With everything from existing tax law, newly enacted provisions, and temporary relief measures to potential tax rate increases crossing the current legislative landscape, it can feel like a taxpayer’s jungle out there. The CARES Act, Consolidated Appropriations Act (CAA), and American Rescue Plan Act (ARPA) all provided significant tax relief measures for businesses and individuals. But many of these measures provided temporary relief, and some of them are coming to an end. Here’s a look at some taxpayer considerations for carryover COVID-19 taxpayer relief still available and what lies ahead in 2021, including possible outcomes for Biden’s tax plan that remains in negotiation.
2021 Carryover of COVID-19 Taxpayer Relief
Employee Retention Credit (ERC) – Eligible employers may continue to use the ERC against their 6.2% share of an employee’s social security tax and 1.45% share of Medicare hospital insurance (HI) tax under Code § 3111(b) for qualifying wages and health care costs paid through December 31, 2021. The maximum credit is $7,000 per employee per quarter.
FFCRA Family and Sick Leave Credits – Employers voluntarily paying sick and family leave may continue to use the FFCRA refundable payroll tax credits through September 30, 2021. The credit provides up to $12,000 per employee.
COBRA Continuation Coverage Premium Assistance – Individuals who become eligible for or already have effective COBRA continuation coverage may seek assistance covering 100% of premiums through September 30, 2021. Employers may continue to offset premiums and wages, including Sec. 3111(b) Medicare tax, paid through September 30, 2021, with premium assistance refundable tax credits.
Extended Limitation on Excess Business Losses of Noncorporate Taxpayers – The TCJA established limits for tax years beginning after December 31, 2017, and before January 1, 2026, on the deductibility of current-year business losses for noncorporate taxpayers. While the CARES Act repealed the limitation for tax years 2018 through 2020, the TCJA limitation resurfaced this year and is set to expire at the end of 2026. Biden’s tax plan includes a proposed provision to make the limitation permanent.
Tax Credits With Special Provisions Available in 2021
Child Tax Credit (CTC) – For 2021 only, the CTC is fully refundable, and the credit amount is $3,000 per child or $3,600 for a child under six. The excess amount over the original credit of $2,000 is subject to phase-out rules based on income. The Treasury and IRS started issuing advance payments this month and will continue to issue periodic payments through the end of the year. Advance payment may be issued for up to half the anticipated credit for 2021, and the remainder would be claimed on the taxpayer’s 2021 return filed in 2022.
Child & Dependent Care Tax Credit (CDCTC) – For 2021 only, the CDCTC is refundable, and the amount of eligible qualifying expenses has increased to $8,000 for one qualifying dependent and $16,000 for two or more qualifying dependents. The credit will be worth 50% of eligible expenses, up to a limit based on income, which means the credit is worth up to $4,000 for one qualifying dependent or $8,000 for two or more.
Earned Income Tax Credit (EITC) – Special rules are in place specific to individuals without qualifying dependents for 2021. The maximum age is eliminated and the applicable minimum age is reduced to 19 in general, 24 for full-time students, and 18 for qualified former foster or homeless youth. Increases have been made to the credit for the 2021 phase-in and phase-out rates (15.3%), the maximum earned income amount ($9,820), and the phase-out threshold for non-joint filers ($11,610).
Premium Tax Credit (PTC) – Enhanced marketplace subsidies are available for 2021 for taxpayers who received or were approved for unemployment compensation during 2021. Affordability percentages have also been temporarily modified for 2021 and 2022.
Where Things Stand for Biden’s Tax Plan
The need for an infrastructure plan has had bipartisan support; however, Democrats and Republicans have not been able to agree on the definition of “infrastructure,” the cost of the plan, or the means for funding it. Negotiations have been in progress since Biden’s initial proposal was released in March.
On May 28th, the Biden Administration released the FY 2022 budget. On the same day, the Treasury released the Green Book, which set forth details on Biden’s tax proposals in the American Jobs Plan and the American Families Plan, intensifying congressional negotiations. The White House’s latest iteration of the American Jobs Plan was presented on June 3rd. The Senate rejected the proposal and made a counteroffer, but that too was rejected by the White House. The Democrats would need at least 10 Senate Republicans to support the plan to break the filibuster.
Various bipartisan groups have proposed alternate plans and means for funding that run the gamut from an 18.4-cent per gallon gas tax, unspent COVID-19 relief funds, and increased private partnerships to recoup unpaid income taxes and annual registration fees on hybrid and electric vehicles. While uncertainties remain, we will continue to track developments as they unfold.
What Could Lie Ahead
If any material tax increases occur, it will likely be through the budget reconciliation process. The House Budget Committee is currently preparing a $3.5 billion package that includes the $1.7 billion American Jobs Plan and the $1.8 billion American Families Plan that could move forward through a majority-rules vote.
If the American Jobs Act and American Families Act are passed through budget reconciliation, several changes lie ahead for individuals and businesses on the domestic and international front.
Changes to Individual Tax
- Individuals with annual income over $452,700 would be subject to a 39.6% top marginal income tax rate for taxable years beginning after December 31, 2021. The income threshold is $509,300 for married couples filing jointly, $481,000 for heads of household, and $254,650 for married individuals filing separately.
- A 3.8% net investment or self-employment tax will apply to all trade or business income of taxpayers with AGI over $400,000 for taxable years beginning after December 31, 2021.
- To the extent a taxpayer’s income exceeds $1 million, long-term capital gains and qualified dividend income rates would increase to 39.6%. This change is proposed to be effective retroactively for gains and income recognized after April 28, 2021.
- While it is not addressed in the Treasury’s Green Book, other proposals have included a decreased lifetime estate tax exemption of $3.5 million, decreased lifetime gift tax exclusion of $1 million, and an increased top gift tax rate of 45%.
- For taxable years beginning after December 31, 2021, the step-up in basis would be eliminated, and estates would owe capital gains tax on appreciated property.
- For 1031 like-kind exchanges made after December 31, 2021, deferred gains will be limited to $500,000, per taxpayer and per tax year ($1 million for married couples filing jointly). This change would have significant effects on the real estate market and taxpayers cashing out rental property.
- For taxable years beginning after December 31, 2021, income from carried interests would be subject to self-employment tax, as it would be treated as ordinary income
Changes to Business Tax
- For taxable years beginning after December 31, 2021, the corporate tax rate would increase from 21% to 28% for taxable years beginning after December 31, 2021.
- A 15% minimum tax on book income would be imposed on certain large corporations for taxable years beginning after December 31, 2021.
- S corporations would be taxed more like partnerships, as the plan proposes a 3.8% net investments tax plus a 3.8% self-employment tax for taxable years beginning after December 31, 2021.
Changes to International Tax
- GILTI would be determined on a country-by-country basis, the effective tax rate on GILTI for corporate taxpayers would increase to 21%
- Base erosion and anti-abuse tax (BEAT) would be replaced by Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD). Financial reporting groups with global annual revenues greater than $500 million would be subject to a 21% tax rate (until the OECD establishes a global minimum tax rate) for taxable years beginning after December 31, 2022.
- The foreign-derived intangible income (FDII) deduction would be repealed.
It’s easy to let tax implications and future possibilities get in the way of a financial plan that supports your goals and desires first or “let the tax tail wag the investment dog,” as they say. As CPAs and professional advisers, we’re accustomed to helping taxpayers meet their financial goals and develop tax-saving strategies accordingly, even across complicated terrain.
Contact me today if you would like to discuss your 2021 tax strategy or carryover COVID-19 taxpayer relief strategies. Whether your income and investments are personal, business, domestic, or international, I want to help you meet your financial goals in a judicious, tax-efficient, and compliant way.
Steven Gallant, CPA is a partner at LGA and is well-versed in all areas of taxation, including corporate, partnership, individual, trust and estate taxation. Steve is also proficient in dual citizenship and expatriate issues, as well as foreign entity tax. He represents businesses, individuals, trusts, and estates before federal and state taxing authorities.