Unemployment Provisions

The legislation extends unemployment benefit assistance:

• An additional $300 weekly benefit to those collecting unemployment benefits, through September 6, 2021
• An additional 29-week extension of federally funded unemployment benefits for individuals who exhaust their state unemployment benefits
• Targeted federal reimbursement of state unemployment compensation designed to eliminate state one-week delays in providing benefits (allowing individuals to receive a maximum 79 weeks of benefits)
• Unemployment benefits through September 6, 2021, for many who would not otherwise qualify, including independent contractors and part-time workers
• For 2020, the legislation also makes the first $10,200 (per person for joint returns) of unemployment benefits nontaxable if modified adjusted gross income is less than $150,000.

Business Relief

• The employee retention tax credit was extended through December 31, 2021. It is available to employers that were significantly impacted by the crisis and is applied to offset Social Security payroll taxes. As in the previous extension, the credit is increased to 70% of qualified wages, up to a certain maximum per quarter.
• The employer tax credits for providing emergency sick and family leave were extended through September 30, 2021.
• Eligible small businesses can receive targeted economic injury disaster loan advances from the Small Business Administration. The advances are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
• Eligible restaurants can receive restaurant revitalization grants from the Small Business Administration. The grants are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.

Housing Relief

• The legislation allocates additional funds to state and local governments to provide emergency rental and utility assistance through December 31, 2021.
• It allocates funds to help homeowners with mortgage payments and utility bills.
• It also targets funds to help the homeless.

Health Insurance

• For those who lost a job and qualify for health insurance under the federal COBRA continuation coverage program, the federal government will generally pay the entire COBRA premium for health insurance from April 1, 2021, through September 30, 2021.
• For 2021, if a person gets unemployment compensation, the taxpayer is treated as an applicable taxpayer for purposes of the premium tax credit, and the household income of the taxpayer is favorably treated for purposes of determining the amount of the credit.
• Persons who bought their own health insurance through a government exchange may qualify for a lower cost through December 31, 2022.

Student Loan

• For student loans forgiven or cancelled between January 1, 2021, and December 31, 2025, the forgiven amounts are not included in taxable income. They would ordinarily be considered income.

Tax Credits

• For 2021, the child credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 for qualifying children under age 6), subject to phaseout based on modified adjusted gross income. The legislation also makes 17-year-olds eligible as qualifying children in 2021.
• For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
• The Treasury Department is expected to send out periodic advance payments (to be worked out by the Treasury) for up to one-half of the credit during 2021.
• For 2021, the legislation increases the maximum credit up to $4,000 for one qualifying individual and up to $8,000 for two or more (based on an increased applicable percentage of 50% of costs paid and increased dollar limits).
• Most taxpayers will not have the applicable percentage reduced (can be reduced from 50% to 20% if AGI exceeds a substantially increased $125,000) in 2021. However, the applicable percentage can now also be reduced from 20% down to 0% if the taxpayer’s AGI exceeds $400,000 in 2021.
• For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
• For individuals with no qualifying children, the minimum age at which the earned income tax credit can be claimed is generally lowered from 25 to 19 (24 for certain full-time students) and the maximum age limit of 64 is eliminated (there are no similar age limits for individuals with qualifying children).
• For 2021 only, earned income tax credit: increase of credit available for individuals with no qualifying children (bringing it closer to the amounts for individuals with one, two, or three or more children which were already much higher).
• To determine the credit amount, taxpayers can elect to use their 2019 earned income if it is more than their 2021 earned income.

We are continuing our series of online free webinars for anyone who needs help during this pandemic and beyond. The next one is March 25 at 5:30pm, and all you need to do is send in a question in advance. We’ll then send the link to the Zoom webinar.

We heard that some people are shy or simply embarrassed to ask financial questions publicly on Zoom. So to include more people, Maura will answer questions that people send in ahead of time.
The audience will not have to show themselves. You don’t even have to dress up!

We want to be able to take down the barriers – whatever they are – that prevent greater financial literacy.

All Are Welcome

Everyone is invited: clients, friends, students, anyone you know who might have a question. Just send in the question ahead of time to postoffice@bluesparkfinancial.com.

Sample Questions

Here are some questions that have been sent in so far:

• How do I improve my credit score?
• What is a stock split?
• If I took money out of my IRA while I was laid off, can I put it back in?
• Are stimulus payments taxable?

It’s the season. Nobody likes it, but we can help you get organized. Let us know if you need help with your CPA’s questionnaire. 2020 was a tough year for many, with different challenges in getting ready to file your taxes.

Your custodian has mailed out your tax documents, and we also put them in the Vault of your online Dashboard. There are still a few updates, or corrected 1099s, for some of you.
Remember that because RMDs were not required in 2020, you may not receive the 1099-R form you are used to getting.

Tax Filing Deadlines

Here are some important deadlines:

• March 15 for S Corps and Partnerships
• April 15 for personal tax returns
• April 15 for C Corps
• April 15 for trusts, estates, and gift returns
• May 15 for exempt organizations
• Sept 15 is extended deadline for S Corps and Partnerships
• October 15 for individuals who extended

Traditional IRA income limits

Can you contribute to an IRA this year? If you are not covered by an employer retirement plan, your contributions to a traditional IRA are generally fully tax-deductible. For those who are covered by an employer plan, the income limits for determining the deductibility of traditional IRA contributions for 2020 have increased. If your filing status is single or head of household, you can fully deduct your IRA contribution up to $6,000 ($7,000 if you are age 50 or older) in 2020 if your modified adjusted gross income (MAGI) is $65,000 or less (up from $64,000 in 2019). If you’re married and filing a joint return, you can fully deduct up to $6,000 ($7,000 if you are age 50 or older) in 2020 if your MAGI is $104,000 or less (up from $103,000 in 2019).

If you’re not covered by an employer plan but your spouse is, and you file a joint return, your deduction is limited if your MAGI is $196,000 to $206,000 (up from $193,000 to $203,000 in 2019), and the deduction is eliminated if your MAGI exceeds $206,000 (up from $203,000 in 2019).

Roth IRA income limits

The income limits for determining how much you can contribute to a Roth IRA have also increased for 2020. If your filing status is single or head of household, you can contribute the full $6,000 ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $124,000 or less (up from $122,000 in 2019). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $196,000 or less (up from $193,000 in 2019). (Again, contributions can’t exceed 100% of your earned income.

Employer retirement plans

Most of the significant employer retirement plan limits for 2020 have also increased. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan is $19,500 in 2020 (up from $19,000 in 2019). This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $6,500 to these plans in 2020 (up from $6,000 in 2019). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($19,500 in 2020 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan — a total of $39,000 in 2020 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) is $13,500 in 2020 (up from $13,000 in 2019), and the catch-up limit for those age 50 or older remains at $3,000.

Note: Contributions can’t exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2020 is $57,000 (up from $56,000 in 2019) plus age 50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2020 is $285,000 (up from $280,000 in 2019), and the dollar threshold for determining highly compensated employees (when 2020 is the look-back year) is $130,000 (up from $125,000 when 2019 is the look-back year).
 

We’ve had several questions from clients about the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), which was signed into law in late December 2019 as part of a larger federal spending package.

This legislation has some positives and some negatives among its new requirements. It gives incentives for employers to provide retirement benefits, but it restricts a popular estate planning strategy for those with significant retirement plans. Here are some of the changes; keep in mind that these may impact your retirement, tax, and estate planning strategies. All of these were effective January 1, 2020, unless noted.

Benefits for retirement savers

Later RMDs.

If you were born on or after July 1, 1949, you won’t be forced to take RMDs at age 70.5. You now have until age 72. This is a boon for those who don’t need to take withdrawals, because it postpones payment of income taxes and gives the account a longer time to pursue tax-deferred growth or a longer Roth conversion strategy. As under previous law, you may be able to delay taking withdrawals from your current employer’s plan as long as you are still working.

No traditional IRA age limit.

There is no longer a prohibition on contributing to a traditional IRA after age 70.5 — you can make contributions at any age as long as you have “earned income” and are working. This helps those who want to continue to save and reduce their taxable income. But keep in mind that contributions to a traditional IRA only defer taxes not eliminate them. Withdrawals, including any earnings, are taxed as ordinary income, and if you have a larger account balance at 72, it would increase the amount of withdrawals that must start then.

Tax breaks for special situations.

For the 2019 and 2020 tax years, you can deduct unreimbursed medical expenses that exceed 7.5% of your AGI. In addition, withdrawals may be taken from tax-deferred accounts to cover medical expenses that exceed this threshold without owing the 10% penalty that normally applies before age 59½.

*The threshold returns to 10% in 2021. So if you can plan large healthcare expenses paid in 2020, it could be beneficial for you. Penalty-free early withdrawals of up to $5,000 are also allowed to pay for expenses related to the birth or adoption of a child. Regular income taxes apply in both situations.

More part-timers gain access to retirement plans.

For plan years beginning January 1, 2021, part-timers age 21 and older who work at least 500 hours annually for three consecutive years must be allowed to contribute to qualified retirement plans, with some exceptions. (The previous law required 1,000 hours and one year of service.) However, employers will not be required to make matching or nonelective contributions on their behalf.

Elimination of “stretch” IRAs

Under previous law, non-spouse beneficiaries who inherited IRAs could “stretch” the RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year “clock” will begin when a child reaches the age of majority (18 in most states).

This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.

In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.

Benefits for small businesses

In 2019, only about half of people who worked for small businesses with fewer than 50 employees had access to retirement benefits. The SECURE Act includes provisions intended to make it easier and more affordable for small businesses to provide qualified retirement plans.

Effective January 1, 2021, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be related somehow in order to join a MEP.) The legislation also eliminates the “one bad apple rule,” so the failure of one employer in a MEP to meet plan requirements will no longer cause others to be disqualified.

The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (1) $500 or (2) $250 times the number of non-highly compensated eligible employees, or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years.
 

The government left some retirement numbers unchanged and increased some for 2020. The maximum you can contribute to a traditional IRA or a Roth IRA in 2020 is $6,000 if under 50 and $7,000 if 50 or older (or up to 100% of your earned income, if that is less), the same as last year. You can split your contribution between a traditional IRA and a Roth IRA, but it can’t be more than $6,000/$7,000.

Traditional IRA income limits

To have your contribution be fully deductible, your income (modified adjusted gross or MAGI) must be $65,000 or less (if single), up from $64,000 in 2019. If you’re married and filing a joint return, you can fully deduct in 2020 if your MAGI is $104,000 or less, which is up from $103,000 in 2019.

If you are not covered by an employer retirement plan, your contributions to a traditional IRA are generally fully tax deductible. If you are not covered by an employer plan but your spouse is, and you file a joint return, your deduction is limited if your MAGI is $196,000 to $206,000 (up from $193,000 to $203,000 in 2019), and eliminated if your MAGI exceeds $206,000 (up from $203,000 in 2019).

Roth IRA income limits

The income limits for determining how much you can contribute to a Roth IRA have also increased for 2020. You can contribute the full amount to a Roth IRA if your MAGI is $124,000 or less (if single), up from $122,000 in 2019. If you’re married and filing a joint return, you can make a full contribution if your MAGI is $196,000 or less, up from $193,000 in 2019).

Employer retirement plans

Most of the employer retirement plan limits for 2020 have increased. The maximum amount you can contribute as your “elective deferral” to a 401k plan is $19,500 in 2020 (up from $19,000 in 2019). This limit also applies to 403b and 457b plans, as well as the Federal Thrift Plan. If you’re 50 or older, you can also make catch-up contributions of up to $6,500 (up from $6,000 in 2019) for a total of $26,000. Special catch-up limits apply to certain participants in 403b and 457b plans.

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit. Deferrals to 401k plans, 403b plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457b plans are not. For example, if you participate in both a 403b plan and a 457b plan, you can defer the full dollar limit to each plan — a total of $39,000 in 2020 (plus catch-up contributions).

The most you can contribute to a SIMPLE IRA or SIMPLE 401k is $13,500 in 2020 (up from $13,000 in 2019), and the catch-up limit for age 50 or older remains $3,000.

The maximum that can be allocated to your account in a defined contribution plan (for example, a 401k plan or profit-sharing plan) in 2020 is $57,000 (up from $56,000 in 2019) plus age 50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2020 is $285,000 (up from $280,000 in 2019), and the dollar threshold for determining highly compensated employees (when 2020 is the look-back year) is $130,000 (up from $125,000 when 2019 is the look-back year).
 

The lifetime exemption for federal estate, gift and generation-skipping transfer (GST) tax has increased for 2020, to $11.58 million per person. When you’re doing advanced estate planning — when you’re making transfers above the $15,000 annual exclusion for gifts — that is your lifetime gift/estate tax exemption. And it’s a good time to do it soon before the exclusion is set to go back down in 2025.

A married couple now has a total of $23.16 million they can transfer free of federal estate/gift taxes, either during life or upon death. If a U.S. estate tax return is filed properly within nine months after the death of the first to die of a married couple, to elect “portability,” then the unused exemption of the first spouse can be used by the estate of the surviving spouse.

Absent intervening legislation, the Federal exemption amount will be increased for inflation each year until January 1, 2026, when it will return to $5 million (adjusted for inflation). IRS regulations now provide that individuals who use the increased federal exemption amount for lifetime gifts will not be adversely affected by a decreased federal estate tax exemption after 2025. They have indicated that there will be no “clawback” if the exemption amount in the year of death is lower than the amount of exemption used during life.

Annual gift tax exclusions are available in addition to the federal gift tax exemption. Each year any person may make gifts of $15,000 (or $30,000 for married couples) to an unlimited number of recipients without using up any part of their federal gift tax exemption.

New York

The New York estate tax exclusion for 2020 is $5.85 million, scheduled to increase annually for inflation. The benefit of the exclusion is “phased out” for taxable estates between 100% and 105% of the exclusion amount, and eliminated entirely for taxable estates that exceed 105% of the exclusion amount. This creates a “tax cliff,” so beware! As a result of this “cliff,” if a taxable estate exceeds 105% of the exclusion amount, the entire taxable estate will be subject to the New York estate tax (applied at graduated rates).

There is no separate gift or GST tax in New York. However, taxable gifts made by a New York resident prior to December 31, 2025, and within three years of death are added back to and taxed in the resident’s estate. The right estate planning can be a benefit.

Massachusetts

The Massachusetts estate tax exemption is only $1,000,000. This exemption is reduced by lifetime gifts in excess of the federal gift tax annual exclusion. The Massachusetts estate tax is imposed on the entire value of the estate when the exemption is exceeded, unlike the federal estate tax which only taxes the excess over the threshold. If an estate exceeds $1 million then all but $40,000 of the entire amount is taxed. However, those tax rates are much less than the 40% federal estate tax rate.

For 2020, Massachusetts estate tax rates: are 0.8% to 16%, depending on the value of the estate. The state does not tax gifts at all of any amount, nor does it have an inheritance tax.

Connecticut

The Connecticut estate and gift tax exemption for 2020 is $5.1 million, and will increase to $7.1 million in 2021, and $9.1 million in 2022. Beginning in 2023, the Connecticut exemption will equal the federal exemption (as adjusted for inflation). There is no separate generation-skipping tax in Connecticut.

New Jersey

New Jersey repealed its estate tax entirely, effective January 1, 2018. However, New Jersey has retained a separate inheritance tax, which is based on the relationship between the decedent and the beneficiary. Transfers to a spouse, child, stepchild, or grandchild of the decedent are exempt from inheritance tax. There is no separate gift or GST tax in New Jersey.

The Tax Cuts and Jobs Act (TCJA) made fundamental changes to the U.S. tax code, and the 2018 returns were the first time most taxpayers felt the impact of these sometimes painful changes.
Most still don’t understand it. In an April 2019 Gallup poll, 43% of Americans said they were unsure how the new tax law affected them personally. Despite a stated effort to simplify the federal withholding and tax filing process, the tax code is still complex.

Withholding

In theory, your withholding amount from earnings should equal your tax liability; otherwise you are loaning your money interest-free to the government. But IRS formulas tend to err on the high side, partly because people usually dislike owing a balance and are often happy to receive a tax refund.

Employers estimate federal tax bills based on the number of exemptions claimed on your W-4 Form and on IRS calculation tables. The IRS rather quickly gave 2018 calculation tables reflecting the new rates and rules. However, the agency did not replace the W-4 Form and worksheet, which are based on exemptions, deductions, and credits that were reduced or eliminated under the new tax law.

This resulted in smaller refunds or higher tax bills than expected for some, especially dual-income households in high-tax states with more complicated situations. The Treasury estimated that 21% of taxpayers would be subject to under-withholding because of the TCJA, compared with 18% if the tax law provisions had not changed.

If you owed a large amount of money for 2018, increasing your withholding could help avoid a similar fate next April. You might also reevaluate your withholding if you received a large refund. You could make larger retirement contributions instead or take home more of your pay and put it to better use. This is why we have annual reviews to look for chances to save.

The IRS (irs.gov) has an online calculator that can help you find the appropriate amount of withholding. You will need to complete and submit a W-4 to your employer to make any adjustments. A new W-4 Form for the 2020 tax year is in the works but isn’t expected to be available until later this year.

Measuring the Impact

How you fared under the TCJA depends on a variety of factors, such as how much you earned, your filing status, the ages of your dependents, and where you live. Undertaking a thorough side-by side comparison of your 2017 and 2018 returns could help you identify changes that affected your bottom line. Be sure to note differences in your allowed deductions, taxable income, and total tax liability.

New tax brackets are likely to mean that much of your income is taxed at lower rates: but other provisions may add to that.

Standard deduction amounts for 2018 roughly doubled to $12,000 for single filers and $24,000 for married taxpayers filing jointly. However, personal exemptions for yourself, your spouse, and your dependents are no longer available. The expanded child tax credit may offset the loss of exemptions for many taxpayers, but the math may not work out in your favor if you’re a family of four or more.

A number of tax deductions commonly used by high earners have also been modified, capped, or eliminated. For example, the itemized deduction for all state and local taxes, including property taxes (SALT) is now capped at $10,000. This provision caused tax increases for many taxpayers in high-tax states. On the other hand, the overall limit on itemized deductions that applied to higher-income taxpayers (known as the “Pease limitation”) was repealed, and fewer taxpayers are subject to the alternative minimum tax.

Employer retirement plans

• Employees in 401(k), 403(b), and most 457 plans can defer up to $19,000 of their compensation in 2019 (up from $18,500 in 2018). Those age 50 and older can defer up to an additional $6,000 in 2019 (the same as last year).
• Employees in a SIMPLE retirement plan can defer up to $13,000 in 2019 (up from $12,500 in 2018), and those older than 50 can defer up to an additional $3,000 in 2019 (the same as in 2018).

IRAs

The annual limit on contributions to traditional and Roth IRAs increased to $6,000 in 2019 (up from $5,500 in 2018), and people older than 50 can contribute an additional $1,000. That can be contributed to one or both, but cannot exceed those limits.

For people covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is phased out for the following modified adjusted gross income (AGI) ranges:

Note that the 2019 phaseout range is $193,000 – $203,000 (up from $189,000 – $199,000 in 2018) when the person making the IRA contribution is not covered by a workplace retirement plan but is filing jointly with a spouse who is covered.

Roth IRAs

The threshold ranges of modified AGI phaseout ranges for individuals to make contributions to a Roth IRA are:

Gift taxes

The annual gift tax exclusion for 2019 remains $15,000 per person, the same as in 2018. The amount not subject to gift and estate taxes (the basic exclusion amount) for 2019 rose to $11.4 million, up from $11.18 million in 2018.

Kiddie tax

Under the kiddie tax rules, unearned income above $2,200 in 2019 (up from $2,100 in 2018) is taxed using the trust and estate income tax brackets. The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those age 19 – 23 who are full-time students and whose earned income doesn’t exceed half of their support.

Standard tax deductions

And finally, new AMT levels: