By Judy Mason, CPA, CVA – Partner and Marco Loza, CPA – Supervisor, Tax
As we continue to strive toward a post COVID-19 world, we hope that you and your loved ones find yourselves safe and well. We once again navigated a postponed tax filing season, albeit a shorter one, which brought with it its unique challenges as well as some tax saving opportunities provided by continued relief legislation.
In response to the COVID-19 pandemic, a good deal of relief legislation has been passed, the most recent of which was the American Rescue Plan Act (ARPA) of 2021. We will speak on some of the more important relief items to come of ARPA, as well as some general tax saving strategies to consider. We will also briefly touch on the proposed American Families Plan, which could hold significant tax increases in the coming years that could impact current tax planning.
Individual Income Tax Opportunities
Here are some items to consider for your personal tax planning.
- Consider Adjusting Your Tax Withholding or Estimated Payments. If you owed taxes for 2020, you may want to revise your Form W-4. The IRS provides a tax withholding estimator at https://www.irs.gov/individuals/tax-withholding-estimator. If you make estimated tax payments throughout the year, you should review your tax situation for 2021 to make sure you are not underpaying or overpaying.
- Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. (Higher-income individuals may be subject to an additional 3.8% net investment income tax.) The rate that applies is determined by your taxable income. For example, the 0% rate applies if your 2021 taxable income does not exceed $80,800 for joint filers or $40,400 for other individuals. The 20% rate does not kick in until your taxable income exceeds $501,600 for joint filers and $445,850 for other individuals.
- Sunset of Increased Estate and Gift Tax Exclusion. The 2017 Tax Cuts and Jobs Act (TCJA) amended the basic exclusion amount, doubling it from $5 million to $10 million per individual (as indexed for inflation). Currently, the exclusion amount is at $11.7 million. In 2025 this increased exclusion period will sunset and the basic exclusion amount will revert to its pre-2018 levels (indexed for inflation), making estate and gift tax planning ever-more important as this window closes. There is also concern that the Biden administration will attempt to reduce this exclusion soon, shortening the planning time for maximizing this benefit. The IRS has indicated that individuals who take advantage of the increased exclusion window, either through gifting and/or transferring any unused exclusion amounts, will not be subject to claw back (retroactive adjustment).
- Check Your Deduction Strategy. Generally, it is best to itemize deductions if your personal expenses, such as mortgage interest, charitable contributions, medical expenses, and taxes exceed the standard deduction. For 2021, joint filers can enjoy a standard deduction of $25,100. The standard deduction for heads of household is $18,800, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,550. However, “bunching” deductions may offer the best of both worlds. For example, you can double up on charitable giving every other year. Allowing you to itemize in the year of the increased donations.
Planning for Small Businesses
If you own a business, consider the following strategies to minimize your tax bill for 2021.
- Employee Retention Tax Credits. The Consolidated Appropriations Act (CAA), signed into law in December of 2020, extended the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021. And now the American Rescue Plan Act (ARPA), signed into law on March 11, 2021, has extended it again through December 31, 2021. In addition, for the first two quarters of 2021, the CAA increased the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter. And it increased the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules). Because of the ARPA extension, these higher wage ceilings now apply to all four quarters of 2021.
- If You Took Out a PPP Loan, Apply for Loan Forgiveness. The Payroll Protection Program (PPP), which many small businesses took advantage of, was introduced to provide forgivable loans to small businesses experiencing financial distress. While it is too late to apply for a new PPP loan, those that did receive PPP loans should consider applying for forgiveness if not already done.
- 20% Qualified Business Income Deduction. A hallmark provision of the TCJA, section 199A provides for a 20% deduction with respect to “qualified business income” and certain other types of income. The deduction is available to individuals, estates, and trusts. As with other provisions that came out of the TCJA, this deduction is set to expire for tax years beginning after December 31, 2025. Proper planning, including contributions to retirement plans, can help maximize this deduction for its remaining years.
- Pay Attention to Losses. Many businesses suffered a significant decline in revenue last year and generated a tax loss. The CARES Act allows eligible small businesses and individuals to apply the losses generated in 2018, 2019, and 2020 to taxable income generated in the previous five years. This carryback will result in an immediate refund. Alternatively, the losses can be carried forward to offset future income.
- Reevaluate Your Retirement Planning. Consider evaluating your company’s retirement plan. Does it provide the owners with an opportunity to maximize contributions? Do employees participate in the plan? Should changes be considered to increase employee participation and possibly improve employee retention.
- Advantages of Cost Segregation Studies. These studies identify and classify portions of major building construction projects as shorter life property allowing the use of bonus depreciation and Section 179 expensing. Bonus depreciation allows for 100% write-off of these short life assets during the year placed in service. This 100% write-off will be phased out after 2022. Section 179 can be used for smaller projects. It allows for the write off of assets up to $1,050,000 but begins to phase out if expenditures exceed $2,000,000.
The American Families Plan
On April 28, 2021, President Biden announced the American Families Plan and the proposed provisions of the Plan. Although, details have not yet been shared, the White House proposes funding the Plan through an increase in tax revenue over a 10-year period. A substantial portion of the funding likely will come from individual tax increases such as:
- Increasing the top individual income tax rate from 37% to 39.6% for taxpayers with an income of $400,000 or more. It is unclear how the $400,000 will be defined (e.g., as gross income, adjusted gross income, taxable income, or some other measure).
- Increasing the top capital gains rate from 37% to 39.6% for households with income over $1 million. Again, it is unclear how the $1 million will be defined.
- Expanding the 3.8% net investment income tax
- Repealing the basis step-up for certain inherited assets
The Professionals at MichaelSilver are ready to help. Our goal is to increase your awareness of tax planning opportunities and potential moves we can make to minimize your taxes before the end of the year. We are continuously monitoring developments and will keep you informed of the latest tax law changes. Please contact us if you want more details about any of the topics discussed or if you just have questions or concerns. We can be reached at 847.982.0333.
Judy Mason, CPA, CVA – Partner has over 20 years of tax, accounting, business consulting, and compliance experience, serving closely-held and start-up businesses, entrepreneurial and family-owned companies, their owners, and families. Her expertise is in federal, state, and local taxation. Judy has a broad depth of expertise in state and local tax research, planning, and compliance matters for entities and individuals with multi-state businesses and/or investments. She has successfully managed a broad range of federal income, and state sales and use tax audits for entities and individuals. As a Certified Valuation Analyst (CVA), Judy prepares business valuations used for various purposes such as estate and gift planning, business succession, buy/sell agreements, and litigation support.
Marco Loza, CPA – Supervisor, Tax has over six years of experience at MichaelSilver. His tax expertise includes compliance and planning services for individuals, corporations, partnerships, trusts, and estates. Marco serves on MichaelSilver’s Estate Planning and Automobile Dealership committees and is a graduate from the Driehaus College of Business at DePaul University.