As 2020 comes to an end, many are trying to focus on positives that lie ahead. One place to look is the tax benefits laid out in the COVID relief package recently passed by both houses of Congress.
The thing people need now more than ever is cash. The proposed legislation gives up to $600 per person (taxpayers and their children under 17 years of age) based on household income thresholds.
To illustrate, under the proposed package a family of four earning less than $150,000 could receive as much as $2,400. The amount of payments proposed has been a point of contention among lawmakers. Some would like to see these amounts increased which could delay passage of the package.
Other Tax Breaks for Individuals
- Tax Credits – receiving a tax credit depends on how much income you earned. With 2020 being an anomaly, some will benefit in this regard and others will not. The proposed relief package allows taxpayers to use either 2019 or 2020 adjusted gross income (AGI) to qualify for both the Child and Earned Income tax credits
- Medical Deductions (for those who itemize) – for several years the amount of medical expenses that must be paid before becoming deductible varied between 10% and 7.5% of AGI. This difference can be significant for taxpayers with substantial medical expenses. The proposed legislation makes the 7.5% threshold permanent
- Student Loans – the temporary employee exemption from income of up to $5,250 in student loan payments made by employers would be extended through 2025
- Charitable Contributions – while charitable contributions typically only help taxpayers who itemize, the CARES Act provided a deduction of up to $300 for everyone. The proposed relief legislation extends this deduction and doubles the amount for married filing jointly taxpayers in 2021
- Payroll Taxes – the proposed relief package strengthens executive orders allowing employees to defer Federal payroll taxes (typically about 7.7% of wages). This ‘holiday’ will come in handy for those barely getting by. The problem is this relief is temporary as these payroll taxes will need to be paid back by the end of 2021
- Flexible Spending Accounts (FSAs) – flexible spending accounts allow taxpayers to set aside pretax dollars to spend on things such as doctors, prescription drugs, vision and dental costs. Unlike similar plans, FSAs are typically use-it-or-lose-it within a calendar year. The proposed legislation would allow taxpayers to rollover unused balances from 2020 to 2021
Big Tax Break for Businesses
The biggest benefit for business owners to come out of the proposed relief legislation relates to Paycheck Protection Program (PPP) loans.
Businesses that qualify can apply for a fully forgivable loan to cover payroll, employee benefits, rent and utility expenses. This includes businesses that previously received this type of loan earlier in the year.
In addition, if you are a business that already acquired a PPP loan pay close attention. Assuming you followed the guidelines, you can have some or all of the PPP loan proceeds be forgiven. Up until now, the US Treasury provided guidelines indicating that expenses paid with forgivable loan proceeds would not be tax deductible. The Idea here is since your received the funds without earning them, you should not also be allowed to deduct them.
A large number of lobbyists requested that these expenses also be deductible. The proposed legislation clears the path for this to happen. This can equate to hundreds of thousands of dollars in tax savings for many business owners.
Will the Relief Bill Pass?
Before you get your hopes up, keep in mind that this bill still has to either be signed by the President or be overridden by Congress if vetoed. There is a chance the bill will change before it passes. There is also a chance it will not pass at all. Let’s keep our fingers crossed.
Check with your tax advisor to see if you stand to benefit from the breaks provided in the proposed coronavirus relief bill. If you do not have a tax adviser, call one of our team members at the Tax Resolution Institute at (877) 829-8370 or email us at firstname.lastname@example.org.