Tax Relief for Those Affected by Natural Disasters

Recovery efforts after natural disasters can be costly. With floods, tornadoes, hurricanes, earthquakes, and other natural disasters affecting so many people throughout the U.S. this year, many have been left wondering how they’re going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is relief for taxpayers – but only if you meet certain conditions. Let’s look:

Tax Relief for Homeowners

Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a Presidentially declared disaster area as long as:

1. The loss was caused by a sudden, unexplained, or unusual event.

Natural disasters such as flooding, hurricanes, tornadoes, and wildfires qualify as sudden, unexplained, or unusual events.

2. The damages were not covered by insurance.

You can only claim a deduction for casualty losses not covered or reimbursed by your insurance company. The catch here is that if you submit a claim to your insurance company late in the year, your claim could still be pending come tax time. If that happens, you can file an extension on your taxes. Please call if you need help filing an extension or have any questions about what losses you can deduct.

3. Your losses were sufficient to overcome any reductions required by the IRS.

The IRS requires several “reductions” to claim casualty losses on your tax forms. The first is that you must subtract $100 from the total loss amount for each casualty event. This is referred to as the $100 loss limit.

Second, you must reduce the amount by 10 percent of your adjusted gross income (AGI) or adjusted gross income from the total casualty losses for the year. For example, if your AGI is $25,000 and your insurance company paid for all of the losses you incurred due to flooding except $3,100, you would first subtract $100 and then reduce that amount by $2500. The amount you could deduct as a loss would be $500.

Taxpayers claiming the disaster loss on a prior year’s return should put the Disaster Designation in red ink at the top of the form. Doing so ensures the IRS can expedite the refund processing, waive the usual fees, and expedite requests for copies of previously filed tax returns for affected taxpayers who need them to apply for benefits or to file amended returns claiming casualty losses.

Tax Relief for Homeowners and Businesses

The IRS often provides tax relief for those affected by natural disasters, such as the individuals and businesses impacted by Hurricane Ida in Louisiana. Tax relief for victims of Hurricane Ida includes postponing various tax filing and payment deadlines that occurred starting on August 26, 2021. As a result, affected individuals and businesses will have until January 3, 2022, to file returns and pay any taxes that were originally due during this period.

Individuals who had a valid extension to file their 2020 return due to run out on October 15, 2021, will now have until January 3, 2022, to file. However, taxpayers should be aware that because tax payments related to these 2020 returns were due on May 17, 2021, those payments are not eligible for this relief.

Claiming Disaster-related Casualty Losses

Affected taxpayers in a Presidential Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original (2021) or amended return for last year (2020) will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors. If you choose to deduct losses on your 2020 tax return, you have one year from the due date of the tax return to file.

Help is Just a Phone Call Away

If you’re confused about whether you qualify for tax relief after a recent natural disaster, please contact the office for assistance in figuring out the best way to handle casualty losses related to hurricanes and other natural disasters.

Highlights of the American Rescue Plan Act

Signed into law on March 11, 2021, the American Rescue Plan Act (ARPA) contains several tax provisions affecting individuals and families. Let’s look:

Economic Impact Payments (EIP3). A third round of economic impact payments (EIP3) will be sent to qualifying taxpayers; individuals will receive $1,400 ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent, which includes college students and relatives who can be claimed as dependents. These payments are sent out as advance payments of the recovery rebate credit. Anyone not receiving EIP3 will be able to claim the recovery rebate credit when they file a 2021 tax return next year. There are specific income phaseouts, and eligibility is determined using a taxpayer’s 2019 adjusted gross income unless the taxpayer has already filed a 2020 return. For more information, see, Economic Impact Payments: Round Three, below.

Loan Debt Forgiveness. Normally, canceled debt – including student loan debt – is considered taxable income and taxed as such. Under the ARPA, however, for eligible loans, the discharge of student loan debt – either full or partial – will not be viewed as taxable income for tax years 2021 through 2025. Eligible loans are those that have been used solely for post-secondary education and that are made, insured, or guaranteed by the US government.

COBRA: Continuing Health Coverage. ARPA requires employers to subsidize at 100 percent premiums paid for COBRA continuation coverage for assistance eligible individuals (AEIs) and is in effect for the period April 1, 2021, to September 30, 2021. Employer costs for the subsidy are offset by a payroll tax credit against the employers’ quarterly taxes. Employers whose credit is greater than the amount of payroll tax owed receive a refund when they submit Form 941, Employer’s Quarterly Federal Tax Return.

Unemployment Benefits. A $300-per-week supplement to federal unemployment benefits that would have expired March 14, 2021, is now extended through September 6, 2021. ARPA also gives eligible taxpayers a special tax break for 2020: the first $10,200 in unemployment benefits is tax-free for taxpayers whose income is less than $150,000 per year. For more information about this topic see, Q & A: the $10,200 Unemployment Tax Break, below.

Child Tax Credit. ARPA includes several important changes pertaining to families, which are summarized below:

  • The amount of the credit is $3,000 per child ($3,600 for children under age 6)
  • The credit is reduced by $50 for each additional $1,000 of income above the following threshold limits: $150,000 and up for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for single taxpayers and married filing separately.
  • The amount of child tax credit is to be paid monthly in advance in the amount of one-twelfth of an annual amount estimated by the IRS. Payments begin in July 2021 and continue through December 2021.

Child and Dependent Care Credit. For tax year 2021, the child and dependent care credit is refundable and is a maximum of $4,000 for one qualifying individual and a maximum of $8,000 for two or more. The credit begins to decrease for households whose income exceeds $125,000 – and as much as 20 percent for households whose income is more than $400,000.

Earned Income Tax Credit. Several special rules pertain to individuals without children. For 2021, the age range of workers without children is expanded to include adults ages 19-24 and older adults age 65 and over. Students under age 24 who are attending school at least part-time are excluded. The maximum earned income credit increases threefold and income levels required to qualify for the credit increase from $16,000 to $21,000. Additional changes under ARPA include:

  • Allowing taxpayers to temporarily use 2019 instead of 2021 income if that income is greater
  • Allowing certain separated spouses to take the credit
  • Increasing the amount of investment income that would disqualify a taxpayer from receiving the EITC from $2,200 to $10,000.

Affordable Care Act Premium Tax Credit. For 2020, taxpayers who received premium tax credits in advance that were more than what they should have received will not have to repay the excess amount. It applies to taxpayers who have received, or have been approved to receive, unemployment compensation for any week beginning during 2021.

Taxes are Complicated
If you have any questions or would like more information about how recent tax law changes affect your tax situation, please call.

Economic Impact Payments: Round Three

On March 12, following the American Rescue Plan Act’s approval and signing, the IRS began sending out the third round of Economic Impact Payments. Most payments were sent out via direct deposit, but approximately 150,000 checks were mailed by the Treasury Department as well. Taxpayers who received EIP1 or EIP2 but didn’t receive a third payment (EIP3) via direct deposit will generally receive a check or, in some instances, a prepaid debit card (EIP Card).

Highlights:

  • The third stimulus payment will generally be larger for most people. Most eligible people will get $1,400 for themselves (those filing joint returns will get $2,800) and $1,400 for each of their qualifying dependents claimed on their tax return. Eligible families will get a payment based on all of their qualifying dependents claimed on their return, including older relatives like college students, adults with disabilities, parents, and grandparents. Unlike the first two payments, the third stimulus payment is not restricted to children under 17. Typically, this means a single person with no dependents will get $1,400, while a family of four (married couple with two dependents) will get $5,600.Under the new law, an EIP3 cannot be offset to pay various past-due federal debts or back taxes.
  • The first batch of payments primarily went to eligible taxpayers who provided direct deposit information on their 2019 or 2020 returns, including people who don’t typically file a return but who successfully used the non-Filers tool on IRS.gov last year. Additional batches and payments will be sent in the coming weeks by direct deposit and through the mail as a check or debit card.
  • The payments are automatic and, in many cases, like how people received their first and second round of Economic Impact Payments in 2020. No action needs to be taken by most taxpayers and contacting either financial institutions or the IRS on payment timing will not speed up their arrival.
  • Income levels in this new round of stimulus payments have changed. As such, some people will not be eligible for the third payment even if they received a first or second Economic Impact Payment or claimed a 2020 Recovery Rebate Credit. Payments begin to phase out for individuals making $75,000 or above in Adjusted Gross Income ($150,000 for married filing jointly). The payments end at $80,000 for individuals ($160,000 for married filing jointly); people above these levels are ineligible for a payment.
  • Taxpayers who received EIP1 or EIP2 but didn’t receive a third payment (EIP3) via direct deposit will generally receive a check or, in some instances, a prepaid debit card (referred to as an “EIP Card).
    A payment will not be added to an existing EIP card mailed for the first or second round of stimulus payments.
  • If a taxpayer’s payment is less than the full amount and is based on their 2019 return, they may qualify for a supplemental payment after filing their 2020 return. The IRS will automatically reevaluate their eligibility. If they are entitled to a larger payment or the full payment, then a supplemental payment will be sent covering the difference. If the reevaluated amount is smaller, they won’t need to pay back the difference. Aside from filing a 2020 tax return, no additional action needs to be taken.

Paper Checks and Prepaid Debit Cards

Taxpayers who did not receive a direct deposit by March 24 should check their mail carefully in the coming weeks for a paper check or a prepaid debit card, known as an Economic Impact Payment Card, or EIP Card.

The form of payment for the third EIP may be different than earlier stimulus payments. More people are receiving direct deposits, whereas those receiving the economic impact payments in the mail may get either a paper check or an EIP Card. This may be different from how they received their previous stimulus payments.

Paper Checks. Paper checks will arrive by mail in a white envelope from the U.S. Department of the Treasury. For those taxpayers who received their tax refund by mail, this paper check will look similar but referenced as an “Economic Impact Payment” in the memo field.

EIP Card. The EIP Card will also come in a white envelope prominently displaying the seal of the U.S. Department of the Treasury. The card has the Visa name on the front and the issuing bank, Meta Bank, N.A., on the back. The information included with the card will explain that this is an Economic Impact Payment. Each mailing will include instructions on how to activate and use the card securely.

None of the EIP cards issued for any of the three rounds is reloadable; recipients will receive a separate card and will not be able to reload funds onto an existing card. EIP Cards are safe, convenient, and secure. EIP Card recipients can make purchases online or in stores anywhere Visa Debit Cards are accepted.

They can get cash from domestic in-network ATMs, transfer funds to a personal bank account, and obtain a replacement EIP Card if needed without incurring any fees. They can also check their card balance online, through a mobile app, or by phone without incurring fees. The EIP Card provides consumer protections against fraud, loss, and other errors and is sponsored by the Bureau of the Fiscal Service and issued by Treasury’s financial agent, Meta Bank, N.A. The IRS does not determine who receives a prepaid debit card.

Social Security and Other Federal Beneficiaries

Most Social Security retirement and disability beneficiaries, railroad retirees, and recipients of veterans benefits who are eligible for an Economic Impact Payment do not need to take any action to receive a payment. These payments will be automatic, and Social Security and other federal beneficiaries will generally receive this third payment the same way as their regular benefits.

Anyone who didn’t file a return but receives Social Security retirement, survivor or disability benefits (SSDI), Railroad Retirement benefits, Supplemental Security Income (SSI), or Veterans Affairs benefits, will receive their third round of economic impact payments the same way as their regular benefits – similar to the first and second rounds of Economic Impact Payments.

If You Don’t Normally File a Tax Return

While payments will be automatic for many people based on their federal benefits information, some may need to file a 2020 tax return – even if they don’t usually file – to provide information the IRS needs to send payments for any qualified dependent. People in this group should file a 2020 tax return to be considered for an additional payment for their dependent as quickly as possible.

People who don’t normally file a tax return and don’t receive federal benefits may also qualify for these stimulus payments, including those experiencing homelessness and others. If you’re eligible and didn’t get a first or second Economic Impact Payment (that is, an EIP1 or EIP2) or got less than the full amounts, you may be eligible for the 2020 Recovery Rebate Credit but will need to file a 2020 tax return.

PPP Loan Deadline Extended Through May 31

The Paycheck Protection Program Extension Act of 2021 was signed into law on March 31, 2021, extending the deadline to apply for a loan by an extra 60 days, from March 31 to May 31, 2021. The law also gives the Small Business Administration (SBA) an additional 30 days after the May 31 deadline to review and process loan applications.

The passage of the PPP Extension Act does not provide additional funding; however, as part of the American Rescue Plan Act, an additional $7.25 billion was earmarked for the Paycheck Protection Program to expand eligibility to additional nonprofits and digital news services.

In February 2021, SBA also made four additional changes to open the PPP to more underserved small businesses, generally small and low- and moderate-income (LMI) businesses who have not received the needed relief a forgivable PPP loan provides. Congress set a $15 billion set-aside for small and LMI First Draw borrowers. To advance these goals, SBA has:

  • Allowed sole proprietors, independent contractors, and self-employed individuals to receive more financial support by revising the PPP’s funding formula for these categories of applicants
  • Eliminated an exclusionary restriction on PPP access for small business owners with prior non-fraud felony convictions, consistent with a bipartisan congressional proposal
  • Eliminated PPP access restrictions on small business owners who have struggled to make student loan payments by eliminating student loan debt delinquency as a disqualifier to participating in the PPP
  • Ensured access for non-citizen small business owners who are lawful U.S. residents by clarifying that they may use Individual Taxpayer Identification Number (ITIN) to apply for the PPP

Prior to addressing these inequities, the current 2021 round of PPP loans had only deployed $2.4 billion to small LMI borrowers, in part because a disproportionate amount of funding in both wealthy and LMI areas is going to firms with more than 20 employees. As a result, in February 2021, SBA established a 14-day, exclusive PPP loan application period for businesses and nonprofits with fewer than 20 employees. The program opened to all borrowers on March 10, 2021, and, as mentioned, has been extended through May 31, 2021.

Business owners who have not received a PPP loan previously can apply for a First Draw Loan. Certain businesses that have already received a PPP loan are eligible for a Second Draw PPP loan.

Finally, borrowers may be eligible for PPP loan forgiveness. First Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8 to 24-week covered period following loan disbursement:

  • Employee and compensation levels are maintained
  • The loan proceeds are spent on payroll costs and other eligible expenses; and
  • At least 60 percent of the proceeds are spent on payroll costs

Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness under the same requirements as First Draw PPP loans provided employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan.

If you’re thinking about applying for a PPP loan, don’t hesitate to contact the office with any questions.

Coronavirus-Related Distributions and Loans

The Coronavirus, Aid, Relief, and Economic Security (CARES) Act made it easier to access savings in IRAs and workplace retirement plans for those affected by the coronavirus. This relief provided favorable tax treatment for certain withdrawals from retirement plans and IRAs, including expanded loan options.

Distributions: Certain distributions made from Jan. 1, 2020, through Dec. 30, 2020, from IRAs or workplace retirement plans to qualify individuals may be treated as coronavirus-related distributions. These distributions are not subject to the 10% additional tax on early distributions (including the 25 percent additional tax on certain SIMPLE IRA distributions).

Taxes on coronavirus-related distributions are includible in taxable income:

  • Over a three-year period, one-third each year, or
  • If elected, in the year you take the distribution.

Coronavirus-related distributions may be repaid to an IRA or workplace retirement plan within three years.

If you had an outstanding loan balance when you left employment, the plan sponsor usually offsets the loan balance against your benefit.

  • For loan offsets in 2020, you have until the due date of your tax return (plus extensions) to repay that amount to another retirement plan or IRA.
  • If you’re a qualified individual, you can treat the loan offset as a coronavirus-related distribution and have three years to repay to an IRA or include in income tax ratably over three years.

RMDs: An IRA owner or beneficiary who received an RMD in 2020 had the option of returning it to their account or other qualified plan to avoid paying taxes on that distribution. RMDs in 2020 that were not rolled over or repaid may be eligible to be treated as coronavirus-related distributions if the individual is a qualified individual. A 2020 RMD that otherwise qualifies as a coronavirus-related distribution may be repaid over a 3-year period or have the taxes due on the distribution spread over three years.

A withdrawal from an inherited IRA to a qualified individual may also be a coronavirus-related distribution. Income from the withdrawal may be spread over three years for income inclusion; however, the withdrawal may not be repaid to the inherited IRA.

The one rollover per 12-month period limitation and the restriction on rollovers to inherited IRAs did not apply to repayments made by August 31, 2020. The RMD suspension did not apply to qualified defined benefit plans.

The CARES Act included special rules for plan loans made to qualified individuals. Plans could suspend loan repayments for up to one year. However, typically, repayments resumed in January 2021 effectively give up to six years (instead of five) to repay a typical plan loan.

As always, don’t hesitate to call the office with any questions.