Cash payments and tax relief for individuals in new law
A new law signed by President Trump on March 27 provides a
variety of tax and financial relief measures to help Americans during the
coronavirus (COVID-19) pandemic. This article explains some of the tax relief
for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES)
Act.
Individual cash payments
Under the new law, an eligible individual will receive a cash
payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing
jointly) plus $500 for each qualifying child. Eligibility is based on adjusted
gross income (AGI).
Individuals who have no income, as well as those whose income
comes entirely from Social Security benefits, are also eligible for the
payment.
The AGI thresholds will be based on 2019 tax returns, or 2018
returns if you haven’t yet filed your 2019 returns. For those who don’t qualify
on their most recently filed tax returns, there may be another option to receive
some money. An individual who isn’t an eligible individual for 2019 may be
eligible for 2020. The IRS won’t send cash payments to him or her. Instead, the
individual will be able to claim the credit when filing a 2020 return.
The income thresholds
The amount of the payment is reduced by 5% of AGI in excess of:
- $150,000 for a joint return,
- $112,500 for a head of household, and
- $75,000 for all other taxpayers.
But there is a ceiling that leaves some taxpayers ineligible for
a payment. Under the rules, the payment is completely phased-out for a single
filer with AGI exceeding $99,000 and for joint filers with no children with AGI
exceeding $198,000. For a head of household with one child, the payment is
completely phased out when AGI exceeds $146,500.
Most eligible individuals won’t have to take any action to
receive a cash payment from the IRS. The payment may be made into a bank
account if a taxpayer filed electronically and provided bank account
information. Otherwise, the IRS will mail the payment to the last known
address.
Other tax provisions
There are several other tax-related provisions in the CARES Act.
For example, a distribution from a qualified retirement plan won’t be subject
to the 10% additional tax if you’re under age 59 ½ — as long as the distribution
is related to COVID-19. And the new law allows charitable deductions, beginning
in 2020, for up $300 even if a taxpayer doesn’t itemize deductions.
Stay tuned
These are only a few of the tax breaks in the CARES Act. We’ll
cover additional topics in coming weeks. In the meantime, please contact us if
you have any questions about your situation.
Answers to your questions about 2020 individual tax limits
Right now, you may be more concerned about your 2019 tax bill than you are about your 2020 tax situation. That’s understandable because your 2019 individual tax return is due to be filed in less than three months.
However, it’s a good idea to familiarize yourself with tax-related amounts that may have changed for 2020. For example, the amount of money you can put into a 401(k) plan has increased and you may want to start making contributions as early in the year as possible because retirement plan contributions will lower your taxable income.
Note: Not all tax figures are adjusted for inflation and even if
they are, they may be unchanged or change only slightly each year due to low
inflation. In addition, some tax amounts can only change with new tax
legislation.
So below are some Q&As about tax-related figures for this
year.
How much can I contribute to an IRA for 2020?
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 2019.)
I have a 401(k) plan through my job. How much
can I contribute to it?
For 2020, you can contribute up to $19,500 (up from $19,000) 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.
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 2020, the threshold when a domestic employer must withhold
and pay FICA for babysitters, house cleaners, etc. is $2,200 (up from $2,100 in
2019).
How much do I have to earn in 2020 before I
can stop paying Social Security on my salary?
The Social Security tax wage base is $137,700 for this year (up
from $132,900 last year). 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.)
I didn’t qualify to itemize deductions on my
last tax return. Will I qualify for 2020?
The Tax Cuts and Jobs Act eliminated the tax benefit of
itemizing deductions for many people by increasing the standard deduction and
reducing or eliminating various deductions. For 2020, the standard deduction
amount is $24,800 for married couples filing jointly (up from $24,400). For
single filers, the amount is $12,400 (up from $12,200) and for heads of
households, it’s $18,650 (up from $18,350). 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 itemize for 2020.
How much can I give to one person without triggering
a gift tax return in 2020?
The annual gift exclusion for 2020 is $15,000 and is unchanged
from last year. This amount is only adjusted in $1,000 increments, so it
typically only increases every few years.
Your tax picture
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 us.
© 2020
Cents-per-mile rate for business miles decreases slightly for 2020
This year, the optional standard mileage rate used to calculate
the deductible costs of operating an automobile for business decreased by
one-half cent, to 57.5 cents per mile. As a result, you might claim a lower
deduction for vehicle-related expense for 2020 than you can for 2019.
Calculating your deduction
Businesses can generally deduct the actual expenses attributable
to business use of vehicles. This includes gas, oil, tires, insurance, repairs,
licenses and vehicle registration fees. In addition, you can claim a
depreciation allowance for the vehicle. However, in many cases depreciation
write-offs on vehicles are subject to certain limits that don’t apply to other
types of business assets.
The cents-per-mile rate comes into play if you don’t want to
keep track of actual
vehicle-related expenses. With this approach, you don’t have to account for all
your actual expenses, although you still must record certain information, such
as the mileage for each business trip, the date and the destination.
Using the mileage rate is also popular with businesses that
reimburse employees for business use of their personal vehicles. Such
reimbursements can help attract and retain employees who drive their personal
vehicles extensively for business purposes. Why? Under the Tax Cuts and Jobs
Act, employees can no longer deduct unreimbursed employee business expenses,
such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, be aware that you must
comply with various rules. If you don’t, the reimbursements could be considered
taxable wages to the employees.
The rate for 2020
Beginning on January 1, 2020, the standard mileage rate for the
business use of a car (van, pickup or panel truck) is 57.5 cents per mile. It
was 58 cents for 2019 and 54.5 cents for 2018.
The business cents-per-mile rate is adjusted annually. It’s
based on an annual study commissioned by the IRS about the fixed and variable
costs of operating a vehicle, such as gas, maintenance, repair and depreciation.
Occasionally, if there’s a substantial change in average gas prices, the IRS
will change the mileage rate midyear.
Factors to consider
There are some situations when you can’t use the cents-per-mile
rate. In some cases, it partly depends on how you’ve claimed deductions for the
same vehicle in the past. In other cases, it depends on if the vehicle is new
to your business this year or whether you want to take advantage of certain
first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding
whether to use the mileage rate to deduct vehicle expenses. We can help if you
have questions about tracking and claiming such expenses in 2020 — or claiming
them on your 2019 income tax return.
© 2019
Help protect your personal information by filing your 2019 tax return early
The IRS announced it is opening the 2019 individual income tax
return filing season on January 27. Even if you typically don’t file until much
closer to the April 15 deadline (or you file for an extension), consider filing
as soon as you can this year. The reason: You can potentially protect yourself
from tax identity theft — and you may obtain other benefits, too.
Tax identity theft explained
In a tax identity theft scam, a thief uses another individual’s
personal information to file a fraudulent tax return early in the filing season
and claim a bogus refund.
The legitimate taxpayer discovers the fraud when he or she files
a return and is informed by the IRS that the return has been rejected because
one with the same Social Security number has already been filed for the tax
year. While the taxpayer should ultimately be able to prove that his or her
return is the valid one, tax identity theft can cause major headaches to
straighten out and significantly delay a refund.
Filing early may be your best defense: If you file first, it
will be the tax return filed by a would-be thief that will be rejected, rather
than yours.
Note: You can get your individual tax return prepared by us before January
27 if you have all the required documents. It’s just that processing of the
return will begin after IRS systems open on that date.
Your W-2s and 1099s
To file your tax return, you must have received all of your W-2s
and 1099s. January 31 is the deadline for employers to issue 2019 Form W-2 to
employees and, generally, for businesses to issue Form 1099 to recipients of
any 2019 interest, dividend or reportable miscellaneous income payments
(including those made to independent contractors).
If you haven’t received a W-2 or 1099 by February 1, first
contact the entity that should have issued it. If that doesn’t work, you can
contact the IRS for help.
Other advantages of filing early
Besides protecting yourself from tax identity theft, another
benefit of early filing is that, if you’re getting a refund, you’ll get it
faster. The IRS expects most refunds to be issued within 21 days. The time is
typically shorter if you file electronically and receive a refund by direct
deposit into a bank account.
Direct deposit also avoids the possibility that a refund check
could be lost or stolen or returned to the IRS as undeliverable. And by using
direct deposit, you can split your refund into up to three financial accounts,
including a bank account or IRA. Part of the refund can also be used to buy up
to $5,000 in U.S. Series I Savings Bonds.
What if you owe tax? Filing early may still be beneficial. You
won’t need to pay your tax bill until April 15, but you’ll know sooner how much
you owe and can plan accordingly.
Be an early-bird filer
If you have questions about tax identity theft or would like
help filing your 2019 return early, please contact us. We can help you ensure
you file an accurate return that takes advantage of all of the breaks available
to you.
© 2020
New law helps businesses make their employees’ retirement secure
A significant law was recently passed that adds tax breaks and
makes changes to employer-provided retirement plans. If your small business has
a current plan for employees or if you’re thinking about adding one, you should
familiarize yourself with the new rules.
The Setting Every Community Up for Retirement Enhancement Act
(SECURE Act) was signed into law on December 20, 2019 as part of a larger
spending bill. Here are three provisions of interest to small businesses.
- Employers that are unrelated will be able to join together to create one retirement plan. Beginning in 2021, new rules will make it easier to create and maintain a multiple employer plan (MEP). A MEP is a single plan operated by two or more unrelated employers. But there were barriers that made it difficult to setting up and running these plans. Soon, there will be increased opportunities for small employers to join together to received better investment results, while allowing for less expensive and more efficient management services.
- There’s an increased tax credit for small employer retirement plan startup costs. If you want to set up a retirement plan, but haven’t gotten around to it yet, new rules increase the tax credit for retirement plan start-up costs to make it more affordable for small businesses to set them up. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to: The greater of $500, or the lesser of: a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or b) $5,000.
- There’s a new small employer automatic plan enrollment tax credit. Not surprisingly, when employers automatically enroll employees in retirement plans, there is more participation and higher retirement savings. Beginning in 2020, there’s a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. This credit is on top of and existing plan start-up credit described above and is available for three years. It is also available to employers who convert an existing plan to a plan with automatic enrollment.
These are only some of the retirement plan provisions in the
SECURE Act. There have also been changes to the auto enrollment safe harbor
cap, nondiscrimination rules, new rules that allow certain part-timers to
participate in 401(k) plans, increased penalties for failing to file retirement
plan returns and more. Contact us to learn more about your situation.
4 new law changes that may affect your retirement plan
If you save for retirement with an IRA or other plan, you’ll be
interested to know that Congress recently passed a law that makes significant
modifications to these accounts. The SECURE Act, which was signed into law on
December 20, 2019, made these four changes.
Change #1: The maximum age for making
traditional IRA contributions is repealed. Before 2020,
traditional IRA contributions weren’t allowed once you reached age 70½.
Starting in 2020, an individual of any age can make contributions to a
traditional IRA, as long he or she has compensation, which generally means
earned income from wages or self-employment.
Change #2: The required minimum distribution
(RMD) age was raised from 70½ to 72. Before 2020, retirement
plan participants and IRA owners were generally required to begin taking RMDs
from their plans by April 1 of the year following the year they reached age
70½. The age 70½ requirement was first applied in the early 1960s and, until
recently, hadn’t been adjusted to account for increased life expectancies.
For distributions required to be made after December 31, 2019,
for individuals who attain age 70½ after that date, the age at which
individuals must begin taking distributions from their retirement plans or IRAs
is increased from 70½ to 72.
Change #3: “Stretch IRAs” were partially
eliminated. If a plan participant or IRA owner died before 2020, their
beneficiaries (spouses and non-spouses) were generally allowed to stretch out
the tax-deferral advantages of the plan or IRA by taking distributions over the
beneficiary’s life or life expectancy. This is sometimes called a “stretch
IRA.”
However, for deaths of plan participants or IRA owners beginning
in 2020 (later for some participants in collectively bargained plans and
governmental plans), distributions to most non-spouse beneficiaries are
generally required to be distributed within 10 years following a plan
participant’s or IRA owner’s death. That means the “stretch” strategy is no
longer allowed for those beneficiaries.
There are some exceptions to the 10-year rule. For example, it’s
still allowed for: the surviving spouse of a plan participant or IRA owner; a
child of a plan participant or IRA owner who hasn’t reached the age of
majority; a chronically ill individual; and any other individual who isn’t more
than 10 years younger than a plan participant or IRA owner. Those beneficiaries
who qualify under this exception may generally still take their distributions
over their life expectancies.
Change #4: Penalty-free withdrawals are now
allowed for birth or adoption expenses. A distribution from a
retirement plan must generally be included in income. And, unless an exception
applies, a distribution before the age of 59½ is subject to a 10% early
withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are
used to pay for expenses related to the birth or adoption of a child are
penalty-free. The $5,000 amount applies on an individual basis. Therefore, each
spouse in a married couple may receive a penalty-free distribution up to $5,000
for a qualified birth or adoption.
Questions?
These are only some of the changes included in the new law. If
you have questions about your situation, don’t hesitate to contact us.
© 2020
New law provides a variety of tax breaks to businesses and employers
While you were celebrating the holidays, you may not have
noticed that Congress passed a law with a grab bag of provisions that provide
tax relief to businesses and employers. The “Further Consolidated
Appropriations Act, 2020” was signed into law on December 20, 2019. It makes
many changes to the tax code, including an extension (generally through 2020)
of more than 30 provisions that were set to expire or already expired.
Two other laws were passed as part of the law (The Taxpayer
Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community
Up for Retirement Enhancement Act).
Here are five highlights.
Long-term part-timers can participate in
401(k)s.
Under current law, employers generally can exclude part-time
employees (those who work less than 1,000 hours per year) when providing a
401(k) plan to their employees. A qualified retirement plan can generally delay
participation in the plan based on an employee attaining a certain age or
completing a certain number of years of service but not beyond the later of
completion of one year of service (that is, a 12-month period with at least
1,000 hours of service) or reaching age 21.
Qualified retirement plans are subject to various other
requirements involving who can participate.
For plan years beginning after December 31, 2020, the new law
requires a 401(k) plan to allow an employee to make elective deferrals if the
employee has worked with the employer for at least 500 hours per year for at
least three consecutive years and has met the age-21 requirement by the end of
the three-consecutive-year period. There are a number of other rules involved
that will determine whether a part-time employee qualifies to participate in a
401(k) plan.
The employer tax credit for paid family and
medical leave is extended.
Tax law provides an employer credit for paid family and medical
leave. It permits eligible employers to claim an elective general business
credit based on eligible wages paid to qualifying employees with respect to
family and medical leave. The credit is equal to 12.5% of eligible wages if the
rate of payment is 50% of such wages and is increased by 0.25 percentage points
(but not above 25%) for each percentage point that the rate of payment exceeds
50%. The maximum leave amount that can be taken into account for a qualifying
employee is 12 weeks per year.
The credit was set to expire on December 31, 2019. The new law
extends it through 2020.
The Work Opportunity Tax Credit (WOTC) is
extended.
Under the WOTC, an elective general business credit is provided
to employers hiring individuals who are members of one or more of 10 targeted
groups. The new law extends this credit through 2020.
The medical device excise tax is repealed.
The Affordable Care Act (ACA) contained a provision that required
that the sale of a taxable medical device by the manufacturer, producer or
importer is subject to a tax equal to 2.3% of the price for which it is sold.
This medical device excise tax originally applied to sales of taxable medical
devices after December 31, 2012.
The new law repeals the excise tax for sales occurring after
December 31, 2019.
The high-cost, employer-sponsored health
coverage tax is repealed.
The ACA also added a nondeductible excise tax on insurers when
the aggregate value of employer-sponsored health insurance coverage for an
employee, former employee, surviving spouse or other primary insured individual
exceeded a threshold amount. This tax is commonly referred to as the tax on
“Cadillac” plans.
The new law repeals the Cadillac tax for tax years beginning
after December 31, 2019.
Stay tuned
These are only some of the provisions of the new law. We will be
covering them in the coming weeks. If you have questions about your situation,
don’t hesitate to contact us.
© 2019
Holiday parties and gifts can help show your appreciation and provide tax breaks
With Thanksgiving behind us, the holiday season is in full swing. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good idea to understand the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Customer and client gifts
If you make gifts to customers and clients, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable.”
Employee gifts
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits aren’t included in your employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Important: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
Throwing a holiday party
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of non-highly-compensated employees and their families. If customers, and others also attend, holiday parties may be partially deductible.
Spread good cheer
Contact us if you have questions about giving holiday gifts to employees or customers or throwing a holiday party. We can explain the tax rules.
What is your taxpayer filing status?
For tax purposes, December 31 means more than New Year’s Eve celebrations. It affects the filing status box that will be checked on your tax return for the year. When you file your return, you do so with one of five filing statuses, which depend in part on whether you’re married or unmarried on December 31.
More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status options could change during the year.
Here are the filing statuses and who can claim them:
- Single. This status is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
- Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
- Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
- Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. The special rules that apply are described below.
- Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.
Head of household status
Head of household status is generally more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.
A “qualifying child” is defined as someone who:
- Lives in your home for more than half the year,
- Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
- Is under 19 years old or a student under age 24, and
- Doesn’t provide over half of his or her own support for the year.
Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.
Maintaining a household
For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.
Marital status
You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may be able to qualify as head of household.
If you have questions about your filing status, contact us.