For tax professionals and taxpayers alike, the past year was characterized by various legislation addressing the coronavirus pandemic, as well as by reacting to the continuing implementation of the Tax Cuts and Jobs Act. Moreover, legislation passed at the end of last year affected expiring tax provisions, retirement provisions,and disaster relief.
Many of the tax law changes, including the ones related to pandemic relief, currently expire at the end of 2020, observed Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. “Both individual and business taxpayers may need to act before year-end to take advantage of many of these tax breaks,” he said.
Here’s a breakdown of the items that may need to be acted on according to Luscombe:
- More than 30 tax breaks that Congress has permitted to regularly expire and then renew currently expire at the end of 2020, including individual, business, and energy tax breaks.
- More generous charitable contribution deduction provisions expire at the end of 2020, including a new above-the-line charitable contribution deduction.
- The ability to make expanded penalty-free withdrawals from retirement plans for COVID-related expenses expires at the end of 2020.
- The deadlines to apply for Economic Impact Payments expire before the end of the year, although tax credit is available on the 2020 tax return.
- Employers must continue to deal with a variety of tax credits and deferrals related to employee payroll taxes that expire at the end of 2020.
- A number tax provisions provide retroactive relief, which might require filing of amended tax returns for prior years, including net operating loss carrybacks, modifications to deductions for non-corporate business losses, modifications to business interest deduction limitations, qualified improvement property, the Kiddie Tax, disaster relief, and the 30-plus regularly expiring provisions.
- The possibility of higher taxes in 2021 might suggest a reversal of the usual year-end tax planning strategy, which is to defer income and accelerate deductions. Taxpayers may also want to realize capital gains, make lifetime gifts, and engage in Roth conversions.
“The expiring provisions were always expiring and getting reenacted every year or two,” Luscombe said. “The TCJA was supposed to replace some of the expiring provisions because of the lower tax rates, but they renewed them anyway and are now talking about doing it again. It’s up to taxpayers whether they want to take advantage of these before the end of the year, or rely on Congress to extend them again. There are about half a dozen individual provisions, and the rest are split between provisions focused on particular industries and the energy area.”
“Some of the individual provisions are the usual suspects — tuition and fees, the deduction for mortgage insurance premiums, and forgiveness of debt on mortgage foreclosures,” he added.
“Another year-end item is the charitable contribution provisions from the CARES Act,” he said. “It offers an above-the-line deduction of up to $300 for those who don’t itemize. Corporations also have some higher contribution percentages as well. Although the contributions don’t have to be COVID-related, the provisions allowing them still expire at the end of the year.”
There will likely be discussions around extending the above-the-line charitable contribution deduction, Luscombe predicted. “Without it, a lot fewer taxpayers will benefit from giving to charity.”
In the retirement area, taxpayers still have the ability to do a COVID-related withdrawal from their 401(k)s and IRAs, and have the option to repay within three years or or pay the tax ratably over a three-year period, he noted.
Which option is the better choice? “If they can afford it, I would lean toward the payback,” he said. “That way, the taxpayer continues to earn tax-deferred money until retirement. If they pay tax on it, then they lose out on all those potential years of tax deferral on the earnings from it.”
Although the deadline for economic stimulus payments has passed, those who failed to receive all or a portion of it may claim a rebate credit on their 2020 return. If they received too much, they probably won’t have to repay it, Luscombe indicated.
A number of issues might make amended returns necessary, according to Luscombe. Among them are provisions that expired at the end of 2019. ”If any of those expired provisions apply to the taxpayer, they can go back and file an amended return. The same goes for disaster relief enacted at the end of 2019. It can be applied to 2018 disasters, so the taxpayer might be able to file an amended return for additional disaster relief.”
The TCJA changed the Kiddie Tax to the estate and trust rate rather than the parents’ rate. “They’ve now gone back to the parents’ rate,” Luscombe noted. “So if a taxpayer had to file in 2018 or 2019 where the tax was paid at the estate and trust rate, they can elect to go back and pay at the parents’ rate.”
“And then there’s the error in the drafting of the qualified improvement property provision in the TCJA,” he said. “This has been corrected by the CARES Act. QIP is now treated as 15-year property qualifying for 100 percent bonus depreciation. Taxpayers can file amended returns and revise their depreciation claims for 2018 and 2019.”
