2021 Tax Update

TAX LEGISLATION

Infrastructure Investment and Jobs Act

On November 5, 2021,Congress passed the Infrastructure Investment and Jobs Act.  The $1.2 trillion legislation provides more than $500 million “new” of spending on roads, highways, bridges, public transit, and utilities.  The bill is significantly smaller than what was originally proposed by President Biden earlier this year.  The bill contains a number of tax changes, mostly relating to private activity bonds, excise taxes,and an extension of highway trust fund provisions.

The most significant change for tax reporting involves the increased reporting requirements on cryptocurrency transactions and the termination of the employee retention credit for businesses closed due to the pandemic.  The Act imposes new reporting requirements on brokers of cryptocurrencies.  Much like sales of securities, brokers will be required to report sales of cryptocurrencies to the government. Taxpayers will receive an equivalent of a 1099 for those sales.  These rules will be effective in 2023.  The provision was included out of concern that large amounts of cryptocurrencies were not be reported as taxable income.

Build Back Better Act

As of this writing, there is a proposed framework for the Build Back Better Act.  The Act has gone through many iterations since initially proposed earlier this year. It would not be surprising to see additional changes before the final version.  Highlights of the current bill:

·        A minimum corporate income tax of 15% based on the corporations “adjusted financial statement income”.  The tax would only apply to corporations with average adjusted financial statement income in excess of $1 billion for the three prior tax years.

·        1% excise tax on stock repurchases by domestic corporations whose stock is listed on an established securities market.

·        Income tax surcharge of 5% on taxpayers’ whose income is in excess of $10 million ($5million married filing separately, $200,000 for an estate or trust).  An additional 3% excess tax on individual taxpayers whose income is excess of $15 million ($12.5 million for married filing separately, $500,000 for an estate or trust).  The tax would be effective for years after 2021.

·        The Net Investment Income tax would apply to income from S corporations, limited partners, and LLC members that are currently not subject to the tax.  The change would only apply to joint returns on incomes over $500,000, $400,000 to singles and heads of household, $250,000 to married filing separately).  The rules would apply to years after 2021.

·        The child tax credit would be increased, fully refundable and could be paid in advance.  

·        Increase the limitation on the deduction for real estate, and income or sales tax to $80,000 thru 2030.

·        Extend the expanded health insurance provisions of the American Rescue Plan Act.

·        Expansion of green energy credits.  

INDIVIDUAL TAX UPDATE

Electronic Payments/Refunds: The pandemic has taught us that the IRS and the mail can be vulnerable to delays.  Many taxpayer payments are still unopened while receiving notices that the IRS has not received payment.  We encourage taxpayers to consider receiving refunds as a direct deposit. Experience has shown us that this is faster and more secure.  We can also set up amounts due and estimated tax payments to be paid electronically.  This will ensure that estimated tax payments are not missed, however if estimated tax payments need to be changed during the year, you will need to contact the IRS at a number we can provide.  In order to set up refunds and payments we will need your bank account information (name of bank, routing number, account number and whether the account is checking or savings).  

Virtual Currency: Virtual currency transactions are becoming more commonplace.  The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment are treated differently for tax purposes.  Each sale or exchange of virtual currency must be reported; therefore, it is important to keep records of purchases.  

In 2016, the IRS won a John Doe summons for Coinbase, and more recently for Kraken and Poloniex, two other large cryptocurrency exchanges.  A John Doe summons is one in which the IRS seeks to obtain evidence against a group of taxpayers that they have reason to believe are violating tax law.  After the IRS won the right to issue the summons, over 10,000 letters were sent to taxpayers informing them that they may have failed to properly report income and gave them an opportunity to comply. It is expected that the IRS will continue to pursue John Doe summonses to identify holders of cryptocurrencies that fail to report their sales of cryptocurrencies.

A Chief Counsel Advice determined that bitcoin cash received as a result of a bitcoin hard fork did constitute receipt and therefore recognition of gross income as determined in Revenue Ruling 2019-24. The FMV of the crypto asset received through a hard fork is included in a taxpayer’s gross income at the time the taxpayer obtains dominion and control over the new crypto asset.

Also,the receipt of crypto assets from mining is includable in gross income.

Unemployment Compensation: For 2021 unemployment compensation is included in taxable income.

Rates: 2021 tax rates are 10, 12, 22, 24,32, 35 and 37 percent.  The rate changes will expire after 2025.    

Standard Deduction:  The 2021 standard deduction is $25,100 for married individuals filing a joint return, $18,800 for head-of-household filers, and $12,550 for all others, indexed for inflation.  All are temporary and will end after 2025.  The additional standard deduction for the elderly and the blind is $1,350 for married taxpayers and $1,700 for single taxpayers.  

Personal Exemptions:  Personal exemptions are eliminated through 2025.

Mortgage Interest:  The mortgage interest deduction is limited to interest on $750,000 of acquisition indebtedness ($375,000 for married taxpayers filing separately), for tax years beginning after 2017 and before 2026.  For acquisition indebtedness incurred before December 15, 2017, the bill allows current homeowners to keep the current limitation of $1 million ($500,000 for married taxpayers filing separately).  The bill allows taxpayers to continue to deduct mortgage interest on second homes, subject to the lower caps.  However,no deduction is allowed for home equity indebtedness, unless it is incurred to improve your home.  If you have multiple mortgages you will have to inform us which mortgages and home equity loans were incurred to buy or improve your home.

State and Local Taxes:  Itemized deductions for all nonbusiness state and local tax deductions, including property taxes, are limited to $10,000 ($5,000 for married filing separate).  Sales taxes may be included as an alternative to claiming state and local income taxes.  The $10,000 limitation is scheduled to expire in 2026.

Medical Expenses:  Medical expenses exceeding 7.5 percent of adjusted gross income can be claimed as an itemized deduction for 2021.

Charitable Donations:  Cash contributions to public charities are not subject to percentage of income limitations in 2021.  In 2022, charitable contributions in excess of 60% of taxpayers adjusted gross income is not deductible.  Charitable contributions in excess of income limits are carried forward up to five years.

Non-itemizers can contribute up to $300 in cash contributions to public charities in 2020 per taxpayer.  This does not apply to contributions to private foundations or donor advised funds.  So, if you expect to take the standard deduction but made cash contributions, please let us know.

Theft and Casualty Losses:  Taxpayers can only deduct casualty losses if the loss is attributable to a federally declared disaster through 2025.

Child Tax Credit:  As part of the American Rescue Plan Act the child tax credit was increased to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of households, and $75,000 for all others.  

Advance payments of the child tax credit must be reported on taxpayers’ tax returns.  If the amount received is in excess of allowable amounts, those amounts will need to be repaid.

Alimony:  The deduction for alimony payments and their inclusion in income of the recipient is repealed.  The new rules will apply only to divorce or separation agreements executed after December 31, 2018.

Principal Residence Debt Cancellation: Congress has extended the exclusion for discharge of qualified principal residence indebtedness through 2025.

Student Loan Cancellation:  The good news is the cancellation of student loans from gross income is extended from 2021 through 2025, the bad news is we have no idea how taxpayers go about getting the loans forgiven.  Employers can pay up to $5,250 of student loans for employees as a fringe benefit through 2025.  

Required Minimum Distributions (RMD) are back for 2021. If you are age 72 or older by the end of 2021 you must take your RMD by the end of the year (April 1, 2022 for taxpayers that turned 72 in 2021).  Required minimum distributions (RMD) were waived for 2020 in coronavirus legislation. Do not be surprised if the age limit is increased to 75 in the coming years.

IRA Contributions: There is no longer an age limit in which taxpayers can contribute to an IRA, however you cannot contribute more than income earned during the year.  Wages and self-employment income are considered earned income.

Qualified Charitable Distributions:  Up to $100,000 in qualifying IRA distributions to charity is excluded from gross income and can reduce taxes for taxpayers that are subject to certain income related phase outs.  To be qualified the taxpayer has to be at least 70 ½ years old.  The distribution must be made directly by the IRA trustee to the eligible organization.  Eligible organizations include publicly supported organizations (public charity), schools, churches, hospitals or government units.  Nonqualified organizations include certain private foundations and donor advised funds. In general, if you meet the qualifications, charitable contributions should be made this way before making cash contributions out of non-retirement accounts.  

We recommend that if you make qualified charitable distributions from your IRA to keep a copy of the statement showing the distribution as well as the acknowledgement letter from the charity to you as owner of your IRA.

IRA Rollovers: Just a reminder that taxpayers are allowed only one tax free IRA rollover every 12 months.  IRA distributions deposited back into an IRA within 60 days are not includable in gross income.  This limitation does not apply to trustee-to-trustee transfers.

Roth Conversions: Conversions of IRA money into a Roth is still allowed. For early retirees whose income has gone up significantly, IRA funds converted to a Roth during low-income years is a good way to shift money from a taxable account to a non-taxable account. The conversion is taxable.  The goal is to convert as much in low-income years before age 72 when required minimum distributions must be made (and reported as income).

Annual Gift Tax Exclusion: For 2021,the amount you may gift to any individual without reducing your giver’s estate and lifetime gift exclusion amount is $15,000. In 2022, the amount is raised to $16,000.  Spouses may “split” their gifts to each donee, effectively raising the per donee annual maximum exclusion to $30,000 for 2021 and $32,000 for 2022.

Estate Tax:  The 2021 estate tax exclusion for estates is $11,700,000, increasing to $12,060,000 in 2022.  As it currently stands the increased exclusion is due to revert back to levels passed in the American Taxpayer Relief Act of 2012, which indexes the 2011 exclusion of $5,000,000 to inflation.

Capital Gains: In 2021, capital gains on property held for more than one year are taxed at a maximum of 20% (for married taxpayers the rate is 0% with incomes below $80,800, 15% with incomes between $80,801 and $501,600, and 20% with incomes over $501,600; for single taxpayers 0% with incomes less than $40,400, 15% with incomes between $40,401 and $445,850, and 20% with income over $445,850).

Social Security Taxable Wage Base and COLA:

The maximum amount of earnings subject to Social Security tax is $142,800 in 2021 and $147,000 in 2022. Both the employee and employer tax rate is 6.2% in 2021 and 2022. All earnings are subject to Medicare tax at an employee and employer rate of 1.45% for both 2021 and 2022.  While the additional .9% Medicare tax for wages above $200,000 is withheld from the employee, the employer’s rate on the excess wages remains at 1.45%

The Social Security Cost-of-Living Adjustment was 1.3% in 2021 and will be 5.9% for 2022.

Retirement Plan Limits:

BUSINESS UPDATE

New Florida Laws

Beginning on September 30, 2021 the Florida minimum wage is $10.00 per hour, with a minimum wage of at least $6.98 per hour for tipped employees.  The minimum is scheduled to increase each year until reaching $15.00 per hour on September 30,2026.

Beginning October 1, 2021, Florida business that hire independent contractors in which they expect to pay more than $600 during the calendar year are required to report the “new hire” to the state within 20 days of the first payment.  Information on how to register and report can be found here: https://servicesforemployers.floridarevenue.com/Pages/how_to_report.aspx

Entertainment and Meals

Entertainment expenses are not deductible. Entertainment is defined as any activity which is a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer for the taxpayer’s family.  

According to IRS Notice 2018-76, business meals are not considered entertainment.  The notice states that 50% of the cost of business meals is deductible if five requirements are met:

1.      The expense is an ordinary and necessary expense paid or incurred during the taxable year

2.      The expense is not lavish or extravagant under the circumstances

3.      The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages

4.      The food and beverage are provided to a current or potential business customer, client, consultant, or similar business contact, and

5.      In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverage is stated separately from the cost of the entertainment on one or more bills, invoice or receipts.  The notice states the disallowance rule may not be circumvented by inflating the cost of the food and beverage.

Only for 2021 and 2022, qualified meals may be 100% deductible.  Qualified meals are those that are purchased from a restaurant.  According to the IRS a “restaurant” is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.  Grocery stores, specialty food stores, liquor stores, drug store, convenience stores, newsstands or vending machines are not considered restaurants.  It is unclear if food trucks or catering companies are considered to be restaurants.

Form 1099-NEC

Reminder:the IRS has revised form 1099-NEC which has not been used since 1982.  The form is now used by business to report compensation for services of $600 or more to any unincorporated businesses or persons during 2020 and later years. Prior to this form, nonemployee compensation was reported on form1099-MISC.  

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