Here are the highlights you need to know about tax changes resulting from the American Rescue Plan (ARP).

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Greetings and happy holidays!

As another memorable year comes to an end and we look forward to 2022, we would like to assure you that we are here to support your individual and business tax and accounting needs.  Below is a summary of some of the new 2021 tax changes resulting from the passage of the American Rescue Plan (ARP). 

Child tax credit

Increased in 2021 from $2,000 to $3,000 for children ages 6-17 and $3,600 for ages 5 and under.  Further to the increase, this credit is now fully refundable.  Half of this credit is being paid in advance through monthly payments that started in July 2021 and ending in December of this year.  The other half will be claimed on your individual tax return.  You will need to inform our office of the monthly payments that you received from the IRS in 2021 in order for us to prepare your income tax return.  We will need the date and amount received for each payment.

Dependent care credit

This credit is also fully refundable in 2021.  The maximum credit percentage increased from 35% to 50%.  The credit is allowed for up to $8,000 in childcare expenses for one child and a total of $16,000 for taxpayers with two or more children.  We will need you to provide childcare statements showing the total amount paid in 2021, childcare provider, address, and employer identification number to properly calculate the credit.

Stimulus checks

ARP authorized a third round of stimulus checks – $1,400 for each member of your household.  The amount received is not taxable income, this was an advanced credit paid in 2021. Some taxpayers that were eligible for these payments did not receive a payment or received less than what they should have.  Our office will need you to provide the amount received and date.  We will then reconcile that amount on your individual return and if you’re due an additional amount we will take the credit.  If you received a higher amount, you will not need to pay it back. 

Required minimum distributions (RMDs)

These distributions from retirement accounts were suspended in 2020 but are back for 2021.  Anyone that is at least 72 years of age by the end of 2021 is required to take an RMD by December 31, 2021.  If you reached age 72 on July 1, 2021 you can delay your RMD to 1 April 2022, keep in mind if you delay this year’s RMD you will also need to take your 2022 RMD by December 31, 2022.

Health savings account (HSA) contributions

The annual cap on contributions increased from $3,550 to $3,600 for single coverage and from $7,100 to $7,200 for family coverage.  Taxpayers aged 55 and older can contribute an additional $1,000 in 2021.  You must be covered under a high deductible plan – $1,400 for individuals and $2,800 for families.  Contributions can be made up to 15 April 2022 and count towards 2021. 

Student loan debt

Starting in 2021, if any student loan debt incurred for a post-secondary education is canceled, forgiven, or otherwise discharged it will not be treated as taxable income.  Further, employees can exclude up to $5,250 of college loans paid by their employer from taxable wages.  This exclusion was extended through 2025.  The $5,250 cap applies to both student loan repayment benefits and educational assistance offered by employers. 

Estate and gift tax exemption

The lifetime exemption increased to $11.7 million and $23.4 million for couples if portability is elected by timely filing IRS Form 706 after the death of the first to die spouse.  The gift tax exclusion remains $15,000 per recipient without reducing your lifetime exemption. 

Business meals deduction

This deduction has been increased from 50% to 100% for tax years 2021 and 2022. 

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As always, we are available if you have any questions or wish to discuss a specific matter.  We value the trust you place in our firm and would like to extend happy holidays and best wishes for a healthy and happy new year!

Sincerely,
Werner & Co. CPAs

Reopening the U.S. is bringing more important changes as we approach post-pandemic normal. This includes an expansion of the Child Tax Credit (CTC).

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Hello again, clients and friends:

Now that the US is beginning to reopen, many of the sources of pandemic-related assistance will expire.  To help with the transition to a more normal economy and to support families with children, Congress authorized expansion of the Child Tax Credit (CTC) and provided for cash payments of half of qualifying amounts. 

Half now, half later

The full credit is $3,000 for each child over age 6 and under 18 years and $3,600 for each child 5 and under as of 31 December 2021, so the advance payment amount is $1,500 and/or $1,800 per qualifying child.  The other half will be claimed when we file your 2021 tax return.

Amount of credit phases out

The amount of credit available phases out at different amounts, depending on your filing status.  Below are the phase-out ranges:

• Single & married filing separately – full credit to $75,000, phases out at $200,000;
• Heads of households – full credit to $112.500, phases out at $200,000
• Married filing jointly – full credit to $150.500, phases out at $400,000;

Calculator for those interested – 2021 Child Tax Credit Calculator | Kiplinger

The above amounts are important because the IRS is basing your advance credits off your 2019 or 2020 filing (whichever year they have on file).  If your income exceeds the limit, you may have to repay the excess amount with your 2021 tax filing.  For this reason, we have had many clients unenroll from receiving these advances.  Both taxpayers on a jointly filed tax return must unenroll for the changes to take effect. 

Unenrollment

It’s too late to unenroll for the July payment, but you may unenroll for later payments if you choose, according to the following schedule:

August: Unenrollment deadline is 2 August 2021, payment date on 13 August 2021;
September: Unenrollment deadline is 30 August 2021, payment date on 15 Sept 2021;
October: Unenrollment deadline is 4 Oct 2021, payment date on 15 Oct 2021;
November: Unenrollment deadline is 1 Nov 2021, payment date on 15 Nov 2021; and
December: Unenrollment deadline is 29 Nov 2021, payment date on 15 Dec 2021.

IRS help

On the below referenced website, there is a link to upload your banking information if IRS doesn’t already have it as well as links to more information about who qualifies and how to test your eligibility.  You can also unenroll from the program from the same website if your circumstances have changed or if you would rather have 100% of the credit on your 2021 tax return. 

https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021

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Please call or email if you have any questions about this or any other topic.  We are here to help! Have a safe and enjoyable 4^th of July!

The team at Werner & Co. CPAs

Long awaited new stimulus and spending bill finally passed last evening. 

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Dear clients and friends:

We hope you’re enjoying the abnormal holiday season upon us and staying healthy.  Late Sunday night, President Trump signed into law a second significant stimulus package as part of H.R. 133.  This $900 billion bill provides Covid-19 related relief to businesses and individuals.  The bill is over 5,500 pages in length, we summarized the major tax components below. 

Stimulus payments

The bill provides another round of individual stimulus payments – $600 for individuals, $1,200 for married couples, plus $600 for each dependent child under age 17.  Taxpayers over the age of 17 and claimed as a dependent on another return are ineligible to receive a payment.  Payments phase out once adjusted gross income (AGI) exceeds $75,000 for single filers and $150,000 for married filers.  Your 2019 AGI will be used to determine payment amount.  

These payments represent an advance against a 2020 tax credit that can be claimed on your 2020 1040.  Checks will be sent in the coming weeks; the Treasury will use bank information on file with the IRS for direct deposit.

Unemployment Insurance

Included in the bill is an additional $300 per week for all workers receiving unemployment benefits, through March 14, 2021.  PUA also was extended until March 2021 for self-employed and gig workers.  The bill increases the maximum number of weeks someone can claim benefits through regular state unemployment or the PUA program to 50 weeks.  

Payroll Protection Program (PPP)

This program originated during the CARES Act. This bill includes $284 billion for Round 2.  The program will operate like the first round but there are some changes.  

Deductibility of expenses paid with PPP funds.  Section 276 of the latest bill states that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.  Businesses may take deductions for business expenses paid by PPP loans, including businesses that already filed for forgiveness.  

Simplified Forgiveness application for loans under $150,000.  These borrowers will only be required to submit a one-page form and only subject to audit if they commit fraud or use the proceeds for improper purposes. 

Eligibility for Second Round Loan  – 300 or fewer employees (down from 500), have already or will use all proceeds from initial PPP loan, and can establish that they experienced a 25% drop in gross receipts during any quarter in 2020 compared to that same quarter in 2019.  As of this writing, guidance on determining gross receipts has not been established.  We should have answers from the SBA within the next 10 days.  

Loan amounts will be based on 2.5 times the borrower’s average monthly payroll for 2019, limited to $2 million.  Food service and accommodation industries are permitted to borrow 3.5 times average monthly payroll, still limited to $2 million.  

All borrowers are required to spend 60% of loan proceeds on payroll costs – wages, health insurance, payroll taxes.  

New legislation also provides PPP borrowers who have not yet applied for forgiveness the opportunity to spend proceeds on four new non-payroll expenses, in addition to rent, utilities and interest costs.  Non-payroll costs cannot exceed 40% of the total costs eligible for forgiveness.  

• Operations expenditures – business software, cloud computing, payroll tracking software, sales and billing functions, processing payments. 
• Supplier costs 
• Property damage costs sustained during public disturbances in 2020. 
• Covered worker protection – capital or operating expenditures that were required to comply with requirements issued by Department of Health and Human Services, CDC or OSHA beginning March 1, 2020 and ending when the national emergency declared by the President expires.  

Covered Period to spend PPP proceeds is no longer locked into either 8 weeks or 24 weeks, the borrower can choose any period between 8 and 24 weeks.  

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Miscellaneous items

100% business meals deduction permitted in 2021 and 2022.  You still need to meet requirements such as not lavish, taxpayer is present, as is an employee or business associate and business was discussed. 

Charitable contributions deduction, taxpayers who do not itemize their deductions can claim up to a $300 charitable deduction when calculating their adjusted gross income in 2020.  This provision extends that deduction to 2021 and increases the deduction to $600 for married filers.  

Unreimbursed medical costs are deductible to the extent they exceed 7.5% of AGI.  This bill makes that permanent instead of increasing to 10% as was set to happen in 2021.  Ex. AGI is $100k, medical expenses paid of $10k, you would receive a medical deduction of $2,500.  

Permanent Section 179D costs, this allows a limited deduction for energy efficient improvements made to nonresidential rental.

Additional loan forgiveness under SBA – under CARES Act, the SBA paid six months of a borrower’s principal and interest on existing Section 7 loans.  This bill provides an additional three months beginning February 2021 and for taxpayers involved in hospitality and accommodation industry allows for eight months.  The amount paid under this program is not taxable.  

More details will emerge now that the bill is finalized, and as new information rolls out we will continue to provide information to you.  Once the SBA provides further guidance (they have 10 days to do so) on the second PPP we will be conducting webinars to answer questions and go into further details.  Look for that invitation via email.  

2020 has certainly proved to be a challenging year for everyone but we are grateful for your continued trust and working together to find solutions.  We will get through this, stay positive, stay strong and stay healthy.  As always if you have questions about this bill or other matters, please contact us.  

The team at Werner & Co. CPAs

Important news about tax questions regarding the President’s recent executive orders dealing with the economic effects of the pandemic.

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To our clients and friends:

We continue to hope that you and yours are healthy and safe.

Three weeks ago, the President signed four executive orders that dealt with four aspects of the economic effects of the pandemic. They addressed a possible $300 federal addition to unemployment benefits if states contribute $100, totaling $400 for affected workers, deferring FICA and Medicare payroll taxes for employees making less than $104K per year, extending the CARES Act eviction moratorium, and keeping the 0% interest rate and payment deferral on federal student loans. We discussed these orders in a previous post (8-17-20).

You need to know

The FICA and Medicare deferrals have generated much discussion in the professional press. Problems identified so far with this potential program include:

• Participation by each employer is voluntary, making the potential benefit quite variable;
• The administrative complexity of implementing the deferral and tracking the liability;
• Repaying the deferred taxes; and
• The unknown risks to the employer with respect to compliance in unforeseen circumstances, such as when an employee leaves when withholding the deferred taxes should occur.

New guidance about deferred payroll taxes

On Friday 28 August, the Treasury issued guidance (Notice 2020-65) about the deadline for remitting deferred payroll taxes. Unfortunately, this notice did not address some important areas of uncertainty. We now know that any deferred taxes are to be withheld and paid by 30 April 2021, after which the normal interest and penalties will apply. The notice did not specify any process or schedule to collect or remit the deferred taxes, so it appears to be up to the employers (and perhaps employees) to determine the schedule. We also know that employers may not use the deferred deposit dates for taxes that were in fact withheld in the normal way. In other words, there’s no free loan for employers.

So, we’re still waiting . . .

We still advise employers wait for further guidance from the Treasury before implementing the payroll tax deferral. Continue withholding employment taxes and remitting according to their normal schedule. Communicate with your employees and educate them on the various implications of the payroll tax deferral.

If you have any questions regarding the payroll tax deferral matter or any tax matter, please contact us. We’ll continue to publish updates as we learn of them.

The team at Werner & Co. CPAs.

Four executive orders, each dealing with a separate topic, were signed on Saturday, August 8th.

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To our clients and friends:

We continue to hope you are well and finding ways to work and take care of your responsibilities as the pandemic continues. As part of our responsibility, we offer this update with respect to the four executive orders that were signed on Saturday August 8th.

Reminder!

Before getting into specifics on the signed orders, we would like to remind all clients that participated in the PPP loan program to hold tight before applying for forgiveness. The forgiveness application is still being re-worked and we expect to see a simpler forgiveness application for loans under $150k.

The 4 executive orders concern:

1. Unemployment benefits
2. FICA and Medicare withholding
3. Eviction moratorium
4. Federal student loans

As virtually every news outlet reported, there are four orders, each dealing with a separate topic. The most widely discussed is the reworking of the federal addition to state unemployment benefits. In sum, it provides for replacing the $600 federal payment that ended on 31 July with $300 in federal disaster funds and a $100 match from state funds. Also receiving significant attention is the order creating a deferral of employee payments of FICA and Medicare withholding for people earning less than about $104,000 per year, more on that topic below. The third order deals with possibly extending through 31 December the eviction moratorium that expired at the end of July. Last, and simplest, is the order dealing with federal student loans. It extends both the 0% interest rate and the moratorium on required payments until 31 December 2020.

We anticipate further clarifications

A greater number of complications exist around the payroll tax deferral that may begin September 1st. First, there is the fact that it is a deferral, not a cancellation. Confusion comes around the twin issues of when & how to collect the deferred liability and the most workable seems to be that IRS would need to add a section to all versions of Form 1040 to both calculate and report the deferred tax due. Employers and payroll companies are right to wonder how they could reprogram their payroll systems to stop the withholding. Some commentators suggested employers could park withheld but unpaid funds in escrow accounts. For sophisticated employers, this could amount to an interest-free loan of the employees’ cash, perhaps until Congress forgave the deferred liability. This would be an unintended consequence that does nothing for the intended beneficiaries. As an employer, you are not forced to comply with the payroll tax deferment.

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As with the programs created by the CARES Act in the spring, there is much left unsaid in the practical application of these orders, so we wait for guidance now as we did before. Be assured that as soon as we learn anything about implementing any of these new orders, we will pass it along as best we can. Until then, please ask any questions that may come to mind.

The Team at Werner & Co.