2021 Tax Changes (RMDs, 1099NEC)

RMDs new required age is 72
The Secure Act made changes to the RMD rules. If you reached the age of 70½ in 2019 the prior rule applies. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.  Please note that if you delay your first distribution to April 1 of the year after you reach 72, you will be required to take two distributions in one year.

New 1099-NEC Form
Beginning in 2020, Form 1099-NEC is the new form to report independent contractor income. The 1099-MISC form will be used to report miscellaneous income such as rent or legal fees.  If you filed Form 1099-MISC in error, you should correct this by amending Form 1099-MISC and reissuing Form 1099-NEC.

COVID Programs (PPP/EIDL/PUA)

In 2020 new programs were created to help small businesses including forgiven loans, grants, and unemployment benefits.

PPP Forgiven Loan

The CARES Act states the forgiven loan amount will not be included in your taxable income and you will not pay taxes on the money received. The second stimulus bill on December 27, 2020 clarified how the expenses covered by a PPP loan will be treated. Previously, IRS guidance stated anything you spent your PPP loan proceeds on were not going to be tax deductible. Congress clarified that – now your expenses are tax deductible. Schedule C filers will not be impacted by their PPP forgiven loans.

EIDL Grant

The second stimulus bill clarified that the EIDL grant will also be tax-free and will not need to be included in your taxable income. An EIDL loan will be treated the same way as any other loan.

Pandemic Unemployment Assistance (PUA) and Unemployment

PUA and Unemployment benefits are considered taxable income. You will pay state and federal taxes on money you received, but will not have to pay medicare or social security taxes on the income.

Virtual Currency

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Sometimes it operates like real currency but it does not have legal tender status in any jurisdiction.

Cryptocurrency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, like a blockchain.

Transactions are taxable by law just like transactions in any other property and taxpayers may have to report those transactions on their tax returns.

Bitcoin is a convertible virtual currency that can be digitally traded between users and purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

FSA Elections for 2021

A Health Care Flexible Spending Account (FSA) allows you to set aside tax-free dollars each year for health care expenses not covered by insurance. You may use these funds to pay for eligible health care expenses incurred by you, your spouse and your qualified dependents.
  • Pre-tax contributions reduce your taxable income.
  • Pay for out-of-pocket eligible health care expenses with tax-free money.
  • Your total annual Health Care FSA contribution amount is available immediately at the start of the plan year .
  • You can carry over up to $550 remaining in your account from one plan year to the next.

Deferring Payroll Tax Obligation: Is it right for your business? 

The Executive Order, Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, issued by President Trump on August 8, 2020, permits deferral of employee OASDI taxes for payroll dates on and after September 1, 2020 through December 31, 2020.  The IRS issued guidance on August 28, but there are still many unanswered questions.  Employers have a choice to continue to withhold and deposit employee OASDI (Old Age, Survivors and Disability Insurance) taxes as usual.  If they decide to implement the executive order, employers will be required to remit taxes next spring for all employees, including ones who may have left the company for any reason.  This liability becomes the employer’s debt.

If the employer elects to implement the order, the following is applicable:
Employers can defer the withholding, deposit and payment of the employee portion of the OASDI segment of FICA taxes. Payment of the employee OASDI tax is only deferred, not forgiven. Employees are still obligated to pay the taxes.  If an employer does elect to defer payment of an employee’s OASDI taxes, the employer is required to withhold and pay those deferred taxes later.  From January 1, 2021 to April 30, 2021, the employer must “ratably” deduct any deferred employee OASDI taxes from the wages paid to the employee, and pay them over to the IRS. If those deductions and payments are not made, penalties and interest will begin to accrue on the unpaid taxes on May 1, 2021.

  • Deferral of employee OASDI taxes is limited to employees with bi-weekly pay of less than $4,000 (Applicable Wages) on a pre-tax basis. An employee with variable pay (commissions, overtime, or a bonus) could be eligible for deferral in one payroll period in which they have less than $4,000 of pay, but not eligible in the next payroll period if their pay exceeds $4,000.

Employers that implement the deferral will need to address situations in which employees with deferred taxes terminate employment before the deferred taxes are collected (later in 2020 and before April 30, 2021). Employers will want to structure “arrangements to otherwise collect” the deferred taxes in this circumstance by collecting the taxes from a final paycheck or by separate check from the employee. Notice 2020-65 does not provide any relief to an employer if there are circumstances that prevent the employer from collecting if the employee terminates employment, has a leave of absence, or otherwise does not have sufficient wages in 2021 to accomplish the required deductions for the previously deferred employee OASDI taxes. Employers in this situation are obligated to pay the tax.

  • Code Section 6672, commonly called a “responsible person” penalty, can apply if an employer deducts amounts from an employee’s wages for employee social security taxes and/or income tax withholding, and the employer then fails to pay those amounts over to the IRS. In that case, the individual who is responsible (e.g., a CFO or CEO) can be held personally liable for the withheld taxes that were not paid over to the IRS. Notice 2020-65 does not provide any relief in relation to the potential application of the responsible person penalty under Code Section 6672.

While Notice 2020-65 clearly states that employers are not required to defer withholding of the employer portion of Social Security taxes on Applicable Wages of all employees, it does not address whether employers must honor requests by employees to have their Social Security taxes deferred in accordance with the Notice. Bloomberg Tax reported on September 3, 2020, that an IRS representative confirmed during its monthly payroll industry teleconference that employers do not need to implement the deferral at the request of employees.  As a result of that teleconference, many of the larger payroll companies have elected not to provide support for implementation because they are struggling with the technology constraints and lack of clarity.

Employers should work with their CPA and legal counsel to determine how and when it should implement the guidance in the Notice. Please contact us at The Hopkins Group for assistance.

Tax Deadlines

VA Income Tax Payment Extension & Penalty Waiver – Any Virginia income tax payments due during the time period of April 1, 2020, to June 1, 2020, will now be due on June 1, 2020. This includes individual and corporate income taxes.  Late payment penalties will not be charged if payments are made by June 1, 2020. However, interest will still accrue, so if you can pay by the original filing due date, you should.

The IRS and most states have moved tax return due dates to July 15. Estimated tax filers should pay their second quarter estimated payment by June 15. First quarter payments are due July 15. If you have any questions about deadlines, please do not hesitate to contact our office.

529 Plans

Now is the time to make a 529 plan contribution before year-end for your child or grandchild!

  • Earnings on assets in a 529 plan are tax-deferred and if the distributions are qualified withdrawals for higher education expenses, they are federally tax free plus tax free in your home state in most cases. Qualified distributions: tuition, room & board, and other related expenses.
  • 529 benefits can now be used to pay for tuition of up to $10,000/yr at elementary and secondary public, private or parochial schools. Tax deduction is possible in over 30 states, including VA, MD and D.C.
  • Plan contributions are gifts from the taxpayer to the 529 beneficiary. The annual gift limit is $15,000/beneficiary ($30,000 if married). You are able to contribute an amount equal to five years of gifts in just one year (up to $75,000, $150,000 for a married couple) with zero gift tax liability.

QBI Deduction

The 20% Sec. 199A qualified business income (QBI) deduction is designed to provide some tax relief to owners of pass-through entities. There are several limitations, most notably on high-income owners. These owners may be subject to a limitation on the QBI deduction based on the entity’s Form W-2 wages paid to employees and its unadjusted basis immediately after acquisition (UBIA) of qualified property. The QBI deduction may also be subject to limitation if the taxpayer’s trade or business is a specified service trade or business (SSTB).

Guaranteed payments are treated similarly to wages. Therefore, partnerships and limited liability companies should review their operating agreements to ensure that the owners are maximizing the QBI.

Rental Real Estate

The IRS issued Rev. Proc. 2019-38 to provide a safe harbor under which a real estate enterprise will be treated as a trade or business for purposes of Sec. 199A, and will qualify for the deduction. The taxpayer must maintain records, including time reports or logs. If you have rental property and you meet the requirements, a signed certification must be attached to your tax return.

The requirements are:

  1. To maintain separate books and records to reflect income and expenses for each rental and
  2. To spend at least 250 hours/year performing services with respect to the rental.

Qualified activities: advertising to rent, negotiating leases, verifying information in the tenant applications, collecting rents, maintaining the property, managing the real estate, purchasing items for the property, supervising employees or independent contractors

Non-qualified activities: arranging financing, procuring property, studying and reviewing financial statements or reports on operations, planning, managing or constructing long-term capital improvements, time spent traveling back and forth to the property