January 14, 2021
Tax law changes frequently and 2020 brought some unique changes, most of which are short term changes specific to 2020. Estate planning and financial planning remain another motivation to review your plans annually.
COVID-19-Related Tax Issues for Individuals & Small Businesses
A quick update on the economic stimulus payments from the US government during 2020: if you received an economic income payment during 2020, the amount is not necessary to include in your taxable income on your 2020 tax return. Also, if you did not receive the stimulus payment you can still claim it through your tax return (as a refundable tax credit.) So not all is lost if you qualified based on your 2020 income, that stimulus will be claimed on your 2020 tax return as a credit.
Several other CARES Act provisions also have made extra funds available from retirement plans, leading to tax consequences discussed below. If you have specific questions, be in touch.
Retirement Plans
Older taxpayers are typically required to take a minimum distribution (RMD) from their IRA or workplace retirement plan, but this requirement has been waived for 2020, including beneficiaries of inherited accounts.
Retirement plan and IRA account withdrawals during 2020 qualify for up to $100,000 to be withdrawn from these funds without having to pay the additional 10% tax on early distributions. You must repay the distribution over the next three years, which means you must include that amount in your income tax for each year you repay. You can also choose to include the entire distribution in your income for 2020, which will increase your tax for that year. Check with your tax professional for details on when the payments must be made.
COVID affects on Small Businesses
The Paycheck Protection Program (PPP) loan program is an SBA-supported loan program for businesses affected by the coronavirus. If you have received a PPP loan, you may still be able to apply for forgiveness if you apply within 10 months of the covered period. A second round of PPP Loans is now available and has similar requirements with the additional condition that the business must have a quarterly reduction in revenue of 25% for any quarter compared to 2019.
Payroll Tax Credits for Businesses
There is an Employee Retention Credit that is a refundable tax credit for businesses that have had their operations partially suspended or substantially affected by COVID-19. The tax credit is equal to 50% of qualified wages for employees per calendar quarter up to $10,000. The maximum credit is $5,000 per employee. You can claim the credit on your quarterly payroll tax report on Form 941.
The 2020 Families First Coronavirus Response Act (FFCRA) provided additional refundable tax credits to cover the cost of providing employees with required paid sick leave and expanded family medical leave due to COVID-19. The tax credits program runs from April 1, 2020 through December 31, 2020.9
These tax credits may also be available to self-employed business owners who take sick and family leave for coronavirus-related reasons.
Finally, the CARES Act had a provision that allows businesses to defer the employer portion of FICA taxes (Social Security and Medicare) during 2020. The deferred amounts may be deducted from required FICA tax payments. These must be repaid in future years so the benefit is limited especially given the transaction costs of coordinating.
Estate Planning Considerations
In California, Prop 19 has changed the property tax paradigm for certain lifetime transfers of primary residences, and it also has substantially changed the property tax consequences of intra-family property transfers both during an owner's lifetime and at death. We can discuss more if you have specific questions.
And, beyond typically planning considerations surrounding legacy and generational wealth, and the risk that policy changes can always change the tax consequences of inheritance plans, the main consideration in the short term is for high-net-worth families to consider using portions of the current “applicable exclusion amount” or “AEA” to effectively gift up to $11.5 million to heirs before the current exclusion amount sunsets in 2026 or the AEA amount changes due to new legislation. Some of the related strategies surrounding this planning topic involve multiple factors (financial, tax and legacy) and certainly merit further conversation. (Reference Now’s the Time for Estate Tax Planning | Kiplinger for a good article on this topic.)
As always, we hope to connect soon.