Sidney Kess

This year of 2020 has seen numerous tax changes. Many of the provisions from the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 took effect in 2020 (P.L. 116-94). Other new tax rules stemming from COVID-19 were created for 2020. There were two major tax laws enacted this year: the Family First Coronavirus Response Act (FFCRA) (P.L. 116-127) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). And Congress is still considering more changes this year. But with that said, there are changes afoot for 2021 that can't be ignored. These changes impact tax planning for individuals and businesses. Here are some of the coming changes to watch.

Health Savings Accounts

Individuals and businesses can begin now to think about their health coverage options for 2021. The IRS has announced inflation adjustments related to health savings accounts (HSAs) (Rev. Proc. 2020-32). A perquisite to contributing to HSAs is having a high-deductible health plan (HDHP). For 2021, an HDHP is coverage requiring a minimum deductible of $1,400 for self-only coverage or $2,800 for family coverage. An HDHP must have a maximum out-of-pocket limit in 2021 of $7,000 for self-only coverage or $14,000 for family coverage. Out-of-pocket deductibles means insurance deductibles, co-payments, and other amounts, but not premiums.

Contributions to HSAs are capped at an annual dollar amount. For 2021, this is $3,600 for self-only coverage and $7,200 for family coverage. Those who are at least 55 years old by the end of 2021 can add another $1,000. But couples who are both this age must have separate HSAs to make the added contributions. No contributions can be made once an individual is enrolled in Medicare.

Withholding on Pensions

Periodic retirement and annuity payments are subject to income tax withholding. Before the Tax Cuts and Jobs Act of 2017, if a recipient didn't provide a withholding certificate to the payer, then withholding was figured as if the taxpayer were married claiming three withholding exemptions. But TCJA eliminated withholding exemptions. Form W-4 used for withholding of income tax on wages and other taxable compensation was revised effective for 2020. Now the IRS has announced it will change the withholding rules periodic retirement and annuity payments (IR-2020-104, 5/27/20).

The IRS will issue proposed regulations to change the withholding rules for payments in 2021 and beyond. The default rate for 2020, however, will continue to be based on the old rule (Notice 2020-03). With the proposed regulations, the IRS will provide revised forms, instructions, publications, and other guidance.

Expired Provisions

The Further Consolidated Appropriations Act, 2020 (P.L. 116-94) (of which the SECURE Act was part) extended a number of tax rules that had expired at the end of 2017, or were set to expire at the end of 2019, through 2020. What's more, FFCRA and the CARES Act has several provisions limited through 2020. Now all of these measures are going to expire at the end of this year unless Congress again extends them. Expiring provisions for individuals include:

• Exclusion from gross income of discharge of indebtedness on principal residence (Code Sec. 108(a)(1)(E))
• Exclusion from gross income of employer payments of student loans up to $5,250 (Code Sec. 127(c)(1)(B)).
• Penalty-free withdrawals from qualified retirement plans and IRAs related to COVID-19 (Code Sec. 72(t)(1)).
• Increased retirement loan limits related to COVID-19 (Code Sec.
• Above-the-line deduction for charitable contributions up to $300 for those claiming the standard deduction (Code Sec. 62(a)(22)).
• Above-the-line deduction for tuition and fees (Code Sec. 222(e)). When this expires, individuals can still write-off costs using an education tax credit (American opportunity credit or lifetime learning credit).
• 5% of adjusted gross income (AGI) threshold for the itemized medical deduction (Code Sec. 213(f)). Once expired, the percentage goes to 10% of AGI.
• Deducting mortgage insurance premiums as an itemized deduction for mortgage interest.
• Tax credit for nonbusiness energy property, which is for storm windows, insulation, and certain other energy improvements to a principal residence (Code Sec. 25C(g).
• Tax credit for health insurance for individuals eligible for trade adjustment assistance allowances or those between age 55 and 65 whose defined benefit (pension) plans have been taken over by the Pension Benefit Guaranty Corporation (Code Sec. 35(b)(1)(B)). The premium tax credit for eligible individuals buying coverage through a government marketplace continues to be available.
• Tax credit for two-wheeled plug-in electric vehicles (Code Sec. 30D(g)(3)(E)(ii)).

Some of the expiring provisions for businesses include:

• Five-year carryback for net operating losses arising after 2020 (Code Sec. 172(b)(1)(D)).
• Net interest deduction limitation reduced to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA) (Code Sec. 163(j). Small businesses, as well as electing large farming and real estate businesses, are exempt from this limitation.
• Credit for alternative fuel vehicle refueling property (Code Sec. 30C(g))
• Indian employment credit (Code Sec. 45A(f)).
• New markets credit (Code Sec. 45D(f)(1)).
• Credit for construction of new energy efficient homes (Code Sec. 45L(g)).
• Employer income tax credit for paid family and medical leave (Code Sec. 45S(i))
• Work opportunity credit (Code Sec. 51(c)(4))
• Three-year recovery period for race horses two years old or younger (Code Sec. 168(e)(3)(A)) and seven-year recovery period for motorsports entertainment complexes (Code Secs. 168(e)(3)(C)(ii) and (i)(15)(D)).
• Deduction for energy efficient commercial buildings deduction (Code Sec. 179D(h)).
• Various empowerment zone tax breaks.

Also expiring are the various COVID-19 related tax breaks for businesses that offset employment taxes, including the employee retention credit, the paid sick leave credit, and the paid family leave credit.

Deferred 2020 Tax Payments Coming Due in 2021

There are certain opportunities to defer taxes that would otherwise be due in 2020. This means that some payments are required in 2021. These include:

• COVID-19-related distributions from qualified retirement plans and IRAs taken in 2020. The income resulting from the distributions can be spread over three years. So, unless all of the income is reported in 2020, one third must be reported in 2021.
• Social Security taxes for employers and self-employed individuals. The option to defer the employer share of Social Security taxes (part of FICA or self-employment tax) due for 2020 means that 50% must be paid no later than December 31, 2021 (the other 50% is due by December 31, 2022).

These tax deferrals should cause that taxpayers to plan ahead to meet required tax payments in 2021.

E-filing for Amended Individual Returns

We don't have to wait until 2021 to see the introduction of an amended returns for individuals that can be e-filed. The IRS has announced (IR-2020-107, 5/28/20) that later this summer Form 1040-X will be able to be filed electronically. Until now, only paper filing has been an option.

The IRS says that about 3 million amended returns are filed each year by individuals. However, e-filing of amended returns for individuals will only be an option for 2019 Forms 1040 and 1040-SR. Amended returns for prior years that can still be filed (i.e., are not barred by the statute of limitations) will still have to be filed on paper and mailed to the applicable IRS service center.

Conclusion

Congress hasn't completed its work on legislation that likely will include additional tax changes for 2020. And because 2020 is an election year, it's impossible to say what will happen to expiring provisions and other tax rules going forward. What's more, states and local governments in desperate need for revenue following COVID-19 may introduce additional tax changes to factor into tax planning. Nonetheless, it's never too early to look ahead to tax changes for the coming year.

 

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.