Tax Legislation
The effect of 2020 will be felt for many years to come. The personal trials and tribulations alone would take many moons to share; in spoken word, in cinema, and in books – both fact and fiction . . . to say the least. For my purposes, purely now, as a tax professional, 2020 was the year all hell broke loose. Three of the major tax legislations in the past 10 years seemed to be competing for the spotlight.
The Tax Cuts and Jobs Act (TCJA) of 2017
Arguably the biggest change in tax law in over 35 years, the TCJA implemented changes that affected big corporations, as well as individual taxpayers and small business owners. For big business, the most notable change was a decline in the tax rate from 35% to a flat 21% (must be nice). For us regular folks, individual taxpayers saw the elimination of personal exemptions in lieu of increases in the standard deduction. The Child Tax Credit and Additional Child Tax Credit were increased for families with children. TCJA also eliminated the controversial “individual mandate” for the Affordable Care Act (ACA, a.k.a. Obamacare). For the small business owner, of course, came the Qualified Business Income Deduction (QBID). The QBID was a very real and tangible business income deduction that allowed small businesses to reduce their taxable income and, therefore, reduce their tax liability. And these TCJA provisions are just an overview of this massive legislation, setting the stage for the SECURE Act that went into law January 1, 2020.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019
The SECURE Act was a much smaller piece of tax legislation than the TCJA. This legislation, in my opinion, focused most of its energies on the individual taxpayer. More specifically, the SECURE Act was all about retirement rule changes!
- The age limit for traditional IRA contributions was repealed.
Very simply, beginning with contributions made for the 2020 tax year, age was no longer a limitation with respect to traditional IRA contributions.
- Another biggie – the required beginning date (RBD) for required minimum distributions (RMDs) was increased from age 70 ½ to age 72 or the year the taxpayer retires (whichever is later) for an employer-provided plan.
- Another provision, affecting beneficiaries inheriting retirement assets, called for distributions to be completed, generally, within 10 years of death.
Note: This might sound like a no brainer. Some would say, “Give it to me all at once!” However, if you are inheriting, say, $1 million, that would be a lot of money to have to pay taxes on all at once.
Not to worry, we are only getting started – enter the CARES Act.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020
Try to keep up here. The massive TCJA kicked off 2018, only to be followed by an admittedly more focused SECURE Act that went into effect in 2020. And then before the paint was dry on the ink outlining the SECURE Act, in comes the CARES Act. A full-fledged five-alarm fire solution for a worldwide pandemic. Mind you, some of us tax pros were still digesting some of the provisions of the TCJA. The most notable provision in the CARES Act were the stimulus payments. $1,200 for single taxpayers, $2,400 for married individuals filing a joint return, and $500 bucks for each (soon-to-be distance learning) kiddo. The questions, in those early days of the news of a stimulus package, overwhelmed the tax office. Are they going to give us money? Do we have to pay it back? Do I have to file my 2019 tax return to be eligible? As for small businesses, the questions were just as perilous. Is there going to be any help with payroll? How does my business qualify for these loans they are talking about? Real-estate professionals, gig workers, those unemployed, all with the same basic question – how am I going to survive this madness?
Poise in a Pandemic
The $2.2 trillion economic stimulus CARES Act would become the largest economic stimulus package in U.S. history. And as of December 27, 2020, there is talk of an extension to the CARES Act. However, before we get bogged down with what could be coming, let’s just drill down into some of the more popular provisions of the CARES Act.
The Recovery Rebate Credit
More commonly referred to as the “stimulus check.” However, on your U.S. Individual Income Tax Return Form 1040 line 30, this year, this credit is referred to as the “recovery rebate credit.” And NO, you do not have to pay it back. And, if you did not, for some reason, receive your full amount when all the checks went out (and have some form of documentation to show as much – proof), you can claim the difference on your 2020 tax return and possibly get that money back, since this is a refundable credit (if you don’t owe more than you would be getting back).
I repeat, “You DO NOT have to pay the stimulus money back!”
Consider it a gift from Uncle Sam . . . that we all paid for first. A re-gift of sorts, lol.
Retirement Plan Distributions
Now let us get into our favorite topic: retirement. I mentioned earlier that the SECURE Act did well to enact tax law changes that benefited the individual taxpayer, and especially with respect to retirement provisions. The CARES Act pushed some of the key provisions even further. One in particular, that a number of my clients, and friends and family as well, have benefited from is the waiver on the 10% penalty on withdrawals from qualified retirement plans or IRAs – for COVID-19–related reasons. Mind you, those reasons are pretty broad. In a nutshell, a COVID-19–related distribution is one made during the 2020 calendar year to an individual who is diagnosed with COVID-19 by a CDC-approved test, whose spouse or dependent is diagnosed with COVID-19, or who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or unable to work due to lack of childcare due to COVID-19; having work hours reduced; or reducing hours of a business owned or operated by the individual. And there are provisions whereby you can pay this money back over a three-year period as though you never took it out in the first place. More to come on that later.
Required Minimum Distributions (RMDs)
Simple, the CARES Act has waived RMDs for calendar year 2020. If you are currently taking RMDs, you are not required to do so for 2020. This also includes your first RMD, which you may have delayed from 2019 until April 1, 2020.
This too Shall Pass
I know it can feel like this is too much to process . . . because it is. However, we are going to get through this one step at a time. These are the broad strokes.
References
H.R.133 – Consolidated Appropriations Act, 2021
Three Big Ways Small Business Would Benefit from the New COVID Relief Package
30 years after the Tax Reform Act: Still aiming for a better tax system
An Overview of Itemized Deductions
Setting Every Community Up for Retirement Enhancement (SECURE) Act
Coronavirus Aid, Relief, and Economic Security (CARES) Act
Kajli Prince (“Prince”) has over 20 years of experience in small business tax preparation; he is the office manager of H&R Block’s Sudley Manor Office in Manassas, Virginia. As a self-published author, Prince holds a special appreciation for NAIWE and its members. One of his passions is sharing relevant information with people and showing them how best to use it for their benefit. Prince is a small business owner of 25 years, and his specialties include emerging currencies (e.g., virtual/crypto currencies), information technology, intellectual property, and business administration.
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