TAX TIME 2021

 

Steep Mountain Road 960x642

 

With another new year comes another tax season. The IRS has announced that it will begin processing tax returns on Friday, February 12, 2021. 

 

Here is a summary of some key tax rules that will help you plan your income taxes better.

 

 

Stimulus Checks Received in 2020 Are Not Taxable

If you receive your economic impact payment in 2020 be aware that it is not taxable. The IRS will treat such payments as a non-taxable refundable credit.

 

 

Help for Those Who Did Not Receive Their Stimulus Check

If you didn't get your check last year you will receive a second chance. The Recovery Rebate Credit will be available to people who otherwise qualified for a stimulus check but, for whatever reason, never received their payment. The credit is $1,200 for singles and $2,400 for married couples who file a joint tax return. You will also receive an extra $500 for qualifying children.

 

 

New Stimulus Checks

The 2021 CRRSA Act provides for another round of stimulus payments of $600 for individuals, $1,200 for couples filing joint returns and an extra $600 for dependent children under age 17. Payments will be sent using the latest information available to the IRS. Most payments should have been issued on January 4, 2021. Individuals with adjusted gross income up to $75,000 and couples filing jointly with AGI up to $150,000 should be eligible for these payments.

If you have not already received your payment you can check status by going to the following secure IRS link:

 

https://sa.www4.irs.gov/irfof-wmsp/login

 

 

Student Loan Payments Deferred Until April 1, 2021

Anyone who has a federally guaranteed student loan will qualify for automatic payment forbearance until April 1, 2021. No action is needed to qualify for forbearance.

 

 

Round 2 of the Payroll Protection Program

The CRSSA Act authorized a second round of PPP loans available to small businesses with 300 or fewer employees, self-employed individuals, and some IRC 501(c)(6) organizations as follows:

 

• Chambers of commerce
• Trade associations
• Real estate boards
• Professional associations
• Pro football leagues
• Boards of trade
• Business leagues

 

As was the case with the first round of PPP loans, businesses should contact a participating lender to apply for additional funds. I predict that funding for this second round will dry up soon.

 

 

Interest Income on IRS Tax Refunds is Taxable

The IRS pays very generous interest on tax refunds. Rates on tax refunds for 2020 ranged from 3% to 5% compounded daily! However this income is taxable (both federal and Maine) and must be reported on your tax return.

 

 

Special Rules for Early Withdrawals from Some Pension Plans

The Cares Act waived the 10% penalty on early withdrawals from certain pension plans. Normally individuals younger than 59.5 are subject to this penalty. However, the withdrawal is still subject to income tax.

 

Another provision of the Act allows individuals to repay the funds they took out over up to three years. You will have to report the early withdrawal as income and pay tax on it. But if all funds are returned to the pension plan within the 3 year period you may file amended tax returns and get back any extra tax you paid on the withdrawal.

 

 

Accelerated Depreciation for Business Owners

Section 179 and Bonus Depreciation continue for 2020 tax returns filed in 2021. These two different depreciation methods allow business owners to deduct the entire cost of qualifying business assets purchased in 2020, including vehicles, equipment, and certain type of improvements to real estate.

 

 

Standard Mileage Rates for Business Vehicles

For 2020 the rate for business miles was 57.5 cents (17 cents/mile for medical travel and 14 cents/mile if you drove for a charity). You must maintain contemporaneous records to document all mileage deductions.

 

For business owners with more than four vehicles used simultaneously you cannot use the standard mileage rate and must instead use the actual method for claiming vehicle expenses. In this case all actual vehicle costs such as fuel, repairs, insurance, etc. are deductible.

 

 

No More Tax Free Trade-Ins of Vehicles

The new tax law enacted in 2017 did away with most forms of like-kind exchanges where property could be swapped tax-free. Any business vehicle traded in for another business vehicle is now treated as a taxable sale, and gain (or loss) is recognized immediately.

 

 

Loss Carrybacks

Many, perhaps most, Maine businesses lost money in 2020 because of Covid-19. The Cares Act allows businesses and/or business owners to carry losses back five years and claim refunds from the IRS. This loss carryback provision facilitates income averaging by deducting 2020 losses from the taxable profits earned in prior years. File Form 1045 or 1139 and claim your refund. By law the IRS is required to issue a refund pertaining to a loss carryback in 90 days or sooner.

 

I predict a massive tidal wave of Maine businesses filing their 2020 tax returns early in order to claim refunds from losses. You cannot claim a refund for a loss carryback until you file all of your 2020 returns.

 

 

Payroll Protection Program Loan Forgiveness

Confusion persists over how to account for PPP loan forgiveness. All of us await the arrival of clarity. See the following article published on March 16, 2021 in the Journal of Accountancy:

 

 AICPA Article

 

Required Minimum Distributions from Pensions Waived for 2020

The Cares Act waived required minimum distributions from pension plans for 2020. Starting in 2021 these payments must resume. A severe 50% penalty applies to any amount that should have been distributed from your pension but was not distributed.

 

 

 

2020 Federal Tax Brackets

The following tax brackets apply to taxable income and are based on your filing status:

Tax Rate Single Married Filing Jointly
10% under 9875 under 19750
12% 9875 - 40125 19750 - 80250
22% 40125 -85525 80250 - 171050
24% 85525 - 163300 171050 - 326600
32% 163300 - 207350 326600 - 414700
35% 207350 - 518400 414700 - 622050
37% over 518400 over 622050

 

 

 

Standard Deduction

Filing Status 2020 2019
Single $12,400 $12,200
Married Filing Jointly $24,800 $24,400
Married Filing Separately $12,400 $12,200
Head of Household $18,650 $18,350

 

 

 

Tax Preparers Must Safeguard Taxpayer Data

New and improved standards issued by both the IRS and the Federal Trade Commission require all tax preparers to proactively safeguard taxpayer data. See:

 

https://www.irs.gov/pub/irs-pdf/p4557.pdf

 

 

 

Remember that the very best answer for you is to always pay the legal minimum tax: not one cent more.

 

IRS Headquarters 2 960x520

National Headquarters of the Internal Revenue Service, Washington DC. The inscription at the top of this building says:

 

Taxes are what we pay for a civilized society

 

 

2020 is the 108th year of the income tax in the United States, following ratification on February 3, 1913 of the 16th Amendment to the Constitution. See here for the very first U.S. income tax return for the year 1913:

 

http://www.irs.gov/pub/irs-utl/1913.pdf

 

 

 

LEGAL DISCLAIMER

George Adams
Certified Public Accountant Master of Business Administration
Tel: (207) 989-2700 E-Mail: GeorgeAdams@IntelligenceForRent.com
450 South Main Street: The HQ of IQ
Brewer, Maine 04412-2339

©2015 Copyright George Adams CPA MBA. All Rights Reserved.

 

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Telephone: (207) 989-2700
Email - georgeadams@intelligenceforrent.com
Address: 450 South Main Street: The HQ of IQ
               Brewer Maine 04412-2339

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