½ if you turned 70½ before 2020). As a COVID-19 tax relief measure, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) suspended RMDs for calendar year 2020, but only for that one year.

Extension prospects: I hope this relief will be extended into 2021. It would help out seniors who will only be getting a 1.3% increase in their 2021 Social Security benefits. But I have no gut feel for whether such relief will be granted. Stay tuned.

Small employer tax credits to cover required COVID-19-related employee paid leave

The Families First Coronavirus Response Act (FFCRA) granted a new federal income tax credit to small employers to cover mandatory payments to employees who take time off under the FFCRA’s COVID-19-related emergency sick-leave and family-leave provisions.

Specifically, a small employer can collect a tax credit equal to 100% of qualified emergency sick-leave and family-leave payments made by the employer pursuant to the FFCRA. However, the credit only covers leave payments made during the period beginning on 4/1/20 and ending on 12/31/20. So, as things now stand, the credit will expire on December 31.

For details on this relief and equivalent relief for self-employed individuals, see here.

Extension prospects: Good if Congress extends mandatory COVID-19-related leave payments into 2021.

Employee retention tax credit for all eligible employers

The CARES Act granted the so-called employee retention credit. The credit amount equals 50% of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. The credit is subject to an overall wage cap of $10,000 per eligible employee. For details, see this IRS website.

Extension prospects: There’s probably a pretty good chance that this credit will be extended to cover eligible employee wages paid in at least the first part of 2021. But the credit costs the Treasury lots of money, so we shall see.

Payroll tax deferral relief for all employers and self-employed individuals

Under the payroll tax deferral relief offered by the CARES Act, your business can defer the 6.2% employer portion of the Social Security tax component of FICA tax owed on the first $137,700 of an employee’s 2020 wages — for wages paid during the deferral period. The deferral period began on the 3/27/20 and will end on 12/31/20. Your business must then pay the deferred payroll tax amount in two installments:

  • Half of the deferred amount must be paid in by 12/31/21

  • The remaining half must be paid in by 12/31/22.

This payroll tax deferral deal is available to all employers, with no requirement to show any specific COVID-19-related impact.

If you are self-employed, you can defer half of your liability for the 12.4% Social Security tax component of the self-employment (SE) tax for the deferral period. The deferral period began on 3/27/20 and will end on 12/31/20. You must then pay the deferred SE tax amount in two installments:

  • Half by 12/31/21

  • The remaining half by 12/31/22.

Extension prospects: Dim IMHO. Hope I’m wrong.

Liberalized rules for deducting business net operating losses

Business activities that generate tax losses can cause you or your business entity to have a net operating loss (NOL) for the year. The CARES Act significantly liberalizes the NOL deduction rules and allows NOLs that arise in 2018-2020 to be carried back five years. So, an NOL that arose in 2020 can be carried back to 2015. NOL carry-backs allow you to claim refunds for taxes paid in the carry-back years. Because tax rates were higher in pre-2018 years, NOLs carried back to those years can result in hefty tax refunds.

Extension prospects: With COVID-19 economic fallout continuing with no end in sight, there’s a good chance that liberalized rules will be allowed for NOLs that arise in 2021. But that will require legislation. Fingers crossed.

Suspension of excess business loss disallowance rule

Current deductions for so-called excess business losses incurred by individuals in tax years beginning in 2018-2025 were disallowed before a CARES Act relief provision became law. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are adjusted annually for inflation. The CARES Act suspended the excess business loss disallowance rule for losses that arise in tax years beginning in 2018-2020.

Extension prospects: With continuing COVID-19 economic fallout, we hope that the suspension of the excess business loss rule will be extended to cover losses that arise in 2021. But that will require legislation.

The bottom line

There you have it: the most-important COVID-19-related federal tax relief measures that will expire at yearend unless our beloved pals in D.C. take action. Stay tuned for developments.



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here