The Consolidated Appropriations Act, 2021, H.R. 133 included funding for the government, extensions for expiring tax extenders, COVID tax relief under the COVID-related Tax Relief Act of 2020, and many more items. Passed by both the House and Senate, it was signed into law by President Trump on December 27, 2020.

Let us look at a few of the highlights related to pandemic taxpayer relief:

Individuals

Economic impact payments. $600 per taxpayer ($1,200 for married taxpayers filing jointly) and an additional $600 per qualifying child (under age 17). The recovery rebate payment begins to phase out starting at $75,000 of modified adjusted gross income for single filers, $112,500 for heads of household, and $150,000 for married taxpayers filing jointly. These payments are like the ones many taxpayers received earlier this year under the CARES Act.

Unemployment benefits. Additional unemployment insurance in the amount of $300 has been extended for an 11-week period beginning from December 26, 2020.

Educator expenses. Clarification that Personal Protective Equipment (PPE) used for the prevention and spread of COVID-19 will be treated as a deductible expense, retroactive to March 12, 2020.

Charitable contributions – Nonitemizers. The $300 above-the-line deduction for cash contributions given to a qualified charitable organization is extended through 2021 and increases to $600 for married taxpayers filing joint returns. In 2020, the maximum amount was $300.

Charitable contributions – Itemizers. The increased contribution limit to qualified charities that was specified in the CARES Act is extended through 2021 and applies to individuals and corporations. Amounts of up to 100 percent of adjusted gross income (AGI) are allowed as deductions (same as 2020). In 2019, the limit for the deduction for cash contributions was 60% of AGI.

Earned Income. For the 2020 tax year, taxpayers may use earned income amounts from the immediately preceding tax year when figuring the Earned Income Tax Credit and the Additional Child Tax Credit.

Flexible spending arrangements. Taxpayers can rollover unused amounts from 2020 to 2021 and from 2021 to 2022 and employers may allow employees to make a contribution change mid-year in 2021.

Money purchase pension plans. The COVID-related Tax Relief Act of 2020 also allows money purchase pension plans to be included as a qualified retirement plan, retroactive to the CARES Act. The CARES Act allowed taxpayers to make penalty-free withdrawals of up to $100,000 from certain retirement plans for coronavirus-related expenses, with the option to pay tax on that income over a three-year period or recontribute withdrawn funds.

Businesses

Paycheck Protection Program (PPP) Loans. Retroactive to the effective date of the CARES Act, PPP loans that are forgiven will be treated as tax-exempt income. Gross income does not include loan forgiveness for Economic Injury Recovery Loans (EIDLs) and certain other loans or loan repayment assistance. Under the CARES Act, taxpayers receiving an EIDL were required to reduce any PPP loan forgiveness by the amount of the EIDL.

In addition, businesses with 300 or fewer employees with a gross revenue loss of 25 percent in any quarter of 2020 compared to the same quarter in 2019 are eligible for a second round of PPP loans.

Deductible expenses. Deductions are also allowed for deductible expenses (that would otherwise be deductible) paid for with the proceeds of a forgiven PPP loan. This reverses earlier IRS guidance that stated no deduction would be allowed. This tax provision applies to the second round of PPP loans as well.

Payroll tax credits. Refundable payroll tax credits for paid sick and family (Families First Coronavirus Response Act) leave are extended through March 2021. Employers are not required to provide paid leave after December 31, 2020; however, employers may still claim the credit if the employee would have qualified for paid leave if the mandate had been extended beyond December 31, 2020, and the employer provides paid leave.

Employee retention tax credits. Implemented as a refundable credit under the CARES Act, the employee retention tax credit (ERTC) is extended through June 30, 2021. The following also applies for calendar quarters beginning after December 31, 2020:

• The credit rate is increased from 50 to 70 percent of qualified wages.
• The limit on per-employee creditable wages is increased from $10,000 for the year to $10,000 for each quarter.
• The required reduction in a year-over-year decline in gross receipts on a quarterly basis is reduced from 50 to 20 percent.
• When determining the relevant wage base, the definition of a “large employer” that can only claim the credit for employees that are not working because of the COVID pandemic increases from more than 100 to more than 500 employees.
• Certain government employers are now allowed to claim the ERTC.
• Safe harbor allowing employers to use prior-quarter gross receipts to figure eligibility.
• New employers in 2020 (i.e., those not in existence in 2019) can claim the credit.

Furthermore, and retroactive to the date of the CARES Act, the ERTC is expanded to allow employers who receive PPP loans to qualify for the credit with respect to wages that are not paid with forgiven PPP proceeds. It also clarifies that group health plan expenses can be considered qualified wages even if no other wages are paid to an employee.

Employee portion of payroll tax deferral. The repayment period for deferral of payroll tax is extended through December 31, 2021.

Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for 2021 are as follows:

401(k), 403(b), 457 plans, and Thrift Savings Plan. Contribution limits for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $19,500. The catch-up contribution limit for employees aged 50 and over remains unchanged at $6,500.

SIMPLE retirement accounts. Contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged in 2021 as well at $13,500.

Traditional IRAs.The limit on annual contributions to an IRA remains at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If a retirement plan at work covers neither the taxpayer nor their spouse, the phase-out amounts of the deduction do not apply.

The phase-out ranges for 2021 are as follows:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $54,000.
• For married couples filing jointly, where a workplace retirement plan covers the spouse making the IRA contribution, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000, up from $196,000 and $206,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRAs. The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver’s Credit.  The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500.

If you have any questions about retirement plan contributions, don’t hesitate to call.

Selecting your business successor is a fundamental objective when planning your exit strategy and requires a careful assessment of what you want from the sale of your business and who can best give it to you.

There are only four ways to leave your business and the more you understand about each one, the better the chance is that you will leave your business on your terms and under the conditions you want. With that in mind, here’s what you need to know about each option:

1. Liquidate It

In a liquidation the owners sell off their assets, collect outstanding accounts receivable, pay off their bills, and keep what’s left, if anything, for themselves. The primary reason liquidation is considered as an exit plan is that a business lacks sufficient income-producing capacity apart from the owner’s direct efforts and apart from the value of the assets themselves. For example, if the business can produce only $75,000 per year and the assets themselves are worth $1 million, no one would pay more for the business than the value of the assets.

Service businesses in particular are thought to have little value when the owner leaves the business. Since most service businesses have little “hard value” other than accounts receivable, liquidation produces the smallest return for the owner’s lifelong commitment to the business. Smart owners guard against this. They plan ahead to ensure that they do not have to rely on this last-ditch method to fund their retirement.

2. Sell It to A Third Party

While a sale to a third party too often becomes a bargain sale – and sometimes the only alternative to liquidation – this option just might be your best way to cash out if the business is well prepared for sale. In fact, you may find that this so-called “last resort” strategy just happens to land you at the resort of your choice.

Although many owners don’t realize it, most or all of your money should come from the business at closing. Therefore, the fundamental advantage of a third-party sale is immediate cash or at least a substantial up-front portion of the selling price. This ensures that you obtain your fundamental objectives of financial security and, perhaps, avoid risk as well.

A second unanticipated advantage in selling to a third party is the ability to frequently receive substantially more cash than your CPA or other business appraiser anticipated because the market place is “hot.” Finally, this may be the best option for a business that is too valuable to be purchased by anyone other than someone who has access to a considerable source of money.

If you do not receive the bulk of the purchase price in cash, at closing, however, your risk will suddenly become immense. You will place a substantial amount of the money you counted on receiving in the unpredictable hands of fate. The best way to avoid this risk is to get all of the money you are going to need at closing. This way any outstanding balance payable to you is “icing on the cake.”

3. Transfer of Ownership to Your Children

While most business owners want to transfer their business to their children, few end up doing so for various reasons. There are however, advantages that are worth considering. For example, transferring your business to your children can provide financial well-being for younger family members unable to earn comparable income from outside employment, as well as allow you to stay actively involved in the business with your children until you choose your departure date. It also affords you the luxury of selling the business for whatever amount of money you need to live on, even if the value of the business does not justify that sum of money.

On the other hand, this option also holds the potential to increase family friction, discord, and feelings of unequal treatment among siblings. Parents often feel the need to treat all of their children equally. In reality, this is difficult to achieve. In most cases, one child will probably run or own the business at the perceived expense of the others.

At the same time, financial security also may be diminished, rather than enhanced, and the very existence of the business is at risk if it’s transferred to a family member who can’t or won’t run it properly. In addition, family dynamics in general, may also significantly diminish your control over the business and its operations.

4. Employee Stock Option Plans (ESOP)

If your children have no interest or are unable to take over your business, there’s another option to ensure the continued success of your business: The Employee Stock Ownership Plan (ESOP).

ESOPs are qualified retirement plans subject to the regulatory requirements of the Employee Retirement Income Security Act of 1974 (ERISA). There’s one important difference however; the majority (more than half) of their investment must be derived from their own company stock.

Whether it’s due to lack of interest on your children’s part, an economic downturn or a high asking price that no one is willing to pay, what an ESOP does is create a third-party buyer (your employees) where none previously existed. After all, who more than your employees have a vested interest in your company?

ESOPs are set up as a trust (complete with trustees) into which either cash to buy company stock or newly issued stock is placed. Contributions the company makes to the trust are generally tax deductible, subject to certain limitations and because transactions are considered stock sales, the owner who is selling (you) can avoid paying capital gains. Shares are then distributed to employees (typically based on compensation levels) and grow tax free until distribution.

If your company is a stable, well-established one with steady, consistent earnings, then an ESOP might be just the ticket to creating a winning exit plan from your business.

If you need assistance figuring out which exit strategy is best for you and your business, please don’t hesitate to contact the office. The sooner you start planning, the easier it will be.

As you approach retirement, it’s vital that you pay attention to several important financial matters to ensure a smooth transition. Here are five of them:

1. Health Insurance

Are you among the lucky few who will continue to be covered after retirement? If not, then you’ll need to replace your health coverage.

If you will be eligible for Medicare at the time of your retirement, then you may want to start checking into “Medigap” coverage. Original Medicare pays for much, but not all, of the cost for covered health care services and supplies. Medigap is Medicare Supplement Insurance that helps fill “gaps” in and is sold by private companies to individuals age 65 and older that covers medical expenses not covered or only partially covered by Medicare.

If your employee plan coverage is broader than Medicare, then take care of any non-emergency medical, dental, or optical needs before you retire.

2. Other Insurance

Once you retire, and depending on individual circumstances, you may need to replace employer-provided life insurance with extra coverage. You should also consider purchasing long-term health care insurance in case of a lengthy nursing home stay in the future. Premiums for qualified long-term care insurance policies are tax deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed 10 percent of the insured’s adjusted gross income in 2020.

3. Social Security

Decide whether you want to take early Social Security benefits if you’re retiring before your full retirement age, which is currently 66 years of age for people born between 1943 and 1954 and age 67 for those born after 1960. The years in between are prorated accordingly. If you choose to retire as early as age 62, doing so may result in a reduction of as much as 30 percent of your full benefits. Conversely, starting to receive benefits after normal retirement age may result in larger benefits.

Taking Social Security benefits at full retirement age makes financial sense for most people, but if you think you might need to take early benefits, please call and speak to a tax professional first.

4. Pension Plan or 401(k) Retirement Plan Payout

You should plan well in advance how you’ll take the payout from your pension plan or 401(k) plan. For example, will you transfer the funds to a conventional or Roth IRA? How will the funds be invested?

5. Relocation

If you’re planning a move to another state or country, make sure that you fully explore the financial ramifications of living there before you move. Cost of living as well as rates of taxation can vary significantly from one region of the country to another.

If you have any questions or need assistance planning for a smooth transition into retirement, please call the office.

With health care, housing, food, and transportation costs increasing every year, many retirees on fixed incomes wonder how they can stretch their dollars even further. One solution is to move to another state where income taxes are lower than the one in which they currently reside.

While federal tax rates are the same in every state, retirees may find that even if they move to a state with no income tax, there may be additional taxes they’re liable for including sales taxes, excise taxes, inheritance, and estate taxes, income taxes, intangible taxes, and property taxes. Retirement benefits are also treated differently in every state and many retirees also have additional income from a job.

Even if you’re not retired yet, if you are working remotely due to COVID-19 and are close to retirement age you may also be considering whether to make a move right now.

If you move to a different state but are still working for an employer in the state you formerly resided in, you will be subject to income tax in that state (as a nonresident) because your employer is located there.

If you’re thinking about making a move to another state, here are six things to keep in mind:

1. Income Tax Rates

Retirees planning to work part-time in addition to receiving retirement benefits should keep in mind that those earnings may be subject to state tax in certain states, as well as federal income tax if your combined income (individual) is more than $25,000. Combined income is defined as your adjusted gross income + nontaxable interest plus 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you see this scenario in your future, it may be in your best interest to consider a state with low income tax rates (Pennsylvania, Arizona, or New Mexico for instance) or no income tax such as Florida, Nevada, Alaska, Washington state, or Wyoming.

2. Income Tax on Retirement Income

Retirement typically income includes social security payments, retirement plan distributions, and income from pension plans. Income tax rates for Social security payments and income from retirement plans and pensions vary for each state. Some states do not tax this income at all, while in other states, a portion of pension income is exempt, while other states tax pension income in its entirety. State tax laws, like federal tax laws, are always changing. Please call if you have any questions about tax law changes in your state

Even if you live in a high-tax state, many offer significant tax benefits for senior citizens.
3. Tax on Social Security

In 2020, thirteen states tax Social Security income in addition to taxing social security income at the federal level; however, there may be exceptions depending on age or income level. Some states treat the taxation of social security benefits the same as federal taxation. Moving to a state that doesn’t tax Social Security is tempting, but keep in mind that tax rates on Social Security payments are just one factor to consider.

4. State and Local Property Taxes

Despite a decline in property values, property taxes have not decreased for most homeowners. Some states, however, offer property tax exemptions to retirees who are homeowners and renters. Again, this varies by individual state.

5. State and Local Sales Taxes

State and local sales taxes may or may not be a factor in the overall decision about where you decide to retire, but keep in mind that only five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not impose any sales or use tax.

6. Estate Taxes

Estate tax may or may not matter, depending on your estate and whether you care about what happens to your estate after you die. Like other state taxes, estate tax varies depending on which state in which you reside. In some states, there is a tax on estates below the federal threshold amount ($11.58 million in 2020). Many states have no estate tax whatsoever, including North Carolina, Delaware, Florida, Kansas, Oklahoma, and Arizona.

The Bottom Line

When it comes to retirees, relocating, and taxes, there are several factors to consider – including the overall tax burden. As you’ve read here, not all states are created equal. If you’re thinking about retiring to another state, please contact the office and make an appointment with a tax professional who will help you figure out which state fits your particular circumstances

Health Coverage Terms Employers Should Know

Under the Affordable Care Act, certain employers – known as applicable large employers – are subject to the employer shared responsibility provisions. You might be thinking about these topics as you make plans about 2021 health coverage for your employees.

If you are an employer that is subject to the employer shared responsibility provisions, you may choose either to offer affordable minimum essential coverage that provides minimum value to your full-time employees and their dependents or to potentially owe an employer shared responsibility payment to the IRS.

Here are definitions of key terms related to health coverage you might offer to employees:

Affordable coverage: If the lowest cost self-only health plan is 9.5 percent or less of your full-time employee’s household income, then the coverage is considered affordable. Because you likely will not know your employee’s household income, for purposes of the employer shared responsibility provisions, you can determine whether you offered affordable coverage under various safe harbors based on information available to you as the employer.

Minimum essential coverage: For purposes of reporting by applicable large employers, minimum essential coverage means coverage under an employer-sponsored plan. It does not include fixed indemnity coverage, life insurance, or dental or vision coverage.

Minimum value coverage: An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.

Please call if you have any questions or need more information about the employer shared responsibility provisions.