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Consolidated Appropriations Act, 2021

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The U.S. House of Representatives and U.S. Senate passed the Consolidated Appropriations Act, 2021 (bill), a massive tax, funding, and spending bill that contains a nearly $900 billion coronavirus aid package. The emergency coronavirus relief package aims to bolster the economy, provide relief to small businesses and the unemployed, deliver checks to individuals and provide funding for COVID-19 testing and the administration of vaccines.

The coronavirus relief package contains another round of financial relief for individuals in the form of cash payments and enhanced federal unemployment benefits. Individuals who earn $75,000 or less annually generally will receive a direct payment of $600. Qualifying families will receive an additional $600 for each child. According to Treasury Secretary Mnuchin, these checks could be distributed before the end of 2020. To provide emergency financial assistance to the unemployed, federal unemployment insurance benefits that expire at the end of 2020 will be extended for 11 weeks through mid-March 2021, and unemployed individuals will receive a $300 weekly enhancement in unemployment benefits from the end of December 2020 through mid-March. The CARES Act measure that provided $600 in enhanced weekly unemployment benefits expired on July 31, 2020.
 
The bill earmarks an additional $284 billion for a new round of forgivable small-business loans under the Paycheck Protection Program (PPP) and contains a number of important changes to the PPP. It expands eligibility for loans, allows certain particularly hard-hit businesses to request a second loan, and provides that PPP borrowers may deduct PPP expenses attributable to forgiven PPP loans in computing their federal income tax liability and that such borrowers need not include loan forgiveness in income.
 
The bill allocates $15 billion in dedicated funding to shuttered live venues, independent movie theaters and cultural institutions, with $12 billion allocated to help business in low-income and minority communities.
 
The bill also extends and expands the employee retention credit (ERC) and extends a number of tax deductions, credits and incentives that are set to expire on December 31, 2020.
 
This alert highlights the main tax provisions included in the bill.
 

Paycheck Protection Program

The PPP, one of the stimulus measures created by the CARES Act, provides for the granting of federally guaranteed loans to small businesses, nonprofit organizations, veterans organizations and tribal businesses in an effort to keep businesses operating and retain staff during the COVID-19 pandemic. (PPP loans are administered by the Small Business Administration (SBA)).
 
A recipient of a PPP loan under the CARES Act (the first round) could use the funds to meet payroll costs, certain employee healthcare costs, interest on mortgage obligations, rent and utilities. At least 60% of the loan funds were required to be spent on payroll costs for the loan to be forgiven.
 

Eligible businesses

Business are eligible for the second round of PPP loans regardless of whether a loan was received in the first round. The bill changes the definition of a “small business.” Small businesses are defined as businesses with no more than 300 employees and whose revenues dropped by 25% during one of the first three quarters of 2020 (or the fourth quarter if the business is applying after January 1, 2021). The decrease is determined by comparing gross receipts in a quarter to the same in the prior year. Businesses with more than 300 employees must meet the SBA’s usual criteria to qualify as a small business.
 
Borrowers may receive a loan amount of up to 2.5 (3.5 for accommodation and food services sector businesses) times their average monthly payroll costs in 2019 or the 12 months before the loan application, capped at $2 million per borrower, reduced from a limit of $10 million in the first round of PPP loans.  
 
The bill also expands the types of organizations that may request a PPP loan. Eligibility for a PPP loan is extended to:

  • Tax-exempt organizations described in Internal Revenue Code (IRC) Section 501(c)(6) that have no more than 300 employees and whose lobbying activities do not comprise more than 15% of the organization’s total activities (but the loan proceeds may not be used for lobbying activities)
  • “Destination marketing organizations” that do not have more than 300 employees
  • Housing cooperatives that do not have more than 300 employees
  • Stations, newspapers and public broadcasting organizations that do not have more than 500 employees

 The following businesses, inter alia, are not eligible for a PPP loan:

  • Publicly-traded businesses and entities created or organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong that hold directly or indirectly at least 20% of the economic interest of the business or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership, or that retain as a member of the entity’s board of directors a China-resident person
  • Persons required to submit a registration statement under the Foreign Agents Registration Act
  • Persons that receive a grant under the Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act

Uses of loan proceeds

The bill adds four types of non-payroll expenses that can be paid from and submitted for forgiveness, for both round 1 and round 2 PPP loans, but it is unclear whether borrowers that have already been approved for partial forgiveness can resubmit an application to add these new expenses:

  • Covered operational expenditures, i.e., payments for software or cloud computing services that facilitate business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses
  • Covered property damage, i.e., costs related to property damage and vandalism or looting due to public disturbances that took place in 2020, which were not covered by insurance or other compensation
  • Covered supplier costs, i.e., expenses incurred by a borrower under a contract or order in effect before the date the PPP loan proceeds were disbursed for the supply of goods that are essential to the borrower’s business operations
  • Covered worker protection equipment, i.e., costs of personal protective equipment incurred by a borrower to comply with rules or guidance issued by the Department of Health & Human Services, the Occupational Safety and Health Administration or the Centers for Disease Control, or a state or local government

 
To qualify for full forgiveness of a PPP loan, the borrower must use at least 60% of the funds for payroll-related expenses over the relevant covered period (eight or 24 weeks).
 

Increase in loan amount

The bill contains a provision that allows an eligible recipient of a PPP loan to request an increased amount, even if the initial loan proceeds were returned in part or in full, and even if the lender of the original loan has submitted a Form 1502 to the SBA (the form sets out the identity of the borrower and the loan amount).
 

Expense deductions

The bill confirms that business expenses (that normally would be deductible for federal income tax purposes) paid out of PPP loans may be deducted for federal income tax purposes and that the borrower’s tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This has been an area of uncertainty because, while the CARES Act provides that any amount of PPP loan forgiveness that normally would be includible in gross income will be excluded from gross income, it is silent on whether eligible business expenses attributable to PPP loan forgiveness are deductible for tax purposes. The IRS took the position in guidance that, because the proceeds of a forgiven PPP loan are not considered taxable income, expenses paid with forgiven PPP loan proceeds may not be deducted. The bill clarifies that such expenses are fully deductible—welcome news for struggling businesses. Importantly, the effective date of this provision applies to taxable years ending after the date of the enactment of the CARES Act. Thus, taxpayers that filed tax returns without deducting PPP-eligible deductions should consider amending such returns to claim the expenses.
 

Loan forgiveness covered period

The bill clarifies the rules relating to the selection of a PPP loan forgiveness covered period. Under the current rules, only borrowers that received PPP proceeds before June 5, 2020 could elect an eight-week covered period. The bill provides that the covered period begins on the loan origination date but allows all loan recipients to choose the ending date that is eight or 24 weeks later.
 

Loan forgiveness

PPP loan recipients generally are eligible for loan forgiveness if they apply at least 60% of the loan proceeds to payroll costs (subject to the newly added eligible expenditures, as described above), with partial forgiveness available where this threshold is not met. Loans that are not forgiven must be repaid.
 
Currently, PPP loan recipients apply for loan forgiveness on either SBA Form 3508, Form 3508 EZ or Form 3508S, all of which required documentation that demonstrates that the claimed amounts were paid during the applicable covered period, subject to reduction for not maintaining the workforce or wages at pre-COVID levels.
 
The bill provides a new simplified forgiveness procedure for loans of $150,000 or less. Instead of the documentation summarized above, these borrowers cannot be required to submit to the lender any documents other than a one-page signed certification that sets out the number of employees the borrower was able to retain because of the PPP loan, an estimate of the amounts spent on payroll-related costs, the total loan value and that the borrower has accurately provided all information required and retains all relevant documents. The SBA will be required to develop the simplified loan forgiveness application form within 24 days of the enactment of the bill and generally may not require additional documentation. Lenders will need to modify their systems used for applications to make an electronic version of the new forgiveness application available to eligible borrowers.
 

Employment Retention Credit and Families First Coronavirus Response Credit

The bill extends and expands the ERC and the paid leave credit under the Families First Coronavirus Response Act (FFCRA).
 

ERC

The ERC, introduced under the CARES Act, is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019.
 
The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:

  • The credit rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
  • The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
  • The credit is available to certain government instrumentalities.
  • The bill clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages even when no wages are paid to the employee.
  • New, expansive provisions regarding advance payments of the ERC to small employers are included, such as special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
  • Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan. Further, the bill strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

 The bill makes three retroactive changes that are effective as if they were included the CARES Act. Employers that received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. The bill also clarifies how tax-exempt organizations determine “gross receipts” and that group health care expenses can be considered “qualified wages” even when no other wages are paid to the employee.
 

FFCRA

The FFCRA paid emergency sick and child-care leave and related tax credits are extended through March 31, 2021 on a voluntary basis. In other words, FFCRA leave is no longer mandatory, but employers that provide FFCRA leave from January 1 to March 31, 2021 may take a federal tax credit for providing such leave. Some clarifications have been made for self-employed individuals as if they were included in the FFCRA.
 

Other Tax Provisions in the CAA

The bill includes changes to some provisions in the IRC:

  • Charitable donation deduction: For taxable years beginning in 2021, taxpayers who do not itemize deductions may take a deduction for cash donations of up to $300 made to qualifying organizations. The CARES Act revised the charitable donation deduction rules to encourage donations following a decline after the enactment of the Tax Cuts and Jobs Act in 2017.
  • Medical expense deduction: The income threshold for unreimbursed medical expense deductions is permanently reduced from 10% to 7.5% so that more expenses may be deducted.
  • Business meal deduction: Businesses may deduct 100% of business-related restaurant meals during 2021 and 2022 (the deduction currently is available only for 50% of those expenses).
  • Extenders: The bill provides for a five-year extension of the following tax provisions that are scheduled to sunset on December 31, 2020:
    • The look-through rule for certain payments from related controlled foreign corporations in IRC Section 954(c)(6), which was extended to apply to taxable years of foreign corporations beginning before January 1, 2026 and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end
    • New Markets Tax Credit
    • Work Opportunity Tax Credit
    • Health Coverage Tax Credit
    • Carbon Oxide Sequestration Credit
    • Employer credit for paid family and medical leave
    • Empowerment zone tax incentives
    • Exclusion from gross income of discharge of qualified principal residence indebtedness
    • Seven-year recovery period for motorsports entertainment complexes
    • Expensing rules for certain productions
    • Oil spill liability trust fund rate
    • Incentive for certain employer payments of student loans (notably, the bill does not include other student loan relief so that borrowers will need to resume payments on such loans and interest will begin to accrue).
  • Permanent changes: The bill makes several tax provisions permanent that were scheduled to expire in the future, in addition to the medical expense deduction threshold mentioned above:
    • The deduction of the costs of energy-efficient commercial building property (now subject to inflation adjustments)
    • The gross income deduction provided to volunteer firefighters and emergency medical responders for state and local tax benefits and certain qualified payments
    • The transition from a deduction for qualified tuition and related expenses to an increased income limitation on the lifetime learning credit
    • The railroad track maintenance credit
    • Certain provisions, refunds and reduced rates related to beer, wine and distilled spirits, as well as minimum processing requirements for certain craft beverages produced outside the U.S.

What Year-End Tax Planning Could Look Like Under Biden Presidency

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On November 7, the Associated Press called the presidential election for former Vice President Joe Biden. The House of Representatives will remain under Democratic control, but control of the Senate is somewhat less certain since the balance of power will be determined in January 2021 following a run-off election for two open Senate seats in Georgia. The run-off is necessary because neither of the candidates in either of the races obtained more than 50% of the total vote count as required by the state’s election law. A win by the two Democratic candidates would shift the balance of power in the Senate from one of GOP control to one where neither party has a majority. In that case, if all Senators vote along party lines (including independent senators who typically vote with Democrats), any deadlock on legislation would be broken by Vice President-elect Harris casting the deciding vote. This tiebreaking potential would also determine the Senate leadership, the ratio of committee memberships between the parties and the leadership of each committee.

Under a Biden administration and if the Democrats assume control of both the House and the Senate, taxpayers are likely to see increases to the corporate tax rate and to the top tax rate for individuals. However, should the Republicans retain control of the Senate, it would be difficult to effect any tax rate changes and most provisions in the Tax Cuts and Jobs Act (TCJA) (as passed during the Trump administration) would continue until they generally expire after 2025.[1]


What does this mean for taxpayers planning for year-end?

Assuming taxable income is consistent from year to year, but tax rates are expected to increase, a taxpayer may wish to accelerate income and defer deductions to higher income tax rate years. Assuming the same, but with a constant or declining income tax rate, then taxpayers may wish to take the tried-and-true approach to year-end tax planning by accelerating deductions and deferring income.

President-elect Biden has indicated that he would like to see the reduction or elimination of the tax cuts made by the TCJA. He believes that the tax system should be changed to ensure that large corporations and high-net-worth individuals pay their “fair share” of taxes. For individuals, President-elect Biden has proposed increasing the top income tax rates and expanding the Social Security tax base, as well as curtailing or eliminating various incentives that are currently available to high income taxpayers. If these plans are implemented, roughly $4 trillion would be raised over the next 10 years, as reflected in estimates obtainable through the Tax Policy Center and the Tax Foundation. The additional tax revenue would be used to pay for spending initiatives to improve the nation’s infrastructure, developing alternative energy sources and building up the U.S. manufacturing sector.

To be successful in implementing proposed changes, the timing of any future tax increases will be balanced against the need to keep the economy strong and resilient at a time when the country is trying to address the economic slump that was brought about by the coronavirus pandemic.

Despite all of the uncertainty, significant tax law changes are possible over the next few years, so it is important for taxpayers to understand both current tax law and changes that may be on the horizon. The following summarizes President-elect Biden’s planned initiatives for both corporate and individual income taxes, Social Security and Medicare taxes and the estate tax, as well as various tax incentives.
 

Individual Income Tax Rates 

Current law provides for a progressive income tax rate system, which means that tax rates increase as taxable income increases. Under the seven-bracket system, tax rates for ordinary income start at 10% and increase to 37% for taxable income of $622,050 for individuals filing joint income tax returns in 2020, and $518,400 for individuals filing as single taxpayers.

Under President-elect Biden’s plan, the TCJA tax cuts likely would be repealed and the top federal income tax rate of 39.6% would be reinstated.


Capital Gains and Qualified Dividend Income

Under current law, individuals are subject to progressive income tax rates on capital gains and qualified dividend income. The long-term capital gains rates are 0%, 15% or 20%, depending on a taxpayer’s ordinary income tax bracket. Moreover, a net investment income tax (enacted during the Obama administration) is imposed on high income taxpayers at a rate of 3.8%, which brings the total maximum tax rate on long-term capital gains up to 23.8%.

Under President-elect Biden’s tax plan, the tax rate on capital gains would increase to 39.6% for taxpayers with taxable income of $1 million or more, plus the 3.8% net investment income tax. As a result, taxpayers whose taxable income exceeds $1 million would be subject to an effective tax rate of 43.4%.


Business Income from Pass Through Entities (Partnerships, S Corporations and Sole Proprietorships)

Under current tax law, many businesses qualify for a qualified business income deduction of up to 20%, which can lower the effective tax rate on the business income of individuals from a high of 37% to as low as 29.6% for qualifying businesses.

President-elect Biden would phase out the tax benefits associated with the qualified business income deduction for individuals making more than $400,000 a year, thus effectively raising the business income tax rate from 29.6% to 39.6%.  


Corporate Tax

The TCJA reduced the corporate income tax rate to a flat 21% rate from a progressive rate of up to 35% before 2018 and abolished the corporate alternative minimum tax.

President-elect Biden would raise the corporate tax rate from 21% to 28%, a middle ground between the top rate of 35% under the Obama administration and the current 21% rate. He also would put in place a new form of corporate alternative minimum tax that essentially would require corporations to pay the greater of their regular corporate income tax or a new 15% minimum tax on worldwide book income.
 

Payroll Taxes

A 6.2% Social Security tax and a 1.45% Medicare tax currently are imposed on both the employer and the employee. While the wage base for the Medicare tax is unlimited, there is a cap on the Social Security tax base equal to the first $137,700 of employee wages (increasing to $142,800 for 2021).

In addition to the Medicare tax rate, which totals 2.9% for the employer and the employee, an additional 0.9% Medicare tax is levied on employees with wage and self-employment income above the same thresholds that are applicable in the case of the net investment income tax ($250,000 or more for joint returns or a surviving spouse, $125,000 or more for a married taxpayer filing a separate return and $200,000 in all other cases). This effectively increases the collective employer/employee rate or self-employed rate to 3.8% (1.45% twice + 0.9%), which would raise the Social Security and Medicare tax rate for self-employed individuals to 16.2% (12.4% + 3.8%).

President-elect Biden has indicated that he would remove the cap on the wage base for the Social Security tax for high earners, defined as those making more than $400,000. These changes to the Social Security and Medicare taxes would apply to employees and self-employed individuals that have sole proprietorships or are partners in a partnership.

It is uncertain whether wages between $142,800 and $400,000 would be subject to the additional income tax, or whether there would be a so-called “donut hole” before the higher rate kicks in for individuals with taxable earnings in excess of $400,000. This would raise the overall income tax rate on some businesses to as high as 55.8% (39.6% + 16.2%) before taking into account state income taxes.


Estate Tax

The estate tax rate currently is subject to a progressive rate scale up to 40%. The estate tax is imposed upon the death of a taxpayer after an exemption allowance of up to $10 million per taxpayer, as indexed for inflation (currently $11,580,000 per taxpayer ($23,160,000 per married couple for 2020)). In addition, beneficiaries are entitled to a step-up in the tax basis of all inherited assets based on the date of death valuation or the alternative valuation date.

President-elect Biden would reduce the exemption amount to pre-Obama levels of $3.5 million per taxpayer, while increasing the top estate tax rate to 45%. He has also suggested eliminating the regime that allows for a step-up in tax basis on the date of death or alternative valuation date.
 

Investments into Distressed Areas

The TCJA introduced significant incentives for investments in qualified opportunity zones (QOZs). These rules allow taxpayers to defer recognition of capital gains where the proceeds are reinvested in a property directly or a QOZ fund property within 180 days.

The capital gains deferral exists until the earlier of the time the QOZ property is sold or December 31, 2026. In addition to the deferral, there is a 10% tax reduction if the fund is held for five or more years, a 15% reduction in tax if the property is held for seven or more years, and if the investment is held for 10 or more years, the appreciation of the QOZ fund investment (not the original gain but the post-acquisition gain) qualifies for a step-up in tax basis, essentially excluding the appreciation from gross income.

In addition to QOZs, a new markets tax credit is available to investors that inject capital into community development entities. The credits are progressive and vest with each year of expenditures and can equal up to 39% of the cost of the new markets tax credit project.

President-elect Biden has indicated that he would like to continue both programs and may be willing to expand and make the new markets tax credit program permanent.
 

Manufacturing and Business Incentives

Tax incentives currently are available for low-income housing, reducing fossil fuels and using alternative energy, as well as employer incentives for hiring individuals that qualify for the work opportunity tax credit and for hiring individuals with disabilities. Tax credits also are available to employers for providing child-care facilities on their premises so that working parents can continue working.

President-elect Biden supports these programs but would like to add a tax credit for manufacturing goods in the United States. He also has proposed imposing a tax penalty on corporations that ship jobs overseas in order to sell products back to the United States.
 

Conclusion

There is much riding on the outcome of the 2020 presidential and congressional election process. The direction of any year-end tax planning involves knowing which direction future tax rates will go.

Year-end planning decisions typically consider the tax consequences of both the current year and the next year. If marginal tax rates are expected to remain unchanged or to drop, taxpayers should consider ways defer income to the next year and accelerate deductions into the current year. Conversely, if marginal tax rates are expected to increase in 2021, taxpayers may wish to consider strategies to accelerate income into 2020 and defer deductions to 2021.

Despite the economic and financial turmoil many taxpayers have experienced in 2020, as well as the coronavirus pandemic, this year is no exception in terms of tax planning. Understanding the possible consequence of the presidential election and Senate race results may be useful in helping taxpayers make informed decisions about their taxes before year-end.

[1] It should be noted that the passage of legislation also may be affected by the Senate “legislative filibuster rules” and whether these rules are maintained, revised or abolished.

Year-End Tax Planning for Individuals

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As the year-end approaches, individuals and business owners should be reviewing their situations to identify any opportunities for reducing, deferring or accelerating tax obligations. Areas that should be looked at in particular include tax reform provisions, as well as new opportunities and relief granted earlier in 2020 under the CARES and SECURE Acts. This article highlights specific areas and provides preliminary inflationary adjustment items for 2021 as of October 15, 2020, compared to current 2020 amounts, to aid taxpayers as they plan deferrals and accelerations before year-end (anticipated inflationary adjustments; official numbers have not yet been published by the IRS, but are expected to be made available later in 2020).

A discussion about 2020 year-end tax planning likely should involve a discussion about the U.S. presidential election. To date, neither candidate has released a formal plan regarding the tax code. Taxpayers can still make informed decisions by taking into consideration what the candidates have said about tax policy on the campaign trail. Of note, Joe Biden has spoken to:

  • Raising the top individual income tax rate to 39.6%
  • Raising the tax on capital gains at 39.6% for taxpayers with more than $1,000,000 in income
  • Eliminating step-up of basis at death

The information contained within this article is summarized. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.

Individual’s Tax Planning Highlights

2020 Federal Income Tax Rate Brackets

Tax RateJoint/Surviving SpouseSingleHead of HouseholdMarried Filing SeparatelyEstate & Trusts
10%$0 – $19,750$0 – $9,875$0 – $14,100$0 – $9,875$0 – $2,600
12%$19,751 –   $80,250$9,876 – $40,125$14,101 – $53,700$9,876 – $40,125–
22%$80,251 – $171,050$40,126 – $85,525$53,701 – $85,500$40,126 – $85,525–
24%$171,051 – $326,600$85,526 – $163,300$85,501 – $163,300$85,526 – $163,300$2,601 – $9,450
32%$326,601 – $414,700$163,301 – $207,350$163,301 – $207,350$163,301 – $207,350–
35%$414,701 – $622,050$207,351 – $518,400$207,351 – $518,400$207,351 – $311,025$9,451 – $12,950
37%Over $622,050Over $518,400Over $518,400Over $311,025Over $12,950

Projected 2021 Federal Income Tax Rate Brackets

Tax RateJoint/Surviving SpouseSingleHead of HouseholdMarried Filing SeparatelyEstates & Trusts
10%$0 – $19,900$0 – $9,950 $0 – $14,200$0 – $9,950$0 – $2,650
12%$19,901 –   $81,050$9,951 – $40,525$14,201 – $54,200$9,951 – $40,525–
22%$81,051 – $172,750$40,526 – $86,375$54,201 – $86,350$40,526 – $86,375–
24%$172,751 – $329,850$86,376 – $164,925$86,351 – $164,900$86,376 – $164,925$2,651 – $9,550
32%$329,851 – $418,850$164,926 – $209,425$164,901 – $209,400$164,926 – $209,425–
35%$418,851 – $628,300$209,426 – $523,600$209,401 – $523,600$209,426 – $314,150$9,551 – $13,050
37%Over $628,300Over $523,600Over $523,600Over $314,150Over $13,050

Long-Term Capital Gains

  • The brackets for long-term capital gains for 2020 and the projected 2021 rates are shown below. Long-term capital gains are subject to a lower tax rate, so investors may wish to consider holding on to assets for over a year to qualify for those rates.
Long-Term Capital Gains Tax RateSingleJointHead of Household
2020Projected 20212020Projected 20212020Projected 2021
0%$0 – $40,000$0 – $40,400$0 – $80,000$0 – $80,800$0 – $53,600$0 – $54,100
15% minimum income$40,001 – $441,450$40,401 – $445,850$80,001 – $496,600$80,801 – $501,600$53,601 – $469,050$54,101 – $473,750
20% minimum incomeOver $441,450Over $445,850Over $496,600Over $501,600Over $469,050Over $473,750

Social Security Tax

  • The Old-Age, Survivors, and Disability Insurance (OASDI) portion of the social security tax is imposed on employee compensation and self-employment income, but only to the extent of the maximum wage base set by the Social Security Administration ($137,700 for 2020 and $142,800 for 2021 by the Social Security Administration).
  • The OASDI program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.
  • On August 8, 2020, President Trump issued an executive order allowing employers to defer the withholding, deposit and payment of certain employee payroll taxes from September 1 to December 31, 2020. Further guidance is contained under Notice 2020-65.
  • Employers, employees and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%.  
  • Some high earners must pay an extra 0.9% HI payroll tax on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately in 2020. However, employers do not pay that extra tax. This tax, also known as the Additional Medicare Tax, was enacted as part of the Affordable Care Act (ACA). The constitutionality of the ACA has been challenged in California v. Texas, No. 19-840, which is set for oral arguments before the Supreme Court on November 10, 2020. Specifically, the issue before the Court is whether the ACA became unconstitutional when Congress reduced the individual mandate penalty to $0. The effective date of the penalty repeal was January 1, 2019. Accordingly, the Court’s ruling in California v. Texas could ultimately impact the Additional Medicare Tax.

Long-Term Care Insurance and Services

  • Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum amount of a deduction is determined by an individual’s age. The following table sets forth the deductible limits for 2020 and 2021:
AgeDeduction Limitation 2020Projected Deduction Limitation 2021
40 or under$430$450
Over 40 but not over 50$810$850
Over 50 but not over 60$1,630$1,690
Over 60 but not over 70$4,350$4,520
Over 70$5,430$5,650

 
These limitations are per person, not per return. Thus, a married couple, both spouses over 70 years old, has a combined maximum deduction of $10,860 ($11,300 projected for 2021), subject to the applicable AGI limit.
 
Retirement Plan Contributions

  • If an employer (including a tax-exempt organization) has a 401(k) plan or 403(b) plan, the maximum amount of elective contributions that employee can make in 2020 is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions, which allows an additional $6,500). For 2021, those limits are projected to remain the same. Qualified plan limits are based on the year-to-year increases in the third-quarter Consumer Price Index for All Urban Consumers (CPI-U), so those amounts cannot be finalized until after the September CPI-U values are published in October. The IRS is expected to announce the official 2021 limits in late October or early November.
  • The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for expenses related to the birth or adoption of a child after December 31, 2019. To qualify, the distribution must be made during the one-year period beginning on the date the child is born or the adoption is finalized. Eligible adoptees are any individual who has not reached age 18 or is physically or mentally incapable of self-support. Qualified birth or adoption distributions are included in the taxpayer’s income in the year of withdrawal but are not subject to the 10% early withdrawal penalty or to the mandatory 20% tax withholding and may be repaid to the retirement plan at any time. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
  • Previously, individuals were not able to contribute to their traditional IRAs in or after the year in which they turn 70½. The SECURE Act eliminates this age cap.
  • The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for individuals who were born on July 1, 1949, or later is due by April 1 of the year after the year in which they turn 72.
  • The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not subject to this rule. Conduit trusts and see-through accumulation trusts are required to use the 10-year payout rule unless the trust is for the sole benefit of a disabled or chronically ill beneficiary. Non-see-through accumulation trusts will continue to use the five-year payout period, which was required before the SECURE Act.
  • The CARES Act allows eligible individuals to withdraw up to $100,000 from qualified retirement plans during 2020 without incurring the 10% early distribution penalty. Individuals or their spouses, dependents or other household members affected by COVID-19 may qualify for this relief. Such taxable distributions can be included in gross income ratably over three years. Taxpayers may recontribute the withdrawn amounts to a tax-qualified plan or IRA at any time within three years after the distribution. These repayments will be treated as a tax-free rollover and are not subject to that year’s cap on contributions.

 Foreign Earned Income Exclusion

  • The foreign earned income exclusion is $107,600 in 2020, projected to increase to $108,700 in 2021.

  Alternative Minimum Tax

  • A taxpayer must pay either the regular income tax or the alternative minimum tax, whichever is higher. The established exemption amounts for 2020 are $72,900 for unmarried individuals and individuals claiming head of household status, $113,400 for married individuals filing jointly and surviving spouses, and $56,700 for married individuals filing separately. For 2021, those amounts are projected to increase to $73,600 for unmarried individuals and individuals claiming the head of household status, $114,600 for married individuals filing jointly and surviving spouses, and $57,300 for married individuals filing separately.

Kiddie Tax

  • The SECURE Act reinstates the kiddie tax previously suspended by the Tax Cuts and Jobs Act (TCJA). For tax years beginning after December 31, 2019, the unearned income of a child is no longer taxed at the same rates as estates and trusts. Instead, the unearned income of a child will be taxed at the parents’ tax rates if those rates are higher than the child’s tax rate. Taxpayers can elect to apply this provision retroactively to tax years that begin in 2018 or 2019 by filing an amended return.

Charitable Contributions

  • Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Contributions in excess of the 60% AGI limitation may be carried forward in each of the succeeding five years. The CARES Act suspends the AGI limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation.

Estate and Gift Taxes

  • The unified estate and gift tax exclusion and generation-skipping transfer tax exemption is $11,580,000 per person in 2020. For 2021, the exemption is projected to increase to $11,700,000.
  • All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2020 and 2021, only the first $157,000 and $159,000 (projected), respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year.

Simplified Employment Pension Plans

  • Small businesses can contribute up to 25% of employees’ salaries (up to an annual maximum set by the IRS each year) to a Simplified Employee Pension (SEP) plan. The SEP contribution must be made by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2020 was $57,000. The maximum SEP contribution for 2021 is projected to be $58,000.
  • The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).

Net Operating Losses

  • Under the TCJA, net operating losses generated beginning in 2018 were limited to 80% of taxable income and could not be carried back but could be carried forward indefinitely. The CARES Act permits individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The CARES Act also eliminates the 80% limitation on such losses.

Excess Business Loss Limitation

  • Under Section 461(l), a taxpayer will only be able to deduct net business losses of up to $262,000 (projected) in 2021 (joint filers can deduct $524,000 (projected) in 2021) for taxable years beginning after December 31, 2020, and before January 1, 2026. Excess business losses are normally disallowed and added to the taxpayer’s net operating loss carryforward, but the CARES Act suspends the application of this excess business loss rule for 2020, and retroactively suspends the excess business loss limitation rule for 2018 and 2019.