In an especially important step to aiding Americas economy due to the pandemic, congress and the senate have passed a new $900 Billion relief bill. The most talked about item is the $600 stimulus checks to qualifying citizens (single files with under $87,000 in income on their 2019 tax returns and $174,000 for those married filing jointly), but this is a large bill with nearly 6,000 pages of new legislation. While this large bill has many different items, this article will focus on some of the more impactful changes to the tax rules.
Deductibility of Expenses Paid by PPP Loans
While the balance of a forgiven loan is typically required to be included in gross income, the first stimulus bill, the CARES Act, removed PPP loans from that requirement. What was unclear was the deductibility of normally deductible expenses if PPP loan proceeds were used to cover those expenses. The Second stimulus bill now clarifies that those normal business deductions will in fact continue to be deductible regardless if the PPP loan was used to pay for that expense. For those businesses that received substantial PPP loans to keep their business moving, this is an important addition to maximize the impact of the loans. Along similar lines, the second stimulus also clarifies that the forgiveness of loans such as the Emergency Disaster Loan Grants will not be reported in gross income for 2020 taxes.
Educators Personal Protective Equipment
Educators can now include any PPE (personal protective equipment) purchased as a deductible expense. This rule allows the inclusion of masks, face shields, cleaners and anything else paid for by an educator to slow the spread of the corona virus within the classroom. This deduction will be a part of the current supply deduction available to educators for the purchase of school supplies not provided by the school.
Extension of Payroll Tax Repayment
Starting September 1st employers could withhold paying the employee portion of old-age, survivors, and disability insurance (OASDI) for any employee receiving less than $4,000 in a bi-weekly pay period. Starting Jan 1st, 2021 employers are required to begin withholding and paying OASDI taxes for all employees including repayment of those funds not paid from Sept 1st through Dec 31st, 2020. The original memorandum required the repayment of those funds to be taken out ratably from January 1st to April 30th, 2021. The second stimulus bill has increased the payback period to Dec. 31st, 2021.
Temporary Increase to Business Meal Deduction
Included to increase spending at restaurants, the second stimulus bill includes 100% deduction for business meals from Jan 1st, 2021 to the end of 2022. Currently only a 50% deduction is allowed.
Effective for tax years 2021 and beyond the new stimulus bill increases the phase out limits on the Lifetime Learning Credit. This credit’s phase out limit will now match the American Opportunity Credit.
Residential Rental Property
The depreciation time frame on certain residential rental property placed into service after Jan 1st, 2018 will now be set at 30 years. This allows the depreciation to be stretched out over a longer period.
Special rules on Earned Income and Child Tax Credits
For the purpose of qualifying for the Earned Income and Child Tax Credits the new stimulus bill will allow income from tax year 2019 to be used instead of 2020. This is a one-year exception, and the lookback is limited to tax year 2019.
As more information is brought forth, we will continue to update our blog with our findings.
As the pandemic has continued the housing market in many parts of the country has heated up. Many now see working from home as a long-term situation and they have made the move to locations they have always wanted to live in or giving up the crowded cities for an area with more wide-open spaces. For many, this has been the opportune time to sell their current home or vacation home for what they believe to be maximum profit. But, with the sale of a home and cashing out the equity on your property it is natural to question if this is taxable income.
The IRS lays out rules to guide you in this situation and to help determine if you must pay tax as well as how much tax you are required to pay. If you were to sell your current home in which you have lived in as a permanent residence the IRS provides an excludable amount of up to $250,000 ($500,000 for a married couple). For instance, if you purchased your home 6 years ago for $250,000 and sold it for $700,000 your profit would be $450,000 and you would owe capital gains tax on $200,000 (a married couple would be under the $500,000 limit and would pay no capital gains tax in this situation). To qualify for this exclusion, you need to fulfil the following:
- It must be your principal residence.
- You must have owned the property for 2 of the last 5 years before you sold it.
- You must have lived in the home for 2 of the last 5 years before you sold it. (some exclusions apply for members of our military and for the disabled).
- You must not have already claimed this exclusion in the last 2 years before the sale.
- It must not have been acquired through a 1031 exchange in the last 5 years.
- You must not be subject to expatriate tax.
If you do not qualify for this exclusion using the metrics above, then the entire profit you made from the home sale may be subject to capital gains tax. There are two types of capital gains taxes; short-term capital gains tax will generally be a taxable amount equal to the standard income tax rate you pay on other earned income, and long term capital gains tax which has rates from 0% up to 20% depending on your unique tax situation. Generally, the long-term capital gains tax is the much more desirable tax rate and to qualify for that rate you must have owned the property for at least one year before the sale.
There is no defined time frame of when this pandemic will end and no defined time frame of if or when the federal government would pass additional coronavirus economic relief and what that might look like. Both the U.S. Treasury Secretary, Steve Mnuchin, and the head of the Federal Reserve, Jerome Powell, have indicated to Congress a desire to see additional relief passed. As many people continue to follow this debate they are asking themselves questions about the already passed stimulus package and wondering, “Where does this money come from?” and “Do I claim this as income for my 2020 taxes?”.
First off, the money is technically a rebate of your 2020 income taxes, paid out to you in the future. So, the money your receiving is after all your money. But rather than this money being spent on typical government services the federal government has returned it in the form of an economic relief package.
This brings up a second natural question, “how does this impact my 2020 taxes?”. The good news to this is, it doesn’t! The stimulus payments are not taxable. They’re an advance on a new credit on your 2020 federal income taxes. Part of the reason the government decided to make the money a rebate on a future tax payment is to help avoid any adverse tax implications that would decrease the impact of the stimulus checks on our economy.
With the explosion of the gig economy comes many questions from those participating. One of those questions seen often is, “How does this impact my income tax bill?” You may be surprised to know many gig workers or those with a side hustle will typically find themselves owing taxes, even if they have always received a tax refund in the past. Of course, this can come as a shock to find out money will be flowing in the opposite direction than you expected.
As with any income received the government will want to receive their portion of the funds. For those used to working as a W-2 employee and having their taxes taken out of each paycheck, paying taxes may be a bit of an afterthought, but with the freedom of working when you want, where you want comes the responsibility to set aside the money needed for taxes.
The reason many with a side hustle such as, opening an online store or driving for a ride share app, end up owing taxes because there is no tax withholding in their pay. In a traditional W-2 employee position the W-4 you fill out when your hired determines how much tax is removed from your paycheck before that money hits your bank account. This helps spread your tax burden out over the course of a full year and can many times lead to an overpayment triggering your tax return. When self-employed income is introduced the money hitting your bank account has not had any federal taxes taken out. So, if you earned $50,000 in taxable income in your day job and an additional $10,000 in a side hustle you will have taxes withheld from your paycheck to help cover your first $50,000 in taxable income but nothing from your $10,000. Based on 2019 tax rates for a single filer it looks as follows:
The first $50,000 will become $37,800 after your standard deduction. The total tax bill owed on this amount would be $4,342 with a marginal tax rate of 12%. If you are paid bi-weekly and you withhold $167 per paycheck you will not owe anything more when you file your taxes. Now, if we add in $10,000 in self-employed income from a side hustle not only do you pay tax on that entire $10,000 in income but it actually bumps you up to a higher marginal tax rate of 22% and creating a total tax bill of $6374.50. If you only had the $167 withheld from your taxes each paycheck you would find you owed an additional $2,032.50 in federal income tax after you filed your taxes.
This is a simplified example used to illustrate the importance of setting aside extra money from your side hustle to cover your end of the year tax liability. The last thing you want is to have spent that entire $10,000 just to find out you now owe $2,032.50. Always refer to your tax specialist when determining a good amount to hold back and to help find any deductions that may decrease your tax liability as well.