Included in the COVID-19 relief bill is the Taxpayer Certainty and Disaster Tax Relief Act of 2020. This act contains many extensions, as well as actual changes, and the legislation will impact both businesses and individuals. A few of the main provisions are detailed below:
Reduction in Medical Expense Deduction Floor:
- Beginning after 12/31/20, a taxpayer can deduct their total qualified unreimbursed medical expenses that exceed only 7.5% of their adjusted gross income (“AGI”), whereas previously taxpayers could deduct their medical expenses more than 10% of their AGI.
Energy Efficient Commercial Buildings Deduction:
- Now made permanent, this deduction serves as a considerable financial incentive for commercial property owners, architects, engineers, and potentially tenants. The amendment also incorporated an adjustment for inflation for taxable years beginning after 2020 that states the potential applicable deduction amounts of $1.80 (IRC Sec. 179D(b)) and $0.60 (IRC Sec. 179D(d)(1)(A)) are to be increased by the cost-of-living adjustment per IRC Sec. 1(f)(3).
Qualified Tuition and Related Expenses:
- No deduction is allowed for qualified expenses such as amounts paid for tuition, fees, and other related expenses that are required for enrollment or attendance for an eligible student for taxable years beginning after 12/31/20; however, the Lifetime Learning Credit and American Opportunity Credit is still available.
Lifetime Learning Credit:
- Previously limited based on the taxpayers’ modified adjusted gross income (“MAGI”) over $40,000 if single or $80,000 if joint return. The credit is now limited based on the same determination of the American Opportunity Credit where the ratio denominators are $80,000 if single or $160,000 if joint return; the limits for each credit are still calculated independently. This amendment increased the previous income limitation for the phaseout of the Lifetime Learning Credit by 100%.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness:
- The Qualified Principal Residence Indebtedness exclusion previously allowed a taxpayer to exclude $2MM if joint or $1MM if single or MFS. With the amendment, for discharges of indebtedness after 12/31/20, the exclusion is reduced to $750,000 if joint or $375,000 if single or MFS.
Extension and Modification of Employee Retention and Rehiring Tax Credit:
- Now extended for all wages paid from 03/13/20 to before 06/30/21, the CARES Act granted a refundable payroll tax credit up to $5,000per employee for certain wages paid. The credit was initially for 50% of qualified wages paid during a quarter, however, starting January 1, 2021 throughJune 30, 2021 the credit percentage is increased to 70% of qualified wages increasing the refundable credit per employee up to $7,000 per quarter. Further guidance was provided on the qualification and treatment of health plan expenses, the applicable definition of “gross receipts” and PPP loan coordination (unable to claim a credit for wages paid with forgiven PPP loan proceeds).
Minimum Age for Distributions During Working Retirement:
- The amendment allows for distributions from specific qualified pensions to be made to workers who are 59 ½ or older that are still working. Workers in the building and construction industry, in the case of a multi employer plan, the age is lowered for qualifying employees who can now begin their penalty-free IRA withdrawals at the age of 55.
Temporary Allowance of Full Deduction for Business Meals:
- As opposed to the current 50% business meals expense deduction, the amendment temporarily allows a 100% expense deduction for food and/or beverages that are provided by a restaurant for expenses incurred after 12/31/20 through 12/31/22.
Temporary Special Rule for Determination of Earned Income:
- For purposes of determining a taxpayer’s earned income credit and/or additional child tax credit for the 2020 tax year, theTaxpayer Certainty and Disaster Relief Act of 2020 allows taxpayers to apply their earned income from the immediately preceding tax year; This provision only applies to the determination of the credits above and does not affect the assessment of gross income and so on.
Certain Charitable Contributions Deductible by Non-Itemizers:
- The charitable contribution deduction for non-itemizing taxpayers was extended for the taxable year beginning 2021. The bill has also increased the maximum deduction for taxpayers filing MFJ to $600 from the original $300.
Modification of Limitations on Charitable Contributions:
- Originally the CARES Act allowed the temporary provisions to promote charitable donations in 2020 specifically by increasing the limitation on charitable contribution deductions for corporations and for itemizing taxpayers. The limit of 50% of adjusted gross income for individuals is waived for 2020 in addition to the above-the-line deduction (up to $300 for single or MFS and $600 for MFJ) for cash contributions made during the year.The latest bill removes the specification of the applicable tax year and broadensSection 2205 of the CARES Act by editing the title to include the word “Temporary” and removing “During 2020” allowing the potential deduction through 2021.