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Federal Income Tax Changes – 2021

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Copyright 2021

ALL RIGHTS RESERVED. NO PART OF THIS COURSE MAY BE REPRODUCED IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE COPYRIGHT HOLDER.

Absent specific written permission from the copyright holder, it is not permissible to distribute files

containing course materials or printed versions of course materials to individuals who have not purchased the course. It is also not permissible to make the course materials available to others over a computer network, Intranet, Internet, or any other storage, transmittal, or retrieval system. This document is designed to provide general information and is not a substitute for professional advice in specific situations. It is not intended to be, and should not be construed as, legal or accounting advice which should be provided only by professional advisers.

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Contents Introduction to the Course ..................................................................................................... 1 Learning Objectives ............................................................................................................... 1

Chapter 1 – Changes in Various Limits ................................................................... 2 Introduction ......................................................................................................................... 2 Chapter Learning Objectives ................................................................................................... 2 Individual Tax Rates .............................................................................................................. 2 Standard Mileage Rates ......................................................................................................... 2

Business Use of a Taxpayer’s Personal Vehicle ....................................................................... 3 Personal Vehicle Use for Charitable Purposes ......................................................................... 3 Use of a Taxpayer’s Personal Vehicle to Obtain Medical Care .................................................... 3

Moving Expenses in Military Relocations ............................................................................. 4 Standard Deduction Increased ................................................................................................ 4

Standard Deduction for Blind and Senior Taxpayers ................................................................ 5 Standard Deduction Eligibility .............................................................................................. 5

Alternative Minimum Tax (AMT) .............................................................................................. 5 Tax Preference Items Added Back to Produce Alternative Minimum Taxable Income ................... 6 Alternative Minimum Tax Exemption Amount Increased .......................................................... 6

Education Savings Bond Program ............................................................................................ 7 Qualified Education Expenses ............................................................................................... 7

Eligible Educational Institutions ......................................................................................... 7 Qualified Education Expenses Reduced by Certain Tax-free Benefits Received ......................... 7

Figuring the Tax-Free Amount .............................................................................................. 8 Education Savings Bond Program Eligibility Subject to Income Limits/Filing Status .................. 8

Determining Taxpayer’s Modified Adjusted Gross Income ................................................... 9 Qualified Long-Term Care Insurance Premiums and Benefits ...................................................... 9

Favorable Benefits Tax Treatment Reserved for Chronically-Ill ................................................. 9 Tax-Qualified Long Term Care Premiums Deductible within Limits ............................................10 Tax-Qualified Long Term Care Insurance Benefits Tax-Free within Limits ..................................10

Social Security Taxable Earnings Limit ....................................................................................11 Maximum Capital Gain/Dividend Tax Rate Increased for High-Income Taxpayers .........................11 Estate and Gift Tax Exemption ...............................................................................................11 Section 199A Threshold Amount ............................................................................................11 Chapter Review ...................................................................................................................13

Chapter 2 – Tax Credit Changes ........................................................................... 14 Introduction ........................................................................................................................14 Chapter Learning Objectives ..................................................................................................14 Retirement Savings Contribution Credit ..................................................................................14

Saver’s Credit Applicable to Range of Retirement Contributions ...............................................15 Saver’s Credit Eligibility Based on Income and Filing Status ....................................................15

Earned Income Credit ...........................................................................................................16 EIC Rules Applicable to Everyone ........................................................................................16

Adjusted Gross Income Limits ..........................................................................................16 Valid Social Security Number Required ..............................................................................16 Tax Filing Status .............................................................................................................17

Separated Spouses ......................................................................................................17 Citizenship or Residency ..................................................................................................17 Foreign Earned Income ...................................................................................................17 Investment Income ........................................................................................................17 Earned Income ...............................................................................................................17

Temporary Special Rule for Determining Earned Income ...................................................18 EIC Rules That Apply if Taxpayer Has a Qualifying Child .........................................................18

Relationship, Age, Residence and Joint Return Tests ...........................................................18 Qualifying Child of More than One Person Rule ...................................................................18 Taxpayer as the Qualifying Child of Another Taxpayer Rule ..................................................18

EIC Rules That Apply if Taxpayer Does Not Have a Qualifying Child .........................................19 The Age Rule .................................................................................................................19

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Taxpayers with no Qualifying Children ............................................................................19 The Dependent of Another Person Rule .............................................................................19 The Qualifying Child of Another Taxpayer Rule ...................................................................19 The Main Home Rule .......................................................................................................20

Figuring the Amount of the Earned Income Credit .................................................................20 Child Tax Credit ...................................................................................................................20

Child Tax Credit Increase Subject to Separate Phase-Out .......................................................21 Reduction Limitation ..........................................................................................................21

Child and Dependent Care Tax Credit .....................................................................................21 Adoption Credit/Exclusion .....................................................................................................21

Eligible Child .....................................................................................................................22 Qualified Adoption Expenses ...............................................................................................22 The Benefit .......................................................................................................................22

Timing of the Credit/Exclusion ..........................................................................................22 Benefit Phased-Out at Higher Taxpayer MAGI.....................................................................23

Chapter Review ...................................................................................................................24

Chapter 3 – PPACA-Related Tax Changes ............................................................. 25 Introduction ........................................................................................................................25 Chapter Learning Objectives ..................................................................................................25 Health Flexible Spending Arrangement Contributions ................................................................25 PPACA’s Individual Shared Responsibility Provision ...................................................................25 Refundable Premium Tax Credit to Assist in Purchase of Qualified Health Plan .............................25

Eligibility for Credit ............................................................................................................26 Federal Poverty Level ......................................................................................................26

Amount of the Credit .........................................................................................................26 Benchmark Plan .............................................................................................................27 Taxpayer’s Expected Contribution .....................................................................................27 Calculating the Credit ......................................................................................................27

Adjusted Monthly Premium ...........................................................................................28 Special Rules Applicable to the Tax Credit ..........................................................................29

Reconciling Advance Premium Tax Credits ......................................................................29 Small Business Tax Credit .....................................................................................................30

Eligibility Requirements ......................................................................................................30 Limitations Affect Health Insurance Premium Credit ............................................................30

Full-Time Equivalent Employee (FTE) Limitation ...............................................................30 Average Annual Wage Limitation ....................................................................................30 Average Premium Limitation..........................................................................................31 State Premium Subsidy and Tax Credit Limitation ............................................................31

Calculating the Credit .........................................................................................................31 Large Employer Shared Responsibility: The Employer Mandate ..................................................31

Employers Not Offering Coverage .....................................................................................31 Employers Offering Coverage ...........................................................................................32

Chapter Review ...................................................................................................................33

Chapter 4 – Changes in Archer MSAs, HSAs & IRAs .............................................. 34 Introduction ........................................................................................................................34 Chapter Learning Objectives ..................................................................................................34 Medical Savings Accounts ......................................................................................................34

High Deductible Health Plan Requirement .............................................................................34 Archer MSA Contributions ...................................................................................................35

Penalty for Excess Contributions .......................................................................................36 Special Rules for Employer-Installed MSAs .........................................................................36

Archer MSA Distributions ....................................................................................................36 Archer MSA Rollovers ......................................................................................................36 Account Transfer Incident to Divorce .................................................................................36 Account Transfer at Death ...............................................................................................37

Archer MSA Taxation..........................................................................................................37 Contribution Tax Treatment .............................................................................................37

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Distribution Tax Treatment ..............................................................................................37 Archer MSA Distribution Tax Penalty...............................................................................38

Health Savings Accounts .......................................................................................................38 HSA Eligibility ...................................................................................................................39 HSA High Deductible Health Plan Requirement ......................................................................39 HSA Contributions .............................................................................................................39

HSA Contributions from Multiple Sources ...........................................................................39 Additional Contributions for Age 55 and Older Account Holders.............................................40 First-Year Contributions for New Account Holders ...............................................................40 Maximum HSA Contributions may be Reduced....................................................................40 Penalty for Excess Contributions .......................................................................................40 Employer HSA Participation ..............................................................................................40

HSA Distributions ..............................................................................................................40 HSA Rollovers ................................................................................................................41 Account Transfer Incident to Divorce .................................................................................41 Account Transfer at Death ...............................................................................................41

HSA Taxation ....................................................................................................................41 Contribution Tax Treatment .............................................................................................42 Distribution Tax Treatment ..............................................................................................42

Tax-Free HSA Distributions ...........................................................................................42 Taxable HSA Distributions .............................................................................................42 HSA Distribution Tax Penalty .........................................................................................42

Individual Retirement Accounts Affected by SECURE Act ...........................................................43 IRA Contribution Changes ...................................................................................................43

Elimination of Age Cap on Traditional IRA Contributions ......................................................43 Taxable Non-Tuition Fellowship and Stipend Payments Considered Compensation for IRAs ......43 Certain Foster Care Payments as Basis for Non-Deductible IRA Contribution ..........................43

IRA Distribution Changes ....................................................................................................43 Minimum Distributions Required at Age 72 .........................................................................44 Certain Qualified Birth or Adoption Distributions Avoid Early Distribution Penalty ....................44 Certain Inherited IRA Balances Must be Fully Distributed within 10 Years ..............................44

Individual Retirement Accounts Affected by CARES Act .............................................................45 Early Distributions .............................................................................................................45 Taxation of IRA Withdrawals Over Three-Year Period .............................................................45 Rollover of IRA Withdrawals Within Three Years of Distribution................................................46 Coronavirus-Related Distribution .........................................................................................46 Suspension of 2020 Required Minimum Distributions .............................................................47

Roth IRA Eligibility ...............................................................................................................47 Limits on Contributions .........................................................................................................47 Traditional IRA Contributions by Active Participants ..................................................................47

Tax Treatment of Contributions by Active Participants ............................................................47 Reduced Deductibility of Traditional IRA Contributions for Active Participants .........................48

Chapter Review ...................................................................................................................49

Chapter 5 – Pandemic-Related Economic Stimulus ............................................... 50 Introduction ........................................................................................................................50 Chapter Learning Objectives ..................................................................................................50 Recovery Rebates (Economic Impact Payments) ......................................................................50 Paycheck Protection Program .................................................................................................50

Maximum Loan Amount ......................................................................................................51 Small Business Association Covered Loan Forgiveness ...........................................................51

Tax Treatment of Loan Forgiveness ..................................................................................51 Unemployment Benefits ........................................................................................................52

Tax Treatment of Unemployment Benefits ............................................................................53 Charitable Contributions ........................................................................................................53

Qualified Contributions .......................................................................................................54 Partial Above-the-Line Deduction for Charitable Contributions .................................................54

Relaxation of Retirement Fund Tax Rules ................................................................................55 Qualified Plan Loan Maximum Increased ...............................................................................55

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Early Distributions .............................................................................................................55 Taxation of Qualified Plan Distributions Over Three-Year Period ............................................55 Rollover of Qualified Plan Withdrawals Within Three Years of Distribution ..............................56

Coronavirus-Related Distribution .........................................................................................56 Suspension of 2020 Required Minimum Distributions .............................................................56

Modifications for Net Operating Losses (NOLs) .........................................................................56 Qualified Medical Expenses ....................................................................................................57 High Deductible Health Plans and COVID-19-Related Expenses ..................................................57 Additional Health Care Related Provisions ................................................................................57 Section 911 Foreign Earned Income .......................................................................................58 Section 1031 Timing Relief ....................................................................................................58 Technical Amendments Regarding Qualified Improvement Property ............................................59 Limitation on Losses for Non-Corporate Taxpayers ...................................................................59 Modifications of Limitation on Business Interest Expense ...........................................................59

Special Partnership Rules ...................................................................................................60 Exclusion of Certain Employer Payments of Student Loans ........................................................60 Economic Injury Disaster Loans (EIDL) ...................................................................................60

Emergency Grants .............................................................................................................61 Taxpayer Relief Act of 2020 ...................................................................................................61

Unreimbursed Medical Expense Threshold Lowered ................................................................61 Education Tax Benefits .......................................................................................................61 Tax Treatment of Expenses used for PPP Loan Forgiveness .....................................................61 Qualified Charitable Expenses .............................................................................................62 Temporary Increase in Business Meal Deductibility ................................................................62 Flexible Spending Arrangements .........................................................................................62 American Rescue Plan Act of 2021 .......................................................................................62

Unemployment Benefits ..................................................................................................63 Recovery Rebates ...........................................................................................................63

Limitation Based on Adjusted Gross Income ....................................................................63 COBRA Premium Assistance .............................................................................................64 Child Tax Credit ..............................................................................................................64

Child Tax Credit Increase Subject to Separate Phase-Out ..................................................64 Reduction Limitation .....................................................................................................64

Earned Income Tax Credit ...............................................................................................65 Taxpayers with no Qualifying Children ............................................................................65 Taxpayers with Qualifying Children who Fail to Meet Identification Requirements .................65 Separated Spouses ......................................................................................................65 Investment Income Test ...............................................................................................66 Temporary Special Rule for Determining Earned Income ...................................................66

Child and Dependent Care Tax Credit ................................................................................66 Premium Tax Credit Expansion .........................................................................................66 Student Loan Discharge ..................................................................................................68 Noncorporate Excess Business Loss ..................................................................................68

Summary ............................................................................................................................68 Chapter Review ...................................................................................................................70

Glossary ............................................................................................................... 72

Answers to Review Questions .............................................................................. 75 Chapter 1 ............................................................................................................................75 Chapter 2 ............................................................................................................................75 Chapter 3 ............................................................................................................................76 Chapter 4 ............................................................................................................................77 Chapter 5 ............................................................................................................................77

Index ................................................................................................................... 80

Appendix A ........................................................................................................... 83

FINAL EXAM ......................................................................................................... 84

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1

Introduction to the Course

Each year, various limits affecting income tax preparation and planning change. Some changes commonly occur each year as a result of inflation indexing, while others occur because of new legislation or the sunsetting of existing law. This course will examine the tax changes that took effect as a result of passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)) and the inflation-changed limits effective for 2021 that are more significant from the perspective of an income tax

preparer. Some context will be supplied, as appropriate, to assist readers in understanding the changes.

Learning Objectives

Upon completion of this course, you should be able to:

• List the 2021 changes in various amounts including the –

o Standard mileage rates, o Standard deduction, o AMT exemption amount, o Limits related to income from U.S. Savings Bonds for taxpayers paying higher

education expenses, and o Deductions for qualified long-term care insurance premiums;

• Identify the 2021 tax credit changes affecting the – o Saver’s credit, o Earned income credit, and o Adoption credit;

• Recognize the 2021 changes affecting – o Health Savings Account (HSA) and Archer Medical Savings Accounts (MSA)

requirements and contribution limits,

o Roth IRA eligibility, and

o Traditional IRA contribution deductibility for active participants in employer-sponsored qualified plans;

• List the changes effective for 2021 with respect to the – o Small business employer premium tax credit, and o Applicable large employer mandate;

• Describe the principal CARES Act provisions, including those related to the –

o Paycheck Protection Program, o Pandemic Unemployment Assistance program, o Net operating loss (NOL) carryback rules, o Health savings account (HSA) rules concerning first-dollar payment for telehealth and

COVID-19 testing and treatment, o Foreign income exclusion,

o Section 1031 exchange timing, o Correction of the deductible period applicable to qualified improvement property, o Modification of limitation on losses for non-corporate taxpayers,

o Limitation on business interest expense deductions, o Employer payments of student loans, and o Expansion of economic injury disaster loans (EIDLs); and

• Apply the various CARES Act provisions affecting –

o Recovery rebate rules, o Expanded tax-favored use of retirement funds, o Charitable contribution rules, and o Qualified improvement property depreciation.

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Chapter 1 – Changes in Various

Limits

Introduction

Federal tax law requires that various limits be adhered to in the preparation of tax returns, and such limits may change from year to year based on an inflation adjustment or on other factors. Included in those changes for 2021 are individual tax rates, standard mileage rates, standard deductions and

various other limits.

This chapter will examine these changes for 2021 and will offer some context within which they apply.

Chapter Learning Objectives

Upon completion of this chapter, you should be able to:

• Identify the individual income tax rate changes affecting taxpayers;

• Calculate the standard mileage deductions for – o Use of a personal vehicle for business purposes, o Use of a personal vehicle to obtain medical care, and o Charitable use of a personal vehicle;

• Identify the 2021 standard deduction amounts available to taxpayers; • Recognize the changes made to the alternative minimum tax exemption amount for 2021;

• Apply the tax-free United States savings bond income limits for taxpayers who paid qualified higher education expenses in 2021; and

• Calculate the tax-deductible premiums for and tax-free benefits received under qualified long-term care insurance contracts;

• Determine the amount of assets that may be passed tax-free at death; and • Identify the qualified business income (QBI) threshold amount.

Individual Tax Rates

The individual tax brackets for 2021 are as follows:

2021 Bracket for Income in Excess of…

Tax Bracket

MFJ

HOH Unmarried MFS Estates & Trusts

10% $0 $0 $0 $0

12% $19,900 $14,200 $9,950 $9,950

22% $81,050 $54,200 $40,525 $40,525

24% $172,750 $86,350 $86,375 $86,375 $2,650

32% $329,859 $164,900 $164,925 $164,925

35% $418,850 $209,400 $209,425 $209,425 $9,550

37% $628,300 $523,600 $523,600 $314,150 $13,050

Standard Mileage Rates

The standard mileage rates enable a taxpayer using a vehicle for specified purposes to deduct vehicle expenses on a per-mile basis rather than deducting actual car expenses that are incurred during the

year. The rates vary, depending on the purpose of the transportation.

Accordingly, the standard mileage rates differ from one another depending on whether the vehicle is used for:

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• Business purposes;

• Charitable purposes; or • Obtaining medical care or moving.

Rather than using the optional standard mileage rates, however, a taxpayer may choose to take a

deduction based on the actual costs of using the vehicle.

Business Use of a Taxpayer’s Personal Vehicle

As a result of the passage of the TCJA, taxpayers may no longer deduct unreimbursed employee expenses—including unreimbursed expenses related to business use of a personal vehicle—as “miscellaneous itemized deductions” to the extent the total of such expenses exceeds 2% of his or her AGI. However, the 2021 alternative standard mileage rate applicable to eligible business use of a vehicle is 56¢ per mile, down from 57.5¢ in 2020. In order for such expenses to be deductible, they

must have been:

• Paid or incurred during the tax year; • For the purpose of carrying on the taxpayer’s trade or business; and

• Ordinary and necessary.

Provided the vehicle expenses meeting these three criteria are not reimbursed, the deductible personal vehicle expenses include those incurred while traveling:

• Between workplaces; • To meet with a business customer; • To attend a business meeting located away from the taxpayer’s regular workplace; or • From the taxpayer’s home to a temporary place of work.

In addition to using the standard mileage rate, a taxpayer may also deduct any business-related parking fees and tolls paid while engaging in deductible business travel. However, parking fees paid by a taxpayer to park his or her vehicle at the usual place of business are considered commuting

expenses and are not deductible.

Personal Vehicle Use for Charitable Purposes

A taxpayer may deduct as a charitable contribution any unreimbursed out-of-pocket expenses, such as the cost of gas and oil, directly related to the use of a personal vehicle in providing services to a charitable organization. Alternatively, a taxpayer may use the standard mileage rate applicable to the use of a personal vehicle for charitable purposes. The standard mileage rate applicable to a taxpayer’s use of a personal vehicle for charitable purposes is based on statute and remains unchanged at 14¢

per mile. The taxpayer may also deduct parking fees and tolls regardless of whether the actual expenses or standard mileage rate is used.

A related issue involves a taxpayer’s travel expenses incurred in providing services to a charity. Thus, in addition, a taxpayer may generally claim a charitable contribution deduction for travel expenses necessarily incurred while away from home performing services for a charitable organization. In order to claim a charitable deduction for such travel expenses, however, certain criteria must be met.

Pursuant to federal regulations, in order to take a charitable contribution deduction for such travel expenses:

• There must be no significant element of personal pleasure, recreation, or vacation in the travel; and

• The taxpayer must be on duty in a genuine and substantial sense throughout the trip. (A taxpayer having only nominal duties in connection with the trip or who has no duties for a significant part of it would not be permitted to deduct the travel expenses.)

Use of a Taxpayer’s Personal Vehicle to Obtain Medical Care

A taxpayer may also deduct medical and dental expenses to the extent they exceed the applicable percentage of his or her adjusted gross income (AGI). The vehicle expenses a taxpayer may include as medical and dental expenses are the amounts paid for transportation to obtain medical care for the taxpayer, a spouse or a dependent. A taxpayer may also include as medical and dental expenses those transportation costs incurred:

• By a parent who must accompany a child needing medical care;

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• By a nurse or other person who can administer injections, medications or other treatment

required by a patient traveling to obtain medical care and unable to travel alone; or • For regular visits to see a mentally-ill dependent, if such visits are recommended as a part of

the mentally-ill dependent’s treatment.

A taxpayer who uses a personal vehicle for such medical reasons is permitted to include the out-of-pocket vehicle expenses incurred—the expenses for gas and oil, for example—or deduct medical travel expenses at the standard medical mileage rate. For 2021, the standard medical mileage rate is 16¢ per mile, down 1¢ from 2020. The taxpayer may also deduct any parking fees or tolls, regardless of whether the actual expense or the standard mileage rate is used.

Moving Expenses in Military Relocations

Although the Tax Cuts and Jobs Act (TCJA) suspended the moving expense deduction and made any

moving expense reimbursement taxable income for non-military relocations, the inclusion of reimbursed moving expenses in the recipient’s gross income does not apply to military relocations meeting certain criteria. In the case of a military relocation, the taxpayer’s move must be pursuant to

a military order and involve a permanent change of station. If those criteria are met, no paid or incurred moving and storage expenses:

• Furnished in kind, or

• For which reimbursement or allowance is provided to the service member, spouse or dependents

…are includible in gross income or reported.

In addition, if the moving expenses paid or incurred in connection with a military relocation are furnished or reimbursed (or an allowance is provided) to the service member’s spouse and dependents to move:

• To a location other than the one to which the service member moves, or

• From a location other than the one from which the service member moves

…such expenses are likewise neither includible in gross income nor reported.

Standard Mileage Rates

Activity 2020 Mileage Rate 2021 Mileage Rate

Eligible business use 57.5¢ 56¢

Medical or moving purposes 17¢ 16¢

Charitable purposes* 14¢ 14¢

*Set by statute; not subject to inflation adjustment

Standard Deduction Increased

The standard deduction has increased for 2021. The standard deductions for 2021 are:

• $25,100 for married couples whose filing status is “married filing jointly” and qualifying

widow(er); • $12,550 for singles and married couples whose filing status is “married filing separately”; and

• $18,800 for taxpayers whose filing status is “head of household.”

A taxpayer who can be claimed as a dependent is generally limited to a smaller standard deduction, regardless of whether the individual is actually claimed as a dependent. For 2021 returns, the standard deduction for a dependent is the greater of:

• $1,100; or • The dependent’s earned income from work for the year plus $350 (but not more than the

standard deduction amount, generally $12,550).

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Standard Deduction for Blind and Senior Taxpayers

Elderly and/or blind taxpayers receive an additional standard deduction amount added to the basic standard deduction. The additional standard deduction for a blind taxpayer—a taxpayer whose vision is less than 20/200—and for a taxpayer who is age 65 or older at the end of the year is:

• $1,350 for married individuals; and • $1,700 for singles and heads of household.

The additional standard deduction for taxpayers who are both age 65 or older at year-end and blind is double the additional amount for a taxpayer who is blind (but not age 65 or older) or age 65 (but not blind). For example, a 65 year-old single blind taxpayer would add $3,400 to his or her usual standard deduction: $1,700 for being age 65 plus $1,700 for being blind. ($1,700 x 2 = $3,400). Thus, his or her standard deduction would normally be $15,950. ($12,550 + $3,400 = $15,950)

Standard Deduction Eligibility

The general rule with respect to deductions is that a taxpayer may choose to take a standard

deduction or itemize his or her deductions. Although that general rule applies in the case of most taxpayers, certain taxpayers are ineligible to take the standard deduction and must itemize.

Taxpayers who are ineligible to take the standard deduction are the following:

• Taxpayers whose filing status is “married filing separately” and whose spouse itemizes

deductions;

• Taxpayers who are filing a tax return for a short tax year due to a change in their annual

accounting period; and

• Taxpayers who were nonresident aliens or dual-status aliens during the year.

Standard Deductions

2020 2021

Filing Status Standard Blind/Age 65+ Standard Blind/Age 65+

Married filing jointly & qualifying widow(er)s

$24,800 $1,300 $25,100 $1,350

Unmarried (other than qualifying widow(er)s or head of household)

$12,400 $1,650 $12,550 $1,700

Married filing separately $12,400 $1,300 $12,550 $1,350

Head of household $18,650 $1,650 $18,800 $1,700

Dependent $1,100 or earned income + $350 $1,100 or earned income + $350

Alternative Minimum Tax (AMT)

A taxpayer's income tax liability is generally reduced under the federal tax code as a result of the preferential treatment the Code gives to certain kinds of taxpayer income. In addition, the Code permits taxpayers to take special deductions and credits for certain kinds of expenses.

To help ensure that taxpayers with higher incomes who avail themselves of the preferences that exist under the Code pay no less than a minimum amount of federal income tax, Congress passed the predecessor to the alternative minimum tax (AMT) in 1969. Under the earlier legislation and the

current alternative minimum tax provisions, taxpayers who benefit from special treatment or special deductions and credits may be required to pay at least a minimum amount of federal tax. That minimum tax amount payable under the AMT is the result of adding back certain amounts deducted from the taxpayer’s income, applying an alternative minimum taxable income exemption and then applying the federal income tax rates to that income amount.

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Thus, imposition of an alternative minimum tax was designed to ensure that at least a minimum

amount of tax is paid by higher-income taxpayers who enjoy significant tax savings through the use of certain tax deductions, exemptions, losses and credits. Absent the alternative minimum tax, such taxpayers could conceivably avoid federal income tax liability completely despite their high income

level.

Tax Preference Items Added Back to Produce Alternative Minimum Taxable Income

The deductions identified as sources of extraordinary tax savings are referred to as “tax preference items.” Because the tax preference items generate tax savings by reducing the taxpayer's taxable income, they are added back to the taxpayer's taxable income for purposes of computing the alternative minimum taxable income (AMTI). The result is that unreasonably-high tax breaks are recaptured. After the various tax-preference items are added back, the applicable AMTI exemption,

discussed below, is subtracted.

Although AMTI includes a wide range of recaptures, the principal tax preference items added back in determining AMTI are:

• The amount by which a depletion deduction claimed by a taxpayer exceeds the adjusted basis of the interest at the end of the tax year;

• Tax-exempt interest on certain specified private activity bonds;

• For property placed in service before 1987, the excess of accelerated depreciation on non-recovery real property over straight line depreciation; and

• For most property placed in service before 1987, the excess of the ACRS deduction for leased recovery property over the straight-line depreciation deduction that would have been allowed if a half-year convention had been used and specified recovery periods have been used.

In addition to these tax preference items, the alternative minimum tax aims to recover some of the tax savings generated by other deductions and methods for computing tax liability. Thus, for purposes

of determining alternative minimum taxable income, taxpayers are required to re-compute certain regular tax deductions in a less preferential manner. As a result of re-computing such tax deductions, the alternative minimum taxable income is usually increased.

Alternative Minimum Tax Exemption Amount Increased

The tax code provides for an AMTI exemption for purposes of determining the alternative minimum tax amount. The amount of the AMTI exemption varies according to the taxpayer's filing status and the tax year. The applicable AMTI exemption amounts are as follows:

AMTI Exemption Amounts

2020 2021

Filing Status Exemption

Phaseout Begins AMTI

Exemption Exemption

Phaseout Begins AMTI

Exemption

Married filing jointly & qualifying widow(er)s

$1,036,800 $113,400 $1,047,200 $114,600

Unmarried (other than qualifying widow(er)s)

$518,400 $72,900 $523,600 $73,600

Married filing separately $518,400 $56,700 $523,600 $57,300

Estates and trusts $84,800 $25,400 $85,650 $25,700

The AMTI exemption amounts are indexed for inflation.

The AMTI exemption amount is reduced (but not below zero) by 25 percent of the amount by which the taxpayer’s alternative minimum taxable income exceeds:

• $1,047,200 for taxpayers whose filing status is “married filing jointly” or “qualifying

widow(er)”;

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• $523,600 for taxpayers whose filing status is “single,” “head of household,” and “married filing

separately”; and • $85,650 for trusts and estates.

Education Savings Bond Program

Although the interest on U.S. savings bonds is normally taxable as ordinary income, a taxpayer may exclude some or all of the interest on certain cashed in savings bonds if he or she pays qualified education expenses and meets federal income tax filing status and income requirements. Under the federal education savings bond program, a taxpayer may exclude some or all interest income received

on qualified U.S. savings bonds if the taxpayer:

• Paid qualified education expenses for the taxpayer, a spouse or a dependent claimed as an exemption;

• Has a modified adjusted gross income (MAGI) not exceeding specified maximum amounts that are adjusted for inflation each year; and

• Has a federal income tax filing status other than married filing separately.

The U.S. savings bonds that qualify for the education savings program are series EE bonds issued

after 1989 and series I bonds. The bonds must be issued either in the taxpayer’s name as sole owner or in the name of the taxpayer and spouse as co-owners. Furthermore, in order for the bond to qualify, the owning taxpayer must have been at least age 24 before the bond’s date of issue.

Qualified Education Expenses

Education expenses considered qualified education expenses under the education savings bond program are education expenses incurred at an eligible educational institution by the taxpayer for the taxpayer, the taxpayer’s spouse or a dependent claimed by the taxpayer. Such expenses include:

• Tuition and fees; • Contributions to a qualified tuition program; and • Contributions to a Coverdell education savings account (ESA)

Room and board expenses are not qualified education expenses for purposes of the education savings

bond program.

Eligible Educational Institutions

An eligible educational institution for purposes of the education savings bond program is broadly defined as one eligible to participate in a student aid program administered by the U.S. Department of Education and includes:

• College; • University; • Vocational school; and • Other post-secondary educational institution.

Thus, the definition of an eligible educational institution includes virtually all accredited U.S. public, nonprofit, and proprietary post-secondary institutions.

Qualified Education Expenses Reduced by Certain Tax-free Benefits Received

To determine the amount of tax-free interest, the qualified education expenses incurred must be reduced, for purposes of the education savings bond program, by certain tax-free education benefits received. The resulting education expenses, reduced as required, are referred to as “adjusted qualified education expenses.”

Thus, adjusted qualified education expenses are equal to the qualified education expenses reduced by all of the following tax-free benefits:

• The tax-free part of scholarships and fellowships; • Expenses used to figure the tax-free portion of Coverdell ESA distributions; • Expenses used to figure the tax-free portion of qualified tuition program distributions; • Any tax-free payments received as education assistance, including –

o Veterans’ educational assistance benefits,

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o Qualified tuition reductions, and

o Employer-provided educational assistance; and • Any expenses used in figuring the American opportunity and lifetime learning credits.

Neither gifts nor inheritances received, however, reduce qualified education expenses for purposes of

the education savings bond program.

Figuring the Tax-Free Amount

If the total amount received by the taxpayer when eligible bonds are cashed in, including both the bond investment and accrued interest, does not exceed the adjusted qualified education expenses, all interest received may be tax free. (Note, the taxpayer must still be eligible based on income.) If the total amount received on liquidation of the bonds is greater than the adjusted qualified education expenses, only a portion of the interest may be tax free.

Determining the tax-free amount of the interest distributed when the bonds are cashed in and the adjusted qualified education expenses are less than the distribution requires that the interest received be multiplied by a fraction. The numerator of the fraction is the adjusted qualified education

expenses, and the denominator of the fraction is the total proceeds received on liquidation of the bonds during the year the bonds were cashed in.

We can illustrate the part of the interest that may be tax free in this case by considering an example.

Suppose a taxpayer received a $9,000 distribution of bond proceeds during the year, and the proceeds consisted of $6,000 of invested principal and $3,000 of interest. Further suppose that the adjusted qualified education expenses were $7,650—less than the bond proceeds, in other words. To determine the part of the $3,000 of interest that may be tax free, we need to use the following equation:

Interest X Adjusted qualified education expenses

Total proceeds received = Maximum tax-free interest

By substituting the appropriate numbers into the equation, we can see that the amount of the

potentially tax-free interest in this example is $2,550, as shown below:

$3,000 X $7,650 $9,000

= $2,550

Since the taxpayer received $9,000 when cashing in the bonds, the $6,000 invested (or any portion of it) is tax free as a recovery of cost basis, but the portion of the interest other than the $2,550 tax-free amount—$450 in this case—is taxable interest. As noted earlier, however, a taxpayer’s eligibility for the education savings bond program is determined by the taxpayer’s income and filing status,

discussed immediately below. Depending on the taxpayer’s MAGI/filing status, some or all of the maximum tax-free interest may also be includible in income.

Education Savings Bond Program Eligibility Subject to Income Limits/Filing Status

The exclusion of interest under the education savings bond program reduces as the taxpayer’s income increases and is eliminated at higher income levels. Under the bond program rules, the amount of a taxpayer’s interest exclusion is gradually reduced if the taxpayer’s modified adjusted gross income

(MAGI) exceeds the applicable dollar amount for the taxpayer’s filing status. (See Determining Taxpayer’s Modified Adjusted Gross Income below.)

When the part of the bond interest that normally would be tax free under the education savings bond

program is determined, the taxpayer’s MAGI is compared to the applicable dollar amount for the tax year to calculate the amount of the potentially tax-free interest that is excludible by the taxpayer. If a taxpayer whose filing status is married filing jointly has a MAGI that exceeds the applicable dollar amount by $30,000 or more, no interest may be excluded under the program. Similarly, if a taxpayer

whose filing status is single, qualifying widow(er) or head of household has a MAGI that exceeds the applicable dollar amount by $15,000 or more, no interest is excludible under the program.

The applicable dollar amounts with which taxpayers’ MAGI are compared are as follows:

Taxpayer’s Filing Status

2021 Applicable Dollar Amount

Phase-Out Income Range

Completely Phased-Out

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Single, qualifying widow(er) or

Head of Household (HH)

$83,200 $83,200 - $98,200 $98,200

Married filing jointly

$124,800 $124,800 - $154,800 $154,800

The amount of excludible savings bond interest to which a taxpayer whose MAGI is in the phase-out income range is entitled, if any, can be determined using the following equation that calculates the part of the interest that is includible:

(MAGI – Applicable dollar amount) $30,000 ($15,000 single or HH)

X Maximum tax-free interest = Includible interest

The amount determined under the equation is then subtracted from the maximum tax-free interest

amount to figure the amount of excludible savings bond interest.

When figuring the excludible interest amount, use IRS Form 8815, a replicated sample of which is shown in Appendix A. The excludible interest amount should be shown on Form 1040.

Determining Taxpayer’s Modified Adjusted Gross Income

For most taxpayers, modified adjusted gross income (MAGI), is the taxpayer’s adjusted gross income (AGI) without taking the interest exclusion into account. However, in some cases determining a taxpayer’s MAGI requires additional modifications to AGI.

When the taxpayer files IRS Form 1040, the taxpayer’s MAGI is his or her AGI (without taking the savings bond interest exclusion into account) and is further modified by adding back any of the following that apply:

• Foreign earned income exclusion;

• American Samoa residents’ income exclusion;

• Excluded employer adoption assistance

benefits; and

• Student loan interest deduction;

• Puerto Rico residents’ income exclusion;

• Domestic production activities deduction.

• Foreign housing deduction; • Foreign housing exclusion;

Qualified Long-Term Care Insurance Premiums and Benefits

In 1996, Congress passed the Health Insurance Portability and Accountability Act (HIPAA). The law

clarified the tax treatment of long-term care insurance policies by defining “qualified long-term care insurance.” In addition, it provided for the tax-deductibility of qualified long-term care insurance premiums and the tax-exemption of long-term care insurance benefits within certain limits for individuals deemed to be chronically-ill.

Those limits generally change yearly.

Favorable Benefits Tax Treatment Reserved for Chronically-Ill

In order for long term care benefits to receive favorable tax treatment, the individual on whose behalf they are paid must meet the “chronically-ill” definition included in HIPAA. A chronically-ill individual is defined as an insured individual who has been certified by a licensed health care practitioner within the previous 12 months as an individual who:

• Is unable, for at least 90 days, to perform at least two activities of daily living (ADLs) without substantial assistance from another individual, due to loss of functional capacity; or

• Requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

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Tax-Qualified Long Term Care Premiums Deductible within Limits

Premiums paid for tax-qualified long term care insurance may be deductible. Tax-qualified long term care insurance policy premiums are included in the definition of “medical care” and are, therefore, eligible for income tax deduction within certain limits.

For individuals who itemize deductions, the amounts paid for medical care—a category of expenses that includes tax-qualified long term care insurance premiums not exceeding the dollar limitations discussed below—are deductible. Medical expenses were scheduled to be tax-deductible only to the extent the taxpayer’s medical expenses for the year exceeds 10% of the taxpayer’s adjusted gross income. However, the 7.5% floor for unreimbursed medical expenses has been reinstated for taxable years beginning before January 1, 2021.

Self-employed persons1 may also deduct such premiums not in excess of the dollar limitations (noted

in the chart below) without the need for medical care expenses to exceed the applicable AGI threshold. In short, tax-qualified long term care insurance policy premiums are 100% tax-deductible for self-employed taxpayers to the extent they don’t exceed the dollar limits or the self-employed

individual’s net earnings.

The amount of any long term care insurance premium that may be included in medical care expenses is limited by certain dollar maximums that are indexed for inflation and which change as the insured’s

attained age changes. The dollar limitations applicable to tax-qualified long term care premiums in 2019 and 2020 are as follows:

Attained Age Before

Close of Tax Year

2020 Limitation on Premium*

2021 Limitation on Premium*

40 or younger $430 $450

41 to 50 $810 $850

51 to 60 $1,630 $1,690

61 to 70 $4,340 $4,520

Older than 70 $5,430 $5,640

* Indexed for inflation

Tax-Qualified Long Term Care Insurance Benefits Tax-Free within Limits

Just as the treatment of a tax-qualified long term care insurance policy as an accident & health insurance contract results in the tax-deductibility of premiums within certain limits, having such status also affects the tax treatment of benefits paid under it. Benefits, other than dividends or premium

refunds, received under a tax-qualified long term care insurance policy are treated as reimbursements for expenses incurred for medical care and are generally not included in the recipient’s income. Also similar to the tax treatment of premiums, the benefits from a tax-qualified long term care insurance policy that may avoid inclusion in the recipient’s income are limited by certain maximums.

Benefits received under tax-qualified long term care insurance policies that may be excluded from income are those benefits not exceeding the greater of:

• The applicable per diem limitation for the year; or • The costs incurred for qualified long term care services provided for the insured.

The applicable per diem limitation for 2021 is $400. The per diem limitation amount is adjusted each year, as needed, to reflect inflation. (Note: Periodic payments under a life insurance contract received on behalf of a chronically-ill insured are likewise tax-exempt, subject to the limits applicable to qualified long-term care insurance benefits.)

1 A self-employed individual, for purposes of long term care insurance premium tax-deductibility, includes sole proprietors, partners, and owners of S corporations, limited liability partnerships and limited liability companies.

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Social Security Taxable Earnings Limit

Social Security taxes are comprised of two components: OASDI (old age, survivors and disability income) and HI (health insurance) taxes. OASDI is a tax imposed on a worker’s wages up to the applicable Social Security taxable earnings limit. That limit is $142,800 in 2021 and generally

increases annually. The employee tax rate for the OASDI part of Social Security is 6.2%.

HI, the second component of Social Security taxes, is a tax of 1.45% imposed on all taxpayer wages—no earnings limit applies, in other words—to fund Medicare Part A.

Maximum Capital Gain/Dividend Tax Rate Increased for High-Income Taxpayers

• High-income taxpayers are subject to higher capital gain and qualified dividend tax rates. For tax years beginning in 2021, the long-term capital gain and qualified dividend tax rate is as follows:

• The 0% rate applies to – o Single filers and married filers filing separately with income up to $40,400,

o Head of household filers with income up to $54,100, o Joint filers with income up to $80,800,

o Trusts and estates with income up to $2,700; • The 15% rate applies to –

o Single filers with income between $40,400 and $445,800, o Married filers filing separately with income between $40,400 and $250,800, o Head of household filers with income between $54,100 and $473,750, o Joint filers with income between $80,800 and $501,600, o Trusts and estates with income between $2,700 and $13,250; and

• The 20% rate applies to – o Single filers with income exceeding $445,800, o Married filers filing separately with income exceeding $250,800, o Head of household filers with income exceeding $473,750, o Joint filers with income exceeding $501,600, o Trusts and estates with income exceeding $13,250.

Estate and Gift Tax Exemption

Every taxpayer is entitled to gift or bequeath assets during lifetime or at death tax free insofar as such assets do not exceed a basic exclusion amount. The gift and estate tax exemption is increased to $11.70 million in 2021. The resulting unified credit for decedents dying in 2021 is $4,625,800.

Section 199A Threshold Amount

The TCJA impacts many taxpayers; among those for whom it has a more significant effect, however, are owners of businesses organized as pass-through entities, i.e. as sole proprietorships, partnerships (including certain LLCs) and S corporations. Such entities may qualify for a special tax deduction, generally referred to as the Section 199A pass-through deduction, which enables eligible taxpayers to

deduct up to 20% of their qualified business income (QBI).

In general, the pass-through deduction under section 199A is available as follows:

• All pass-through business owners whose personal taxable income does not exceed a threshold amount are eligible for the deduction;

• Pass-through business owners of certain types of business known as “specified service trades or businesses (SSTBs)” whose personal taxable income is greater than the threshold amount but less than the sum of the threshold amount and $50,000 or $100,000, based on their filing

status, are eligible for a reduced deduction; and • Pass-through business owners of non-SSTBs, irrespective of their personal taxable income, are

eligible for the deduction.

The applicable threshold amounts are adjusted annually for inflation and, for 2021, are as shown in the chart below:

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Taxpayer’s Filing Status 2021 Threshold Amount Phase-In Range

Married filing jointly $329,800 $100,000

Married filing separately $164,925 $50,000

Single & head of household filers $164,900 $50,000

Thumbnail Summary of 2021 Changes

Subject 2021 Change

Standard mileage rates Charity - 14¢

Medical & moving – 16¢

Business – 56¢

Standard deduction Married filing jointly & qualifying widow(er)s - $25,100

Married filing separately & single - $12,550

Head of household - $18,800

Additional standard deduction for blind or elderly:

Married - $1,350

Head of household and single - $1,700

Alternative minimum tax Single and head of household - $73,600 exemption; 25% phaseout beginning at $523,600 taxable income

Married filing jointly and qualifying widow(er) - $114,600 exemption; 25% phaseout beginning at $1,047,200 taxable income

Married filing separately - $57,300 exemption; 25% phaseout beginning at $523,600 taxable income

Estates and trusts - $25,700 exemption; 25% phaseout beginning at $85,650 taxable income

Education savings bond interest

exclusion

Single, head of household and qualifying widow(er) – MAGI of

$83,200, phased-out to $98,200

Married filing jointly - $124,800, phased-out to $154,800

Qualified LTCi premiums & benefits

Limit on premium deduction

Per diem limit on benefit exclusion

Age of taxpayer:

40 or younger - $450

41 to 50 - $850

51 to 60 - $1,690

61 to 70 - $4,520

71 or older - $5,640

$400

Social Security taxable earnings limit

$142,800

Medical expense deduction threshold

7.5% of AGI

Estate and gift tax exclusion Increased to $11.70 million

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Taxable income threshold amount applicable to section 199A pass-through deduction

Increased to:

• $329,800 for taxpayers with MFJ filing status

• $164,925 for taxpayers with MFS filing status

$164,900 for taxpayers with all other filing statuses

Chapter Review

1. Philip uses his personal vehicle for charitable purposes. If he drove 1,400 miles, spent $50 on gas

and oil, $40 on parking fees, $60 on tolls and elected to use the standard mileage deduction, how much of the expenses would be tax-deductible?

A. $0

B. $196

C. $296

D. $346

2. Karl received qualified long term care insurance benefits in 2021 of $420 per day. How much of

such daily benefits must he include in income, if any, assuming his actual long term care costs were $330 per day and the applicable per diem limitation is $400?

A. $0

B. $20

C. $70

D. $90

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Chapter 2 – Tax Credit Changes

Introduction

Although the U.S. Tax Code serves as the legal authority facilitating the nation’s funding, it is also an

instrument through which the government attempts to bring about social change by encouraging certain types of behavior and discouraging other types. Many of the behaviors the federal government wishes to promote are encouraged through the use of tax credits. Principal among the tax credits providing such encouragement are the retirement savings contribution credit—often referred to as the “saver’s credit”—and the child adoption credit. Other tax credits—the earned income credit, for example—are designed to provide additional funds to working taxpayers whose income is below certain levels. The limits affecting these and other credits may change from one year to the next.

This chapter will briefly discuss the principal tax credit changes for 2021.

Chapter Learning Objectives

Upon completion of this chapter, you should be able to:

• Calculate the retirement savings contribution credit available to eligible taxpayers;

• Recognize the rules and income limits applicable to eligibility for the earned income credit; • Identify the tax credit rules revised under the American Rescue Plan Act, including the –

o Child tax credit; o Child and dependent care tax credit; and

• Apply the adoption credit rules.

Retirement Savings Contribution Credit

Traditional defined benefit pension plans in which employers provided virtually all the funding of

employees’ retirement income were among the most popular qualified plans sponsored by employers until the decade of the 1980s. Beginning in the early 1980s—a period characterized by abnormally high interest rates and rampant employer downsizing in an effort to bolster bottom lines—many employers terminated existing defined benefit pension plans under which they had enormous liability

and began sponsoring the then-new 401(k) plans. These 401(k) plans shift the principal burden of providing employee retirement income from the employer to the employee. Studies have indicated that the level of employee participation in and contribution to these plans has generally been insufficient to enable the individual to maintain his or her lifestyle in retirement.

Since 401(k) plans were introduced, the tax code has been changed to provide an additional incentive for lower-income taxpayers to provide for their own retirement. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) brought about the incentive by offering a tax credit—referred to

as the Retirement Savings Contribution Credit or “saver’s credit”—to make a retirement plan contribution.

The retirement savings contribution tax credit is a nonrefundable credit that is limited to the applicable

percentage of the taxpayer’s eligible retirement savings contributions; the credit cannot exceed $1,000 per taxpayer. A nonrefundable tax credit is a tax credit that is limited by the individual’s tax liability and acts to reduce the amount of federal income tax payable. If a taxpayer has no income tax

liability, or has an income tax liability that is less than the tax credit, a nonrefundable tax credit will not result in a payment of any amount in excess of the taxpayer’s tax liability from the federal government.

The retirement savings contribution tax credit, if any, for which a taxpayer is eligible does not affect the tax treatment to which the contribution would normally be subject. For example, if a taxpayer’s contribution to a traditional individual retirement account made him or her eligible for the credit, the taxpayer would still normally be able to take a tax deduction for the IRA contribution. In other words,

retirement savings contributions made by individuals who are otherwise eligible for the tax credit receive the credit in addition to enjoying any other tax advantages for which they are eligible.

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Saver’s Credit Applicable to Range of Retirement Contributions

The retirement savings contribution credit is available to taxpayers who make a wide range of retirement plan contributions. The retirement plan contributions eligible for the credit are contributions to traditional and Roth individual retirement arrangements (IRAs) and elective deferrals to:

• 401(k) plans; • 403(b) tax sheltered annuity plans; • Section 457 governmental plans; • SIMPLE IRAs; and • Salary reduction SEPs (SARSEPs).

In addition, the SECURE Act amends the term “compensation,” for purposes of the retirement savings tax deduction to include any amount included in the taxpayer’s gross income and paid to the taxpayer

in the pursuit of graduate or postdoctoral studies. The SECURE Act addition is effective for years after December 31, 2019. Thus, a contribution to an IRA based on that compensation could enable the recipient, if otherwise eligible, to qualify for a saver’s credit. Despite the number of plans to which the

taxpayer makes contributions and the amount of those contributions, the total saver’s credit will not exceed $1,000 per taxpayer for the year.

Saver’s Credit Eligibility Based on Income and Filing Status

The percentage of the retirement savings contribution (not exceeding $2,000) available to the taxpayer as a tax credit, up to the $1,000 maximum tax credit, depends upon the individual’s adjusted gross income and income tax filing status. The applicable percentages for 2021 retirement contributions are as shown below:

Saver’s Credit Adjusted Gross Income Limits (2021)2

Joint Return Head of Household Return All Other Statuses

Applicable Credit

Over Not over Over Not over Over Not over

Percentage

$0 $39,500 $0 $29,625 $0 $19,750 50%

$39,500 $43,000 $29,625 $32,250 $19,750 $21,500 20%

$43,000 $66,000 $32,250 $49,500 $21,500 $33,000 10%

$66,000 $49,500 $33,000 0%

Since the maximum tax credit percentage is 50% and the maximum contribution eligible for the tax credit is $2,000, the maximum retirement savings contribution tax credit that may be taken for 2021

is $1,000 per taxpayer. For example, suppose Bill and Trudy Smith file a joint federal income tax return and have an adjusted gross income of $39,500. If Bill and Trudy each make a $2,000 eligible retirement savings contribution—to an IRA, a 401(k), 403(b), or other eligible plan—they would receive a total tax credit of $2,000, i.e. $1,000 for each of them. ($4,000 x 50% = $2,000) If their adjusted gross income was $39,501, however, their total tax credit would be reduced to $800 because the applicable percentage falls to 20%. ($4,000 x 20% = $800)

When taking the credit, a taxpayer must subtract the amount of any distributions received from his or

her retirement plans from the contributions made. The distributions that must be subtracted for purposes of determining the saver’s credit are those received:

• During the two years before the year the credit is claimed; • In the year the credit is claimed; and • The period after the end of the credit year but before the due date (including any extensions)

for filing the return for the credit year.

2 Note that the adjusted gross income limits may change from year to year.

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The saver’s credit is not available to a taxpayer who a) is single, married filing separately or a

qualifying widow(er) with a 2021 income of more than $33,000, b) is a head of household with a 2021 income of more than $49,500, or c) files a return as married filing jointly with a 2021 income of more than $66,000.

Earned Income Credit

The earned income credit (EIC) is a tax credit for certain low-income working taxpayers who meet income, filing status and other requirements. Eligibility to claim the credit requires, among other things, that the taxpayer have an earned income; the taxpayer must also have an adjusted gross

income (AGI) below a specific level. The applicable AGI level generally changes annually. Unlike the saver’s credit, EIC is a refundable credit and, accordingly, it is available to eligible individuals regardless of whether or not they have a federal income tax liability.

In order to receive EIC, the taxpayer must meet certain rules. The EIC rules fall into three categories:

• Rules that apply to everyone;

• Rules that apply if the taxpayer has a qualifying child; and • Rules that apply if the taxpayer does not have a qualifying child.

EIC Rules Applicable to Everyone

Determining whether a taxpayer qualifies for EIC begins with the seven rules that apply to everyone. If the taxpayer meets all of the seven rules that apply to everyone, the taxpayer must then meet the additional rules that apply a) if the taxpayer has a qualifying child, or b) if the taxpayer does not have a qualifying child.

The rules for everyone relate to:

• Adjusted gross income (AGI) limits;

• Social Security number; • Tax filing status; • Citizenship or residency; • Foreign earned income;

• Investment income; and • Earned income.

If the taxpayer does not meet all seven of the rules applicable to everyone, the taxpayer cannot receive the earned income credit, regardless of whether or not the taxpayer has a qualifying child.

Adjusted Gross Income Limits

To meet the rule concerning adjusted gross income limits, a taxpayer must have an AGI that is less than the maximum amount for his or her filing status and number of qualifying children. The applicable AGI limits generally change each year and, for 2021, are as shown in the following chart:

2021 EIC ADJUSTED GROSS INCOME LIMITS

Children Married Filing Jointly Other Than Married Filing Jointly*

3 or more qualifying children $57,414 $51,464

2 qualifying children $53,865 $47,915

1 qualifying child $48,108 $42,158

No qualifying children $21,920 $15,980

*Taxpayer’s filing status cannot be married filing separate.

Valid Social Security Number Required

In order to claim the EIC, the taxpayer—and spouse, if filing a joint return—must have a valid social security number issued by the Social Security Administration. In addition, if a qualifying child is listed on Schedule EIC the child must also have a valid social security number. A social security card stating “Not valid for employment” is not sufficient for purposes of the EIC.

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Tax Filing Status

A married taxpayer cannot qualify for the EIC if he or she has a “married filing separate” filing status. If the taxpayer is married, he or she must normally file a joint return to claim the EIC. (An exception may apply if the taxpayer’s spouse did not live with the taxpayer during the last 6 months of the year.

In such a case, the taxpayer may be able to file as head of household and claim the EIC.)

Separated Spouses

Internal Revenue Code § 32(d) requires that otherwise eligible married individuals file a joint tax return in order to claim the earned income tax credit. ARPA, § 9623, effectively eliminates this requirement for a separated spouse by a special rule, effective for taxable years beginning after December 31, 2020, providing that the individual will not be treated as married, for purposes of the credit, if he or she meets the following requirements:

• The individual is married and does not file a joint tax return for the year;

• The individual resides with a qualifying child for more than one half of the taxable year; and

• Either of the following is true –

o during the last six months of the taxable year, the individual does not have the same

principal place of abode as the individual’s spouse, or

o the individual has a separation agreement with respect to the individual’s spouse and

is not a member of the same household by the end of the taxable year.

Citizenship or Residency

If the taxpayer (or spouse, if married) was a nonresident alien for any part of the tax year, the taxpayer cannot claim the EIC unless the taxpayer’s filing status is married filing jointly. (Such filing status is available only if one spouse is a U.S. citizen or resident alien and chooses to treat the nonresident spouse as a U.S. resident.) If the taxpayer or spouse was a nonresident alien for any part

of the year and the taxpayer’s filing status is other than married filing jointly, the EIC is not available.

Note: Making the election to treat the nonresident spouse as a U.S. resident will cause the worldwide income of both spouses to be subject to U.S. taxation.

Foreign Earned Income

A taxpayer is ineligible for the EIC if he or she files Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. These forms are used to exclude income earned in foreign countries from the taxpayer’s gross income or to exclude a foreign housing amount.

Investment Income

Internal Revenue Code § 32(i) denies the earned income tax credit to those taxpayers having excessive investment income. For 2021, prior to the passage of ARPA, “excessive investment income” was investment income in excess of $3,650 ($2,200, increased by inflation after 2015). ARPA modifies

§ 32(i) and provides that, for 2021, excessive investment income is that income in excess of $10,000, subject to inflation adjustment for years beginning after 2021.

Earned Income

A taxpayer eligible for the EIC must work and have earned income. The requirements of the earned

income rule are met if the taxpayer is married, files a joint return and at least one spouse works and has earned income. Eligibility for the EIC does not require that both spouses be employed.

Earned income includes:

• Wages, salaries, tips and other taxable employee pay; • Net earnings from self-employment; and • Gross income received by the taxpayer as a statutory employee.

Although earned income generally excludes non-taxable pay, a taxpayer can elect to include non-taxable combat pay in earned income for purposes of the EIC.

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Temporary Special Rule for Determining Earned Income

ARPA, § 9626, provides a special rule for determining a taxpayer’s earned income for purposes of the earned income tax credit. Specifically, if the taxpayer’s earned income for 2021 is less than his or her earned income in 2019, the earned income tax credit may be determined based on the income

providing the higher credit.

EIC Rules That Apply if Taxpayer Has a Qualifying Child

In addition to meeting the EIC rules that apply to everyone, a taxpayer who has a qualifying child must meet certain other rules in order to qualify for the EIC. The rules applicable to a taxpayer with a qualifying child are:

• The relationship, age, residence and joint return tests; • The qualifying child of more than one person rule; and

• The qualifying child of another taxpayer rule.

Relationship, Age, Residence and Joint Return Tests

A taxpayer’s child is a qualifying child for purposes of the EIC if the child meets four tests:

• The relationship test; • The age test; • The residency test; and

• The joint return test.

All four tests must be met.

Qualifying Child of More than One Person Rule

In some cases, a child may meet the tests to be a qualifying child of more than one person. However, even if a child meets the tests to be a qualifying child of more than one person, only one person is permitted to treat the child as a qualifying child. Only that person is permitted to use the child as a qualifying child to take all the following tax benefits, assuming the taxpayer is eligible for each benefit:

• The child tax credit;

• Head of household filing status; • The credit for child and dependent care expenses; • The exclusion for dependent care benefits; and • The EIC.

The other person cannot take any of these benefits based on the same qualifying child. Accordingly, the taxpayer and the other person cannot divide these tax benefits between themselves based on the

same child. In the event the taxpayer and another person meet the qualifying child tests, the tiebreaker rules are used to determine which person can treat the child as a qualifying child.

However, the IRS has recently changed its position so that even if a taxpayer is not permitted to claim an individual as a qualifying child after application of the tiebreaker rules, the taxpayer may still be able to claim the EITC without a qualifying child for all open tax years if all other requirements are met. In such a case, the taxpayer not claiming the EITC with the qualifying child may become an

eligible individual for claiming the EITC without a qualifying child if the taxpayer otherwise qualifies and meets all the following rules:

• A resident of the United States for more than half of the year, • Cannot be claimed as a dependent or qualifying child on anyone else’s return, and • Be at least 25 but under 65 years old at the end of the tax year.

Taxpayer as the Qualifying Child of Another Taxpayer Rule

A taxpayer cannot claim the EIC if he or she is a qualifying child of another taxpayer. A taxpayer is

considered a qualifying child of another person only if all of the following are true:

• The taxpayer is the other taxpayer’s son, daughter, stepchild, grandchild, or foster child; • The taxpayer is the brother, sister, half-brother, half-sister, stepbrother, or stepsister (or a

child or grandchild of the brother, sister, half-brother, etc.) of the other taxpayer; • The taxpayer was –

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o Under age 19 at the end of the tax year and younger than the other taxpayer (or

spouse, if the other taxpayer files jointly), o Under age 24 at the end of the tax year, a student, and younger than the other

taxpayer (or spouse, if the other taxpayer files jointly), or

o Permanently and totally disabled, regardless of age; • The taxpayer lived with the other taxpayer in the United States for more than half of the year;

and • The taxpayer is not filing a joint return for the year (or is filing a joint return only as a claim

for an income tax refund).

EIC Rules That Apply if Taxpayer Does Not Have a Qualifying Child

A taxpayer may claim the EIC without a qualifying child, provided the taxpayer meets all the rules that

apply to everyone and all the following rules that apply to taxpayers without qualifying children. The EIC rules applicable to a taxpayer with no qualifying children are:

• The age rule;

• The dependent of another person rule; • The qualifying child of another taxpayer rule; and • The main home rule.

The Age Rule

A taxpayer claiming the EIC must be at least age 25 but less than age 65 at the end of the tax year. If the taxpayer is married filing a joint return, either the taxpayer or spouse must be at least age 25 but under age 65 at the end of the year. Either spouse may meet the age test as long as one of the spouses does. A surviving spouse filing a joint return with a deceased spouse who died during the tax year meets the age test if the deceased spouse was at least age 25 but under age 65 at the time of death.

Taxpayers with no Qualifying Children

ARPA, § 9621, provides special rules, applicable only in 2021, designed to strengthen the tax credit for individuals with no qualifying children. The special rules provide for the following:

• A decrease in the minimum age at which a taxpayer is eligible for the credit to –

o age 19,

o age 24 in the case of a specified student, i.e., an individual who is an eligible student

during at least five calendar months in the taxable year,

o age 18 in the case of a qualified former foster youth3 or homeless youth;4

• Elimination of the maximum age for the credit; and

• An increase in the maximum earned income tax credit available to individuals with no

qualifying children from $543 to $1,502.

The Dependent of Another Person Rule

A taxpayer claiming the EIC cannot be the dependent of another person, regardless of whether or not the other person actually claimed the taxpayer as a dependent. Thus, if someone else can claim the taxpayer (or the taxpayer's spouse, if filing a joint return) as a dependent, the taxpayer cannot claim the EIC.

The Qualifying Child of Another Taxpayer Rule

A taxpayer claiming the EIC cannot be a qualifying child of another taxpayer. As noted earlier, a taxpayer is a qualifying child of another person if all of the following are true:

• The taxpayer is the other person’s son, daughter, stepchild, grandchild, or foster child;

3 a “qualified former foster youth” is defined as an individual who, on or after age 14, was in foster care and who provides consent for disclosure of that status. 4 a "qualified homeless youth" is defined as an individual who certifies as either an unaccompanied youth who is a homeless child or youth, or is unaccompanied, at risk of homelessness, and self-supporting.

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• The taxpayer is the brother, sister, half-brother, half-sister, stepbrother, or stepsister (or a

child or grandchild of the brother, sister, half-brother, etc.) of the other person; • The taxpayer was –

o Under age 19 at the end of the tax year and younger than the other person (or

spouse, if the other person files jointly), o Under age 24 at the end of the tax year, a student, and younger than the other person

(or spouse, if the other person files jointly), or o Permanently and totally disabled, regardless of age;

• The taxpayer lived with the other person in the United States for more than half of the year; and

• The taxpayer is not filing a joint return for the year (or is filing a joint return only as a claim

for an income tax refund).

The Main Home Rule

Under the main home rule, a taxpayer claiming the EIC must have lived in the United States more than half the year. A taxpayer will meet this rule if he or she lived in the 50 states or the District of

Columbia for more than half the year. It does not include Puerto Rico or U.S. possessions. The rule does not require that a taxpayer reside in a traditional home; instead, a taxpayer who lived in one or

more homeless shelters in the United States for more than half the year will meet the rule.

U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for purposes of the EIC.

Figuring the Amount of the Earned Income Credit

If the taxpayer meets all of the rules applicable to his or her claiming EIC, the next step is figuring the amount of EIC. Determining the earned income credit is done on either EIC Worksheet A or EIC Worksheet B, as discussed below:

• EIC Worksheet A is used if the taxpayer was not self-employed at any time during the tax year and was not a member of the clergy, a church employee who files Schedule SE, or a statutory employee filing schedule C or C-EZ.

• EIC Worksheet B is used if the taxpayer was self-employed at any time during the year or

was a member of the clergy, a church employee who files schedule SE or a statutory employee filing schedule C or C–EZ.

Child Tax Credit

The child tax credit, before passage of ARPA, was limited to no more than $2,000 for each child who qualified, i.e., a child who, in addition to meeting other requirements, was under the age of 17 by the end of the year. If the child met the requirements—and the taxpayer’s modified adjusted gross income (MAGI) did not exceed specified amounts—the taxpayer could claim the tax credit in an amount not

exceeding his or her federal income tax liability. The passage of ARPA, specifically § 9611, made several changes to the child tax credit applicable to 2021:

1. The credit is increased to $3,000 per qualifying child age 6 or older ($3,600 per qualifying

child who has not attained age 6) for taxpayers whose MAGI does not exceed the applicable

threshold amount;

2. A qualifying child is one who, in addition to meeting other existing requirements, is under the

age of 18 by the end of the year;

3. The child tax credit will no longer require that the taxpayer have any federal income tax

liability in order to receive it, i.e., the child tax credit is refundable; and

4. The credit may be paid monthly in advance5 and reconciled when filing the tax return.

5 The IRS will create an Internet portal to enable taxpayers to opt out of the monthly

periodic payment regime.

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Child Tax Credit Increase Subject to Separate Phase-Out

The increased child tax credit amount begins phasing out at higher incomes. Thus, the increased portion of the aggregate credit is reduced by $50 for each $1,000 (or fraction) of MAGI in excess of the following amounts:

• $150,000 for married taxpayers filing jointly;

• $112,500 for taxpayers filing as head of household; and

• $75,000 for other taxpayers.

Reduction Limitation

The child tax credit for 2021 may be estimated, based on the taxpayer’s most recent tax return—2019 tax return if 2020 tax return was not yet filed—and 1/12th of the annual credit paid each month beginning in July 2021 and ending in December 2021. Although the periodic payments made between July and December are such that the total amount advanced will not normally exceed 50% of the child tax credit, if the credit is paid in advance, the possibility exists that some or all of the child tax credit

may need to be repaid when the advanced credit is reconciled at the time the 2021 tax return is filed.

In such a case, the amount of the tax credit reduction based on the taxpayer’s MAGI will not generally

exceed the lesser of:

a. The applicable credit increase amount, or

b. 5% of the applicable phaseout threshold range.

Child and Dependent Care Tax Credit

Internal Revenue Code § 21 offers assistance to taxpayers responsible for child and dependent care who are, or are seeking to become, gainfully employed. Under the Code prior to the passage of ARPA, taxpayers may qualify for a nonrefundable tax credit of up to 35 percent of their qualifying employment-related expenses6 not exceeding a specified limit. The limit on qualifying expenses is generally $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents.

ARPA, § 9631, makes various changes to the child and dependent care tax credit that are effective

only for 2021. These changes include:

• Making the credit refundable; • Increasing the percentage from 35% to 50% of eligible expenses; • Increasing the maximum credit to –

o $4,000 for one qualifying individual, and o $8,000 for two or more qualifying individuals;

• Changing the threshold income at which credit reduction begins from $15,000 to $125,000; and

• Changing the maximum possible credit reduction to less than 20% for household incomes exceeding $400,000.

Adoption Credit/Exclusion

The adoption credit is a nonrefundable tax credit designed to offset qualified adoption expenses for eligible taxpayers adopting an eligible child or children. The adoption assistance program enables a taxpayer to exclude from income amounts a) paid by the taxpayer to adopt an eligible child or b) paid

6 In general, employment-related expenses incurred by a taxpayer with a qualifying

dependent are those that enable the taxpayer to engage in gainful employment and include

expenses for:

• household services, and

• care of a qualifying individual.

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for the taxpayer by an employer to offset qualified adoption expenses under a qualified adoption

assistance program.

The American Taxpayer Relief Act, legislation enacted on January 2, 2014, permanently extended the adoption credit and adoption assistance programs for tax years beginning after December 31, 2012.

Both the adoption credit and exclusion from income are subject to phase out and elimination at higher incomes.

Let’s briefly consider the rules associated with the adoption credit and income exclusion for employer-provided adoption benefits.

Eligible Child

An eligible adopted child, for whose adoption expenses an adoption credit or exclusion could apply, may be a) a U.S. citizen or resident, or b) a foreign child. However, the rules concerning the benefit

vary somewhat depending upon the citizenship status of the adopted child and whether the child has special needs.

A child whose qualified adoption expenses may give rise to the adoption credit or exclusion is a child who is:

• Under age 18 (if the child turned age 18 during the year, the child is an eligible child for the part of the year he or she was under age 18); or

• A disabled individual physically or mentally unable to care for himself or herself, regardless of age; such a child is generally referred to in connection with the adoption credit and exclusion as a “special needs” child.

Qualified Adoption Expenses

Qualified adoption expenses are those expenses that are reasonable and necessary and which are related to, and for the principal purpose of, a legal adoption of an eligible child. Such expenses include:

• Adoption fees; • Attorney fees;

• Court costs; • Travel expenses, including meals and lodging, while away from home; and • Re-adoption expenses relating to the adoption of a foreign child.

Expenses that are not considered qualified adoption expenses for purposes of the adoption credit or exclusion include expenses:

• For which the taxpayer received funds under a state, local, or federal program; • That violate state or federal law; • For carrying out a surrogate parenting arrangement; • Paid or reimbursed by the taxpayer’s employer or any other person or organization; or • Allowed as a credit or deduction under any other provision of federal income tax law.

The Benefit

A taxpayer may be able to take the adoption credit or exclusion if the following criteria are met:

1. The taxpayer’s filing status is single, head of household, qualifying widow(er), or married filing

jointly. In most cases, a married taxpayer must file a joint return in order to take the credit or exclusion;

2. The taxpayer’s modified adjusted gross income (MAGI) is less than the applicable limit for the year; and

3. The taxpayer reports the required information concerning the eligible child in part I of IRS

Form 8839.

Timing of the Credit/Exclusion

The year in which the taxpayer can take the adoption credit or exclusion depends upon whether the eligible child is a citizen or resident of the United States at the time the adoption effort began. If the eligible child is a U.S. citizen or resident—an adoption referred to as a “domestic adoption”—the taxpayer can take the adoption credit or exclusion even if the adoption never became final.

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The year in which a taxpayer may take the credit or exclusion in connection with a domestic adoption

is as shown in the following table:

Domestic Adoptions

Qualifying Expenses Paid by Taxpayer in… Credit Taken in…

Any year before the year the adoption becomes final

The year after the year of the payment

The year the adoption becomes final The year the adoption becomes final

Any year after the year the adoption becomes final

The year of the payment

Qualifying expenses paid by an employer under an adoption assistance program in…

Exclusion Taken in…

Any year The year of the payment

A taxpayer who adopts a U.S. child with special needs may be able to exclude up to the maximum amount and take a credit for additional expenses up to the maximum amount. The exclusion may be available even if neither the taxpayer nor the taxpayer’s employer paid any qualified adoption expenses.

The year in which a taxpayer may take the credit or exclusion in connection with a foreign adoption is similarly shown in the chart below (foreign adoption rules that vary from domestic adoption rules are highlighted):

Foreign Adoptions

Qualifying Expenses Paid by Taxpayer in… Credit Taken in…

Any year before the year the adoption becomes final

The year the adoption becomes final

The year the adoption becomes final The year the adoption becomes final

Any year after the year the adoption becomes

final

The year of the payment

Qualifying expenses paid by an employer under an adoption assistance program in…

Exclusion Taken in…

Any year before the year the adoption becomes

final

The year the adoption becomes final

The year the adoption becomes final The year the adoption becomes final

Any year after the year the adoption becomes final

The year of the payment

Unlike the rules applicable to domestic adoptions that permit a taxpayer to take the adoption credit or exclusion even if the adoption never became final, an adoption credit or exclusion for a foreign adoption is available to a taxpayer only if the adoption becomes final.

Benefit Phased-Out at Higher Taxpayer MAGI

In 2021, the maximum adoption credit is $14,440 per child. Similarly, the maximum amount of employer-provided adoption assistance that a taxpayer may exclude from gross income in 2021 is

$14,440 per child. The amount of the adoption credit or excludable assistance, however, is phased out for taxpayers whose 2021 modified adjusted gross income (MAGI) exceeds $216,660 (the “applicable amount”) and is eliminated for taxpayers whose MAGI is $256,660 or more.

The reduction in the maximum adoption credit or exclusion for taxpayers whose MAGI exceeds the applicable amount may be determined by using the following equation:

Maximum adoption credit/excludable

amount

x MAGI – Applicable amount

$40,000 =

Reduction in maximum adoption credit/excludable

amount

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Thumbnail Summary of 2021 Changes

Subject 2021 Change

Saver’s credit Available at AGI up to: Married filing jointly - $66,000 Head of household - $49,500 All other statuses - $33,000

Earned income credit

AGI limits

Married filing jointly: 3 or more children - $57,414 2 children - $53,865 1 child - $48,108 No children - $21,920

Other qualifying statuses: 3 or more children - $51,464

2 children - $47,915

1 child - $42,158 No children - $15,980

Adoption credit/excluded assistance Maximum amount

Phase-out MAGI range

$14,440/child

$216,660 to $256,660

Chapter Review

1. Hank is single and has a $30,000 adjusted gross income in 2021. What would his saver’s credit be if he deferred $1,000 in his employer’s 401(k) plan and received a $500 employer match?

A. $100

B. $150

C. $200

D. $500

2. Sally made a $4,000 traditional IRA contribution in 2021 and received a $1,000 saver’s credit. If she would be eligible to deduct the contribution in the absence of a saver’s credit, how much of

her contribution may she deduct?

A. $0

B. $2,000

C. $3,000

D. $4,000

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Chapter 3 – PPACA-Related Tax

Changes

Introduction

In addition to its various healthcare-related provisions, the PPACA also brought about several changes that affect the tax liability of many taxpayers. They include changes in allowable health flexible spending arrangement contributions, unreimbursed medical expense deductions and Social Security

tax rates for higher-income taxpayers. In 2021 additional changes may affect taxpayers, including a) an increase in the limit for employee contributions to an employer-sponsored health care flexible spending arrangement, b) an increase in the level of a small employer’s average annual wages at which the health care premium credit is phased out, and c) changes in the employer mandate under which large employers employing 50 or more full-time employees are required to offer affordable

health insurance coverage and make contributions toward premiums or potentially pay a penalty.

In this chapter we will briefly summarize the principal tax changes that became effective as a result of

passage of the healthcare law and will then discuss the changes effective in 2021.

Chapter Learning Objectives

Upon completion of this chapter, you should be able to identify the changes effective in 2021 related to the –

• Health flexible spending arrangement contribution limits; • Small business health care tax credit; and • Large employer shared responsibility provision.

Health Flexible Spending Arrangement Contributions

Health FSAs enable workers to contribute before-tax amounts to an account that may then be

accessed tax-free to pay various out-of-pocket health-related expenses. Although annual caps on the amount that can be contributed to a health FSA are generally imposed by employers—usually as a way to limit their risk of pre-funding—no limit was previously imposed by the federal government. That changed for years 2013 and later.

For years 2013 and 2014 a $2,500 per year limit was imposed on the amount that may be contributed to a flexible spending arrangement for medical expenses. That limit may be increased annually by a

cost of living adjustment and, for 2020 and 2021, is $2,750.

PPACA’s Individual Shared Responsibility Provision

The individual shared responsibility provision of the PPACA—sometimes referred to as the “individual mandate”—imposes a tax penalty for failure to maintain minimum essential coverage. Any tax penalty imposed under the provision—a penalty called an “individual shared responsibility payment”—for the

failure to maintain minimum essential coverage is payable when the taxpayer files his or her federal

income tax return. However, under the Tax Cuts and Jobs Act of 2017 the penalty for a failure to maintain minimum essential coverage for years after 2018 is reduced to zero.

In December 2019 a federal appeals court ruled that the Affordable Care Act’s requirement that individuals maintain health insurance coverage was unconstitutional but sent the case back to the district court to rule on which of the law’s other provisions could survive without the individual

mandate. Regardless of this ruling, however, it is expected to be a long time before anything actually changes.

Refundable Premium Tax Credit to Assist in Purchase of Qualified Health Plan

Although the tax penalty for a taxpayer’s failure to maintain health coverage has been reduced to zero, individuals who meet specified income, coverage and other criteria are eligible to receive a

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refundable tax credit to enable them to purchase a qualified health plan. Since the tax credit is a

refundable tax credit, the taxpayer may receive the credit even though he or she has no income tax liability.

Eligibility for Credit

Individuals are eligible to receive a refundable tax credit for purchase of one or more qualified health plans provided they meet all of the following criteria:

• The covered individuals are enrolled in a qualified health plan through an Affordable Insurance Exchange;

• The individual’s household income is between less than 133% and 400% of the federal poverty level;

• Covered individuals are legally present in the United States and not incarcerated;

• Covered individuals are not eligible for other qualifying coverage, such as Medicare, Medicaid, or affordable employer-sponsored coverage; and

• The individual cannot be claimed as a dependent by another person.

In order to be eligible for a premium tax credit, a taxpayer who is married at the close of the taxable year must file a joint income tax return, unless he or she meets the criteria that allow victims of domestic abuse to claim the premium tax credit for the year while using the Married Filing Separately

filing status. The applicable criteria an otherwise eligible married taxpayer filing a tax return as Married Filing Separately must meet in order to be eligible for the credit are that the taxpayer:

1. Is living apart from his or her spouse at the time the taxpayer files the tax return; 2. Is unable to file a joint return because the taxpayer is a victim of domestic abuse; and 3. Indicates on the tax return that he or she meets criteria 1 and 2 above.

Federal Poverty Level

The federal government’s poverty level is based on the amount of income received in a year relative

to annually-published poverty guidelines. The incomes in the guidelines, which are published by the federal government in January each year, generally increase annually to account for the higher prices for goods and services that result from inflation.

The federal poverty guidelines are as shown in the chart below:

HHS Poverty Guidelines

Persons in family/household

48 Contiguous States and D.C.

Alaska

Hawaii

1 $12,760 $15,950 $14,680

2 $17,240 $21,550 $19,830

3 $21,720 $27,150 $24,980

4 $26,200 $32,750 $30,130

5 $30,680 $38,350 $35,280

6 $35,160 $43,950 $40,430

7 $39,640 $49,550 $45,580

8 $44,120 $55,150 $50,730

For each additional

person add $4,480 $5,600 $5,150

Assuming the poverty guidelines for any subsequent year are as shown above (they typically would not be the same because of inflation), a taxpayer living in the contiguous 48 states, whose household is comprised of three persons and whose income is between $21,720 (see highlighted number in the chart) and $86,880, i.e. 400% of the federal poverty level, would have a household income that would make the taxpayer eligible for the credit. ($21,720 x 4 = $86,880)

Amount of the Credit

The amount of the tax credit for an eligible taxpayer is generally equal to the difference between the premium for the benchmark plan and the taxpayer’s expected contribution, a contribution that

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increases as the taxpayer’s income increases. The amount of the credit is capped at the premium for

the plan chosen. Thus, the tax credit will never be larger than the premium for the plan.

Tax Credit = Benchmark Plan Premium - Taxpayer’s Expected Contribution

Benchmark Plan

The “benchmark plan,” as the term is used in connection with the insurance premium tax credit, is the second-lowest-cost plan that would cover the family at the silver level of coverage. The PPACA defines7 such a silver level plan as one “designed to provide benefits that are actuarially equivalent to 70 percent of the full actuarial value of the benefits provided under the plan.” In other words, the plan pays at least 70 percent of covered charges.

Taxpayer’s Expected Contribution

The taxpayer’s expected contribution, as the term is used with respect to the premium tax credit, is a

specified percentage of the taxpayer’s household income. The applicable percentage of the taxpayer’s household income applicable in 2021 increases—from 2.07% of income for families at less than 133%

of the federal poverty level to 9.83% of income for families at 300% to 400% of the federal poverty level—as the taxpayer’s income increases. The amount a family actually pays for coverage will be less than the expected contribution if the family chooses a plan that is less expensive than the benchmark plan.

The income percentages, based on the taxpayer’s household income as a percentage of the federal poverty line, are as shown in the table below:

Household Income Percentage of Federal Poverty Line – 2021 Initial

Percentage Final

Percentage

Less than 133% 2.07% 2.07%

At least 133% but less than 150% 3.10% 4.14%

At least 150% but less than 200% 4.14% 6.52%

At least 200% but less than 250% 6.52% 8.33%

At least 250% but less than 300% 8.33% 9.83%

At least 300% but less than 400% 9.83% 9.83%

Calculating the Credit

The tax credit available for premium assistance for a coverage month is equal to the lesser of:

1. The premiums for the month for one or more qualified health plans in which a taxpayer or member of the taxpayer’s family enrolls; or

2. The excess of the adjusted monthly premium for the benchmark plan over 1/12th of the product of a taxpayer’s household income and the applicable percentage for the taxable year. (see Adjusted Monthly Premium below.)

Although the language of the regulations makes the calculation of the second part of the tax credit

appear complicated, the calculation is fairly simple and is more readily understood by considering an equation. Thus, in the form of an equation, the calculation of the second component of the tax credit is as follows:

Adjusted monthly premium for the benchmark plan

- Taxpayer’s household income x applicable %age

12 = Tax credit

(component 2)

7 Affordable Care Act §1302(d)(1)(B).

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We can illustrate how component 2 is determined by looking at an example. For purposes of the

example, assume the following:

The only value that we need to calculate before substituting them into the equation is the applicable percentage that is multiplied by the taxpayer’s household income.

The following steps will produce the correct applicable percentage for the equation:

1. Divide the taxpayer’s household income ($59,730) by the applicable poverty level guideline for a three-person household ($21,720); by doing so, we can see that the taxpayer’s household

income is 275% of the poverty level. ($59,730 ÷ $21,720 = 2.75 = 275%)

2. Consult the household income percentage chart (above) to determine the initial and final percentages for the taxpayer’s household income; by doing so, we see that the initial percentage for a taxpayer whose household income is between 250% and 300% of the federal poverty level is 8.33%; the final percentage is 9.83%.

3. Determine the excess of the taxpayer’s federal poverty line percentage over the initial

household income percentage in the taxpayer’s range; that amount is 25. (275% - 250% = 25)

4. Determine the difference between the initial household income percentage and the final household income percentage in the taxpayer’s range, which is 50. (300% - 250% = 50)

5. Divide the result in step 3 by the result in step 4; the answer is .50. (25 ÷ 50 = .50) 6. Subtract the initial percentage (8.33%) from the final percentage (9.83%) in the taxpayer’s

range; the amount is 1.50. (9.83 – 8.33 = 1.50)

7. Multiply the result obtained in step 6 by the result obtained in step 5; that calculation yields .75. (1.50 x .50 = .75 )

8. Add the result obtained in step 7 (.75) to the initial premium percentage in the taxpayer’s range to calculate the applicable percentage; the result is 9.08%. (8.33% + .75% = 9.08%)

Now that we have the applicable percentage value, we can substitute the amounts into the equation to determine component 2 of the tax credit calculation as follows:

$1,000 - $59,730 x .0908

12 = $548.04

By solving the equation, we see that component 2 of the tax credit calculation for any month is $548.04. Since $548.04 is less than the $1,000 monthly premium (component 1), it is the tax credit available as a premium assistance amount. The balance of the monthly premium—$451.96 in this case—is the taxpayer’s contribution. The tax credit for the entire year would be $6,576.48. ($548.04 x 12 = $6,576.48)

Adjusted Monthly Premium

The term used for the monthly premium in the final regulations implementing the PPACA when calculating the tax credit is adjusted monthly premium rather than simply monthly premium. The

“adjusted monthly premium” used in the calculation of the credit is the premium an issuer would charge for the applicable benchmark plan to cover all members of the taxpayer’s coverage family, adjusted only for the age of each member.

Thus, the adjusted monthly premium for purposes of the credit:

• Is determined without regard to any premium discount or rebate under a wellness program.

Thus, participation in such a program could reduce the taxpayer’s actual premium without reducing the credit to which the taxpayer is entitled under the PPACA; and

• Does not include any adjustments for tobacco use. Accordingly, although tobacco use could increase a taxpayer’s premium, any increased premium reflecting tobacco use would not increase the taxpayer’s credit.

Adjusted monthly premium: $1,000 Taxpayer’s household income: $59,730 Members of taxpayer’s family: 3 Applicable poverty level guideline: $21,720

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Special Rules Applicable to the Tax Credit

Although tax credits are normally applied at the conclusion of the year, the premium tax credit may be advanced if desired by the taxpayer. Such advance payments are made directly to the insurer on the taxpayer’s behalf. When the taxpayer’s federal income tax return is filed, the advance payments are

reconciled with the amount of the taxpayer’s actual premium tax credit. Although a repayment of the advance payment may be due, any repayment due from the taxpayer may be subject to a cap. (See Reconciling Advance Premium Tax Credits below.)

Tax credits are also available to qualified individuals who are offered, but not enrolled in, employer-sponsored insurance. Such tax credits are available only if:

• The self-only premium payable by the taxpayer under the employer-sponsored insurance would exceed 9.5% of household income (9.78% in 2020 and 9.83% in 2021)); or

• The employer-sponsored insurance does not provide a minimum value, i.e. it covers less than 60% of total covered costs.

Reconciling Advance Premium Tax Credits

If advance premium tax credits are provided for a taxpayer, the individual must file a federal income tax return for that year. Such advance credits must be reconciled at the time of filing the individual’s federal income tax return for the year in which advance credits were received. The tax credit is

computed on the taxpayer’s return using the taxpayer’s family size and household income for the taxable year. Since a taxpayer’s actual modified adjusted gross income for the year may be larger or smaller than expected at the time of determining the advance tax credits, the advance premium tax credits paid to the insurer may be more or less than the amount for which a taxpayer is eligible.

A taxpayer whose premium tax credit for the taxable year exceeds the taxpayer’s advance credit payments may receive the excess credit as an income tax refund, regardless of whether the taxpayer has any federal income tax liability. A taxpayer whose advance credit payments for the taxable year

exceed the premium tax credit for which the taxpayer is eligible owes the excess as an additional income tax liability, subject to any applicable limitation (discussed next).

Additional Tax Limitation

In general, if the reconciliation of the premium tax credit with advance tax credit payments made on behalf of the taxpayer shows an excess payment, that excess is owed by the taxpayer as an additional income tax liability. In certain cases, however, the amount of any additional income tax liability resulting from such excess payment may be limited.

The additional tax imposed on a taxpayer because of excess advance credit payments is limited to the dollar amounts in the additional tax limitation table if the taxpayer’s household income is less than 400% of the federal poverty line. The dollar limit on the additional tax depends upon the taxpayer’s filing status and his or her household income as a percentage of the federal poverty line.

The limits for 2021 are as shown in the additional tax limitation table below:

2021 - Additional Tax Limitation Table*

Household Income Percentage of Federal Poverty Line

Limitation Amount for Unmarried Individuals

(other than qualifying

widow(er)s or heads of

households)

Limitation

Amount for All Other

Taxpayers

Less than 200% $325 $650

At least 200% but less than 300% 800 1,600

At least 300% but less than 400% 1,350 2,700 *Subject to inflation adjustment.

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Small Business Tax Credit

Small employers may be eligible to receive a nonrefundable tax credit for premiums paid for employee health insurance coverage. The credit may be carried back one year and forward 20 years.

The credit is available to eligible employers for two consecutive taxable years and is subject to

limitations based on:

• The number of employees; and • The average annual wages paid to employees.

The maximum small employer health insurance premium credit available to eligible small employers is 50% of workers’ healthcare premiums paid by small employers and 35% of such premiums paid by small tax-exempt employers, such as charities. If an employer receives a tax credit for premiums paid, its tax deduction for the cost of providing health insurance coverage is reduced by the amount of

the credit.

Eligibility Requirements

Not all small employers are likely to be eligible to receive the small employer health insurance premium credit. The credit is available only if the employer meets the following three requirements:

1. The employer paid premiums for employee health insurance coverage under a qualifying arrangement—one under which the employer is required to pay at least 50% of the premium

for the employee—obtained through a Small Business Health Options Program (SHOP); 2. The employer had fewer than 25 full-time equivalent employees, not counting employees with

ownership interest, for the tax year; and 3. The employer paid average annual wages for the tax year of less than $50,000 (indexed for

inflation) per full-time equivalent employee.

Small employer health insurance premium tax credits are available for no more than two consecutive years.

Limitations Affect Health Insurance Premium Credit

Various limitations may apply that have the effect of reducing any health insurance premium credit to

which a small employer is entitled. Those limitations are the:

• Full-time equivalent employee (FTE) limitation; • Average annual wage limitation; • State average premium limitation; and • State premium subsidy and tax credit limitation.

Full-Time Equivalent Employee (FTE) Limitation

A small employer's health insurance premium credit will be reduced if the employer had more than 10 FTEs for the tax year. If the employer had 25 or more FTEs for the tax year, the credit is reduced to zero. A small employer has 1 FTE for each 2,080 hours worked by an individual considered an employee.

Average Annual Wage Limitation

A small employer’s health insurance premium credit is also reduced if the employer paid average

annual wages of more than $25,000 (inflation-adjusted to $27,600 in 2020 and $27,800 in 2021) for the tax year and is eliminated if the employer paid average annual wages of $50,000 or more for the tax year ($55,200 in 2020 and $55,600 in 2021). For purposes of the health insurance premium credit, the term “wages” means wages subject to Social Security and Medicare tax withholding determined without considering any wage base limit. For purposes of this limitation, wages paid to a seasonal employee who worked 120 or fewer days during the tax year should not be included.

In order to figure the average annual wages an employer paid for the tax year, follow the steps below:

1. Figure the total wages paid for the tax year to all individuals considered employees; and 2. Divide the total wages paid by the employer by the number of FTEs the employer had for the

tax year.

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If the result of the following the steps above is not a multiple of $1,000—$1,000, $10,000 or $20,000,

for example—the result should be rounded down to the next lowest multiple of $1,000. Thus, if the result is $25,750, it should be rounded down to $25,000.

Average Premium Limitation

A small employer’s credit is reduced if the employer premiums paid are more than the employer premiums that would have been paid if individuals who are considered employees enrolled in a plan with a premium equal to the average premium for the small group market in the rating area in which the employee enrolls for coverage.

The average premium for the small group market in the rating area in which the employee enrolls is determined by referring to the current table of average premiums for small group markets which is contained in the IRS Form 8941 instructions for the applicable tax year. A small excerpt from a

representative table listing the average premiums for small group markets by rating area within a state is shown below:

Average Premiums Needed To Figure Adjusted Amounts on Worksheet 4

(sample only*)

County Employee-Only Dependent, Family, etc.

County Employee-Only Dependent, Family, etc.

Albemarle $5,363 $13,185 Williamsburg City $5,433 $11,739

Alexandria City 7,961 16,808 Winchester City 5,463 13,270

Amelia 4,946 12,006 York 5,417 12,125

Amherst 4,546 10,575 All others 6,153 15,367

*NOT a current table; provided only to illustrate determination of adjusted amounts.

State Premium Subsidy and Tax Credit Limitation

A small employer’s premium tax credit may be reduced if the employer is entitled to a state tax credit

or a state premium subsidy for the cost of health insurance coverage it provides under a qualifying

arrangement to individuals considered employees. Even though a state tax credit or premium subsidy does not reduce the amount of the employer premiums paid, the amount of an employer's credit cannot be greater than its net premium payments.

(Net premium payments are employer premiums paid less the amount of any state tax credits the employee or employer received or will receive and any state premium subsidies paid.)

Calculating the Credit

IRS Form 8941, Credit for Small Employer Health Insurance Premiums, is used to calculate the credit and is attached to the small employer’s tax return. Several worksheets are used to assist preparers in figuring the amounts to report on various lines of the form, and those worksheets are contained in the instructions for Form 8941.

Large Employer Shared Responsibility: The Employer Mandate

The Affordable Care Act requires that large employers offer their full-time employees and dependents health plan coverage at least equal to minimum essential coverage or face a possible tax penalty. The possible penalties imposed on a large employer for failing to comply with the employer mandate vary, depending upon the nature of its noncompliance. Thus, liability for a penalty may arise as a result of:

• The employer's failure to offer coverage; or • An employer’s offering coverage whose employee received a premium tax credit.

Employers Not Offering Coverage

A large employer that does not offer full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan may be liable for a penalty8

8 IRC §4980H(a).

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if one or more of its full-time employees enrolls in health insurance coverage through an exchange

and receives a premium tax credit or cost-sharing reduction.

The penalty for each month in such a case is an amount equal to the number of the employer’s full-time employees in excess of 30 multiplied by 1/12th of $2,000 adjusted for years after 2014. That

penalty applies regardless of the number of employees who are enrolled in health insurance coverage obtained through a state exchange and who receive a tax credit or cost-sharing reduction. For calendar year 2021, the $2,000 penalty is adjusted to $2,700.

For example, suppose only one employee of a large employer that does not offer health insurance coverage enrolled in health insurance coverage through an exchange and received a premium tax credit in 2021. If the employer employed 130 full-time employees, the penalty for which the employer would be liable is equal to:

(Full time employees – 30) X Annual penalty

12 =

Monthly penalty

(130 – 30) X $2,700

12 = $22,500

If the employer provided no coverage for the entire year and its full-time employees remained at 130 throughout the year, the penalty for which the employer would be liable is $270,000. ($22,500 x 12

= $270,000)

Since the liability imposed on a large employer for a failure to offer health insurance coverage to its full-time employees is triggered by an employee’s obtaining health insurance coverage through a state exchange and receiving a tax credit or subsidy to assist in its purchase, an employer failing to offer such coverage may, nonetheless, avoid a penalty. Specifically, an employer who has no full-time employee whose income would qualify him or her for a subsidy when purchasing health insurance coverage through an exchange will not be liable for the penalty even though it offers no health

insurance coverage to its full-time employees.

Employers Offering Coverage

It is not only large employers that fail to offer coverage that may be liable for a penalty. In some cases, employers that offer health insurance coverage to their full-time employees may, nonetheless,

be subject to a penalty. If a large employer offers coverage to its full-time employees but at least one full-time employee receives a premium tax credit or cost-sharing reduction, the employer is subject to a penalty. Thus, even if an applicable large employer offers coverage to at least 95% of its full-time

employees and their dependents, it may be subject to a penalty if one or more of the full-time employees obtains a premium tax credit because the coverage fails to provide minimum value or its premium exceeds 9.83% (2021) of the individual’s income9 or the employee obtaining the premium tax credit is not one of the 95% of employees offered coverage.

Unlike the penalty to which an employer that fails to offer health insurance coverage to its full-time employees may be subject—whose penalty is based on the total number of full-time employees in

excess of 30—the penalty applicable to an employer who offers coverage but whose employee purchases coverage through an exchange and receives a premium tax credit or subsidy is based solely on the number of full-time employees who actually purchase health insurance through a state exchange and receive a premium tax credit or cost-sharing reduction. For each full-time employee receiving a credit or subsidy through a state exchange, the penalty for any month is equal to 1/12th of

$3,000. For calendar year 2021, the penalty amount is adjusted to $4,060 ($338.33 per month). Thus, if 25 employees of such large employer receive a credit or subsidy in 2021, the applicable

employer penalty for that month would be $8,458.25. ($338.33 x 25 = $8,458.25)

The penalty for the month to which a large employer offering unaffordable coverage (or coverage failing to provide minimum value) to its full-time employees in 2021 would be subject is limited to no more than the penalty for which it would have been liable if it didn’t offer coverage at all, i.e., an amount equal to the number of full-time employees in excess of 30 during the month multiplied by 1/12th of $2,700. Accordingly, if the large employer employed 50 full-time employees in 2021, and 25 of those employees received a credit or subsidy, the applicable penalty limit would be the lesser of:

9 IRC §4980H(b).

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a) 25 x $338.33 (25 x $338.33 = $8,458.25), or

b) (50 – 30) x $225 (20 x $225 = $4,500)

Clearly, in such a case, the applicable monthly penalty for the employer who offered coverage in which 25 employees declined to participate and purchased coverage through an exchange and received a

credit or subsidy would be the smaller of the two possible penalties, i.e. $4,500 ((50 – 30) x $225 = $4,500)

Thumbnail Summary of 2021 Changes

Subject 2021 Change

Small business premium credit Average annual wage at which small business premium credit begins to be reduced is increased to $27,800 in 2021.

Large employer mandate Employers with 50 or more full-time employees must offer health coverage at least equal to minimum essential coverage

to full-time employees and dependents or be subject to a possible tax penalty.

• The applicable 2021 penalty amount for a large employer failing to offer full-time employees and dependents coverage is $2,700.

• The applicable 2021 penalty amount for a large employer offering full-time employees and dependents coverage whose employee obtains coverage through an Exchange and receives a subsidy or tax credit is $4,060.

Chapter Review

1. If a taxpayer’s household income of $30,000 places the taxpayer at 110% of the federal poverty level, what is the taxpayer’s normal expected contribution when calculating the refundable tax

credit for which the taxpayer may be eligible under the PPACA to purchase a qualified health plan

in 2021?

A. $0

B. $300

C. $621

D. $1,200

2. Burger Barn is eligible for a small employer health insurance premium credit. If the company

employs 10 full-time employees, all of whom have family coverage, and its monthly group insurance premium rates are $500 for employee-only coverage and $1,200 for family coverage, what is the minimum monthly premium contribution Burger Barn must make in order to qualify for the credit?

A. $2,500

B. $5,000

C. $6,000

D. $12,000

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Chapter 4 – Changes in Archer MSAs,

HSAs & IRAs

Introduction

Archer medical savings accounts and health savings accounts permit taxpayers to make deductible contributions annually to a trust from which they can take tax-free withdrawals, as needed, to pay qualified medical expenses. Individual retirement arrangements enable taxpayers to make annual

contributions to a personal retirement plan that offers tax-deferred growth and either tax-deductible contributions or tax-free qualified distributions. The limits applicable to these tax-favored plans change from year to year.

This chapter will briefly discuss each of the plans and the 2021 changes that affect them.

Chapter Learning Objectives

Upon completion of this chapter, you should be able to:

• Recognize the eligibility rules applicable to Archer MSAs and HSAs; • Calculate the maximum contributions that may be made to an Archer MSA; • Apply the tax treatment rules to contributions to and distributions from Archer MSAs and

HSAs; • Calculate the traditional IRA tax deduction available to a taxpayer who is an active participant

in an employer-sponsored retirement plan; and • Recognize the MAGI limits that apply to a taxpayer’s eligibility to make a Roth IRA

contribution.

Medical Savings Accounts

The Health Insurance Portability and Accountability Act (HIPAA) authorized the establishment of a pilot

program designed to make individuals more cost-conscious in their selection and use of healthcare with the intention of reducing healthcare utilization. The pilot program which ended on December 31, 2007 allowed individuals to establish medical savings accounts. These medical savings accounts have been renamed and are now referred to as “Archer MSAs.”

Archer MSAs are trusts created solely to pay the qualified medical expenses of the individuals for whom established. Archer MSAs call for an individual to:

• Buy a high-deductible health insurance policy (HDHP), and • Make tax-deductible contributions to the trust.

Trust earnings are tax-deferred and may be withdrawn tax-free to pay qualified healthcare expenses. When the individual’s expenses for healthcare exceed the policy’s high deductible, the expenses would be covered—partly or fully—by the health insurance. The important incentive under the Archer MSA arrangement is that, if the individual’s expenses for healthcare amount to less than the sum of the funds in the trust, the balance of the funds can be used for any other purpose the individual chooses,

including to provide additional retirement income. Although the trust funds used for other than to pay qualified medical expenses would be subject to income taxation and—if distributed before the accountholder’s age 65, death or disability—income tax penalties, it was expected that individuals covered under an Archer MSA would avoid unnecessary expenses for healthcare.

Even though the pilot program ended in 2007, existing Archer MSAs may continue in force.

High Deductible Health Plan Requirement

To be eligible for an Archer MSA, an otherwise eligible individual must be covered under a high-

deductible health plan. A “high-deductible health plan” is defined differently for individuals and families, and the deductible under the definition of such a plan tends to increase annually. For a policy that covers only the individual, a high deductible health plan in 2021 is one whose annual deductible is

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at least $2,400 but not more than $3,600. It must also provide that annual out-of-pocket expenses

other than for premiums do not exceed $4,800.

A high-deductible health plan providing family coverage in 2021 must have an annual deductible of at least $4,800 but not more than $7,150 and must require annual out-of-pocket expenses other than

for premiums of not more than $8,750. (These limits tend to be adjusted upward each year.) Since the term “family coverage” applies to any health plan coverage except self-only coverage, the term would apply to a health insurance plan covering only a husband and wife as well as one covering a husband, wife and multiple children.

High Deductible Health Plan (MSA) – 2021

Deductible and out-of-pocket limits in an Archer MSA high deductible health plan for a specific year depend on whether the plan provides self-only coverage or family coverage. The limits applicable to an Archer MSA in 2021 are the following:

Minimum HDHP

Deductible

Maximum HDHP

Deductible

Maximum Annual

Out-of-Pocket

Self-only coverage $2,400 $3,600 $4,800

Family coverage $4,800 $7,150 $8,750

Archer MSA Contributions

The maximum deductible contribution that may be made to an Archer MSA depends on whether the high deductible health plan provides self-only coverage or family coverage and the amount of the applicable deductible. An eligible individual may deduct the contributions he or she makes to an Archer MSA during the taxable year in an amount not to exceed:

• 65% of the annual deductible for individuals with self-only coverage; or • 75% of the annual deductible for individuals with family coverage.

So, an individual with self-only coverage and a deductible of $2,500 may make a deductible contribution to an Archer MSA in 2021 of up to $1,625. ($2,500 X .65 = $1,625) If the self-only coverage had a $2,650 annual deductible, the permitted maximum deductible contribution to the accompanying Archer MSA would be $1,722.50. ($2,650 X .65 = $1,722.50)

Similarly, if an individual with family coverage had a deductible of $6,450, he or she could make an annual Archer MSA contribution of up to $4,837.50. ($6,450 x .75 = $4,837.50) While the participant in an Archer MSA is permitted to make contributions to the trust, there is no requirement that the

contributions be made or that they be made in any specified amount, provided they don’t exceed the maximum allowable.

Often, a contribution to the Archer MSA is made at the same time that the premium for the high-deductible health plan is paid. Such simultaneous payments, however, are not required. In addition, the time of the year the qualifying high deductible coverage began is important since the maximum amount that may be contributed to the trust for any year is based on a full year; thus, if the MSA high-deductible health plan coverage began later than January 1st, the maximum trust contribution

permitted for that calendar year would be reduced. (Note that this is different for health savings accounts, discussed next.)

For example, assume that a taxpayer with MSA self-only coverage having an annual deductible of $2,650 began the coverage on July 1st. If the taxpayer had maintained the high-deductible coverage for the entire year, rather than beginning it on July 1st, he or she could have contributed up to $1,722.50, i.e. .65 x $2,650. Since the taxpayer started the coverage after 6 months of the year had

gone by, the maximum contribution that the taxpayer may make in the first year is reduced to one-half, or $861.25. ($1,722.50 x 1/2 = $861.25)

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Penalty for Excess Contributions

A taxpayer’s contributions to an Archer MSA in excess of the limits are subject to a 6% excise tax penalty, not to exceed 6% of the value of the Archer MSA at the close of the tax year. If a taxpayer makes an excess contribution to his or her Archer MSA, it may be withdrawn, along with any net

income attributable to it, on or before the last day for filing the individual’s income tax return (including extensions) for the year. The excess contribution withdrawn before the tax-filing date is not includible in the distributee’s income, nor is the contribution deductible. Any income that is attributable to the excess contribution being withdrawn must be included in gross income in the year in which received.

Special Rules for Employer-Installed MSAs

Archer MSAs may be sponsored by small employers and self-employed individuals. Contributions made

by an employer to employees’ Archer MSAs are deductible by the employer on the “Employee benefit programs” line of the business income tax return for the year in which the employer made the contributions.

If an Archer MSA is installed by an employer, some additional rules come into play. The additional rules applicable to employer-installed MSAs that affect contributions to it include the following:

• In any year in which an employer makes a contribution to an Archer MSA, no contributions to

the Archer MSA may be made by the individual account holder; • The deduction for contributions made to an Archer MSA in any year cannot exceed the

employee’s compensation attributable to the employer maintaining the MSA. Likewise, a self-employed individual’s Archer MSA contribution cannot exceed the individual’s earned income from the self-employment with respect to which the plan is established; and

• Contributions for all employees of the employer must be comparable, but they are not required to be identical.

Archer MSA Distributions

Although distributions taken from Archer MSAs are designed principally to pay qualified medical expenses, they may be taken by the individual to meet any kind of need. The tax treatment of the distribution, however, is different—and less favorable—when distributions are taken to meet other

than qualified medical expenses.

For Archer MSA purposes, qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction and include amounts paid by the individual for

unreimbursed medical care for the taxpayer, a spouse and dependents. Through 2019, a medicine or drug is also considered a qualified medical expense but only if the medicine or drug for which the expense is incurred:

• Requires a prescription; • Is available without a prescription and the taxpayer obtains a prescription for it; or • Is insulin.

However, section 3702 of the CARES Act permanently adds over-the-counter medical products as qualified medical expenses effective after December 31, 2019.

Archer MSA Rollovers

Not unlike other qualified funds, the funds in an Archer MSA can be rolled over to a different MSA or to an HSA. (See Health Savings Accounts below.) The applicable rollover rules are much like those that apply to IRA rollovers and rollovers from qualified plans insofar as they require the rollover to be completed within 60 days of a distribution and limited to once every 12 months.

Also similar to a traditional IRA rollover, no mandatory withholding for tax purposes applies even though the rolled-over Archer MSA funds may have been distributed to the account holder before being rolled over. An Archer MSA rollover does not affect the individual’s current Archer MSA contribution.

Account Transfer Incident to Divorce

The account holder’s divorce or death may cause the Archer MSA account to be transferred. If the account holder divorces, the Archer MSA interest may be transferred from one spouse (or former

37

spouse) to another without income taxation. To avoid taxation on the transfer it must be made

under a divorce or separation agreement. (See IRC §71(b)(2)(A).) Upon such a transfer, the Archer MSA is treated as the MSA of the spouse (or former spouse) to whom it was transferred.

Account Transfer at Death

The disposition of an Archer MSA upon the death of the account holder depends on who the beneficiary is. The Archer MSA designated beneficiary may be:

• A spouse;

• A designated beneficiary other than a spouse; or

• The individual account holder’s estate.

If the designated beneficiary of the Archer MSA is the account holder’s surviving spouse, he or she

becomes the new account holder. In such a case, no income needs to be recognized as a result of the original account holder’s death. Alternatively, an Archer MSA designated beneficiary may be someone other than a spouse—a friend or the individual’s estate, for example. In such a case, the account stops being an Archer MSA when the account holder dies, and the value of the Archer MSA must be

recognized by the beneficiary to the extent its value exceeds the amount of the decedent’s qualified medical expenses paid by the beneficiary within one year following the account holder’s death.

When the Archer MSA account holder’s estate is designated as the beneficiary, the account’s fair market value is taxable in the account holder’s final taxable year and must be included in the final income tax return prepared by the executor or administrator. In such a case, the assets in the Archer MSA are distributed income tax-free according to the terms of the account holder’s will or the intestacy laws if the account holder dies without a will.

Archer MSA Taxation

A taxpayer who is an MSA account holder must file Form 8853, Archer MSAs and Long-Term Care

Insurance Contracts, and attach it to Form 1040 or Form 1040NR if:

• The taxpayer or employer made contributions to the taxpayer’s Archer MSA during the year; • The taxpayer files a joint return and his or her spouse or spouse’s employer made

contributions to the spouse’s Archer MSA during the year; or

• The taxpayer (or spouse, if filing jointly) acquired an interest in an Archer MSA because of the death of the account holder.

In addition, the taxpayer must report any contributions and/or taxable MSA distributions on Form

1040 or 1040NR, as appropriate.

Contribution Tax Treatment

When Archer MSA contributions are made by an individual account holder they are deductible above the line. When an individual’s employer makes Archer MSA contributions to an account for the individual, the contributions are considered employer-provided coverage for medical expenses up to the allowable amount of Archer MSA contributions. They are generally deductible to the employer as a

business expense but are not included in the employee’s gross income for tax purposes.

Contributions made to an Archer MSA earn tax-deferred interest, and tax-deferral continues as long as the funds remain in the MSA. However, tax-deferral may be lost if the account holder pledges the Archer MSA as security for a loan.

Deductible contributions may be made through the due-date of the federal income tax return (without extensions). Such contributions should be reported on Form 1040 or Form 1040NR, as appropriate.

Distribution Tax Treatment

Distributions from an Archer MSA may be tax-free or taxable as ordinary income. The difference between the tax treatments lies in the use to which the distribution is put.

A distribution, including a rollover distribution, from an Archer MSA must be reported on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. The amount by which a distribution (other than a distribution that is rolled over) exceeds the account holder’s unreimbursed qualified medical expenses must be reported as “Other income” on Form 1040 or Form 1040NR. In addition, 20% of the taxable MSA distribution during the year that does not meet any of the exceptions to the tax penalty

38

must be reported as “Other taxes” on Form 1040 or Form 1040NR. The amount of the additional tax

and “MSA” should be entered on the adjacent dotted line.

Archer MSA distributions are fully tax-free when the funds distributed are used to pay qualified medical expenses. For MSA purposes, qualified medical expenses are those expenses that would

generally qualify for the medical and dental expense deduction and include amounts paid by the individual for unreimbursed medical care for the taxpayer, spouse and dependents.

Archer MSA distributions are taxable and must be included in the account holder’s gross income for tax purposes to the extent used for any purpose other than the payment of qualified medical expenses.

Archer MSA Distribution Tax Penalty

A taxable Archer MSA distribution may also subject the account holder to a substantial tax penalty.

Archer MSA distributions are includible in income and subject to income tax penalties when they are used for other than qualified medical expenses and fail to meet specific exceptions.

An Archer MSA distribution includible in an account holder’s income is subject to a 20% penalty tax levied on the amount of the distribution includible in income, unless one of the following exceptions applies:

• The distribution is received while the account holder is disabled;

• The distribution is received following the account holder’s death; or • The distribution is received by the account holder after reaching the eligibility age for

Medicare, i.e. age 65.

Even if one of these exceptions to the tax penalty applies, however, a distribution not used to pay qualified medical expenses is still includible in the distributee’s income for tax purposes.

Health Savings Accounts

Based, in part, on the experience of the Archer MSA pilot program, legislation was signed into law establishing health savings accounts (HSAs). HSAs are similar to Archer MSAs in many areas. Like

MSAs, HSAs are trusts created solely to pay the qualified medical expenses of an account beneficiary and call for an individual to:

• Buy a high-deductible health insurance policy, and

• Make tax-deductible contributions to the trust.

Contributions made to the trust and any earnings are tax-deferred for as long as they remain in the trust. HSA account holders may withdraw funds from the trust to pay any qualified healthcare expenses. When the account holder’s expenses for healthcare exceed the policy’s deductible, those expenses are covered, in whole or in part, by the health insurance.

Although HSAs and their accompanying high-deductible health plans (HDHPs) are intended to provide insurance coverage for covered costs only to the extent they exceed the HDHP deductible, the CARES

Act has modified this requirement, effective on and after January 1, 2020, by:

• Allowing HDHP participants with HSAs to obtain telemedicine10 and other remote care services free of any cost sharing without jeopardizing the HSA;

• Eliminating the ACA ban on the pre-tax reimbursement of over-the-counter drugs not prescribed by a physician; and

• Treating expenses incurred for menstrual care products as qualified medical expenses.

Additionally, the Families First Coronavirus Response Act (FFCRA) requires all group health plans and

health insurers to cover coronavirus tests and related services without any type of cost sharing. Thus, no deductible or coinsurance charges apply to testing for the coronavirus, and receiving such first-dollar benefits will not adversely affect the HSA or the individual’s eligibility.

10 “Telemedicine” refers to the use of technology to provide remote medical services to individuals over a smart phone or computer.

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Distributions from an HSA may be taken by an account holder at any time. If taken to pay or be

reimbursed for qualified healthcare expenses, such distributions are tax free provided they are not compensated by insurance or otherwise. If taken for any purpose other than to pay qualified healthcare expenses, the distribution is taxable as ordinary income and may be subject to a tax

penalty.

HSA Eligibility

An individual eligible to establish an HSA is one who meets all the following requirements. The individual:

• Is covered under a high deductible health plan (HDHP) on the first day of the month; • Has no other health coverage except for certain specified coverages; • Is not enrolled in Medicare; and

• Cannot be claimed as a dependent on another person’s tax return for the year.

HSA High Deductible Health Plan Requirement

To be eligible for an HSA, an otherwise eligible individual must be covered under a high-deductible health plan. For a policy that covers only the individual, a high deductible health plan in 2021 is one whose annual deductible is at least $1,400 and which also provides that annual out-of-pocket expenses do not exceed $7,000. A high-deductible health plan providing family coverage in 2021 must

have an annual deductible of at least $2,800 and must require annual out-of-pocket expenses of not more than $14,000. (These limits tend to be adjusted upward each year.)

High Deductible Health Plan (HSA) – 2021

Contribution, deductible and out-of-pocket limits in an HSA high deductible health plan for a specific year depend on whether the plan provides self-only coverage or family coverage. The limits applicable to an HSA in 2021 are the following:

Coverage Type Minimum Deductible

Maximum Annual Out-of-Pocket*

Maximum Individual Annual

Contribution

Individual Annual Catch-up Contribution

Self-only coverage $1,400 $7,000 $3,600 $1,000

Family coverage $2,800 $14,000 $7,200 $1,000 *The maximum out-of-pocket limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.

HSA Contributions

Contributions to an HSA may be made up until April 15th of the year following the year for which contributions are made. Similar to Archer MSA contribution limits, the maximum deductible contribution that may be made to an HSA depends on whether the high deductible health plan provides self-only coverage or family coverage. However, the amount of the applicable deductible—a

factor in determining the maximum MSA contribution—does not affect the maximum HSA contribution. The test to determine whether self-only or family coverage limits apply occurs on the first day of the month.

An eligible individual who has not attained age 55 by the end of the taxable year may deduct the contributions he or she makes to an HSA during 2021 in an amount not to exceed:

• $3,600 for account holders with self-only coverage; or • $7,200 for account holders with family coverage.

HSA Contributions from Multiple Sources

Contributions made to an account holder’s HSA may come from multiple sources. If the account holder has an HSA under an employer’s plan, contributions may be made by the employer, the employee or both for the same year. In addition, family members or any other person may also contribute to an HSA on behalf of an eligible individual.

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Additional Contributions for Age 55 and Older Account Holders

HSA account holders who attain age 55 before the close of a taxable year are eligible to make an additional contribution. The maximum additional contribution amount is $1,000. Thus, an HSA account holder who is age 55 or older and has self-only coverage may make a maximum contribution in 2021

of $4,600; such an individual with family coverage may make a maximum contribution of $8,200. (If both spouses are age 55 or older, each may make a catch-up contribution of up to $1,000.)

First-Year Contributions for New Account Holders

An individual who becomes an eligible individual (for HSA purposes) after the beginning of a taxable year and who is an eligible individual for the last month of the taxable year is treated, for purposes of maximum contributions, as being an eligible individual for the entire year. Thus, an individual who becomes eligible for an HSA in December 2021 and establishes the HSA may make a contribution not

exceeding the applicable maximum for the entire year. (Note the difference from an Archer MSA.)

However, if such an individual fails, at any time during the following taxable year (the same “plan” year, in other words), to be an eligible individual (for HSA purposes), the taxpayer must include in his

or her gross income the aggregate amount of all HSA contributions made by the taxpayer that could not have been made under the general rule. The amount includible in the former account holder’s gross income is also subject to a 10% penalty tax for failure to maintain HDHP coverage. An exception

exists if the failure to remain HSA eligible is the result of death or disability.

Maximum HSA Contributions may be Reduced

An HSA account holder must reduce the amount that can be contributed to the HSA, but not below zero, by any amounts contributed:

• To an Archer MSA, including employer contributions, for the year; • To the HSA by any other person, including the HSA account holder’s employer, that are

excludible from the account holder’s income; and

• Under a qualified HSA funding distribution, i.e. a distribution from the account holder’s IRA to the HSA.

Penalty for Excess Contributions

If a taxpayer makes an excess contribution for the year the account holder must withdraw it or be subject to a 6% excise tax penalty, not to exceed 6% of the value of the HSA at the close of the tax year. An excess contribution to an HSA may be withdrawn, along with any net income attributable to it, on or before the last day for filing the individual’s income tax return (including extensions) for the

year. The excess contribution withdrawn before the tax-filing date is not includible in the distributee’s income, nor is the contribution deductible. Any income that is attributable to the excess contribution being withdrawn must be included in gross income in the year in which received.

Employer HSA Participation

Contributions made by an employer to employees’ HSAs are deductible by the employer on the “Employee benefit programs” line of the business income tax return for the year in which the

employer made the contributions. If an employer makes contributions to employees’ HSAs, the employer is required to make comparable contributions to all comparable participating employees’ HSAs.

HSA Distributions

Although distributions taken from HSAs are designed to pay qualified medical expenses, they may be taken by the individual to meet any kind of need. The tax treatment of the distribution, however, is different—and less favorable—when distributions are taken to meet other than qualified medical

expenses.

Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction and include amounts paid by the individual for unreimbursed medical care for the taxpayer, spouse and dependents. Under the ACA, a medicine or drug is considered a qualified medical expense but only if the medicine or drug for which the expense is incurred:

• Requires a prescription; • Is available without a prescription and the taxpayer obtains a prescription for it; or

41

• Is insulin.

Section 3702 of the CARES Act permanently adds non-prescription over-the-counter medical products as qualified medical expenses effective after December 31, 2019.

As noted earlier, the Cares Act also adds telehealth and other remote care services to the list of

coverages that can be provided on a first-dollar basis, i.e., with no deductible, without adversely affecting the taxpayer’s eligibility to establish and maintain an HSA. Without this provision, a taxpayer receiving first-dollar coverage for such services would be disqualified from establish an HSA or making tax-favored HSA contributions.

Health insurance premiums are not normally considered a qualified medical expense for HSA purposes; however, exceptions apply. The following health insurance premiums are deemed HSA-qualified medical expenses:

• Premiums for healthcare continuation coverage (such as coverage under COBRA);

• Premiums for long term care insurance; and

• Health plan premiums paid while the account holder is receiving unemployment

compensation

HSA Rollovers

Funds in an HSA or Archer MSA can be rolled over to an HSA. The applicable rollover rules are much like those that apply to IRA rollovers and rollovers from qualified plans and require the rollover to be completed within 60 days of a distribution. Rollovers are limited to no more than one every 12 months.

Account Transfer Incident to Divorce

The account holder’s divorce or death may cause the HSA account to be transferred. If the account holder divorces, the HSA interest may be transferred from one spouse (or former spouse) to another

without income taxation. To avoid taxation on the transfer it must be made under a divorce or separation agreement. (See IRC §71(b)(2)(A).) Upon such a transfer, the HSA is treated as the HSA of the spouse to whom it was transferred.

Account Transfer at Death

The disposition of an HSA upon the death of the account holder depends on who the beneficiary is. If the designated beneficiary of the HSA is the account holder’s surviving spouse, he or she becomes the new account holder and no income needs to be recognized. If the beneficiary is other than a spouse,

the account stops being an HSA when the account holder dies and the value of the HSA must be recognized by the beneficiary to the extent its value exceeds the amount of the decedent’s qualified medical expenses paid by the beneficiary within one year following the account holder’s death.

When the HSA account holder’s estate is designated as the beneficiary, the account’s fair market value is taxable in the account holder’s final taxable year and included in the final income tax form prepared by the executor or administrator. In such a case, the assets in the HSA are distributed income tax-free

according to the terms of the account holder’s will or the intestacy laws if the account holder dies without a will.

HSA Taxation

The tax treatment of HSA contributions varies, depending on the source of the contributions. A taxpayer who is an HSA account holder must file Form 8889, Health Savings Accounts (HSAs), and attach it to Form 1040 or Form 1040NR if:

• The taxpayer or employer made contributions to the taxpayer’s HSA during the year;

• The taxpayer files a joint return and his or her spouse or spouse’s employer made contributions to the spouse’s HSA during the year; or

• The taxpayer (or spouse, if filing jointly) acquired an interest in an HSA because of the death of the account holder.

In addition, the taxpayer must report any contributions and/or taxable distributions on Form 1040 or 1040NR, as appropriate.

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Contribution Tax Treatment

When HSA contributions are made by an individual account holder they are deducted by the individual from his or her income for purposes of determining the account holder’s adjusted gross income.

When an individual’s employer makes HSA contributions to an account for the individual, the

contributions are considered employer-provided coverage for medical expenses up to the allowable amount of HSA contributions. Accordingly, employer-provided HSA contributions are generally deductible to the employer as a business expense but are not included in the employee’s gross income for income tax purposes. Contributions made to an HSA earn tax-deferred interest, and tax-deferral continues as long as the funds remain in the account.

Deductible contributions may be made through the due-date of the federal income tax return (without extensions). Such contributions should be reported on Form 8889, Health Savings Accounts (HSAs)

and on Form 1040 or Form 1040NR.

Distribution Tax Treatment

Distributions from an HSA may be tax-free or taxable as ordinary income. The difference between the tax treatments lies in the use to which the distribution is put.

A distribution, including a rollover distribution, from an HSA must be reported on Form 8889, Health Savings Accounts (HSAs). The amount by which a distribution (other than a distribution that is rolled

over) exceeds the account holder’s unreimbursed qualified medical expenses must be reported as “Other income” on Form 1040 or Form 1040NR. On the adjacent dotted line, enter “HSA” and the amount. In addition, 20% of the taxable HSA distribution during the year that does not meet any of the exceptions to the tax penalty must be reported as “Other taxes” on Form 1040 or Form 1040NR. The amount of the additional tax and “HSA” should be entered on the adjacent dotted line.

Tax-Free HSA Distributions

HSA distributions are fully tax-free when the funds distributed are used to pay qualified medical

expenses. As noted earlier, expenses for menstrual care products and other over-the-counter medicine and drugs are also considered qualified medical expenses beginning in 2020. Furthermore, no prescription requirement applies to other non-drug medical expenses incurred to purchase supplies

over the counter, such as:

• Bandages; • Contact lenses cleaner; • Blood pressure monitors; and

• Other similar medical supplies.

Taxable HSA Distributions

HSA distributions are taxable and must be included in the account holder’s gross income for tax purposes to the extent used for any purpose other than the payment of qualified medical expenses.

An HSA owner who is at the age at which he or she is eligible for Medicare may withdraw funds from the account for other than to pay qualified medical expenses without incurring a tax penalty. Although

the funds thus withdrawn are subject to income taxation as ordinary income—just as a distribution from a traditional IRA would be—no tax penalty applies.

HSA Distribution Tax Penalty

A taxable HSA distribution may also subject the account holder to a substantial tax penalty. HSA distributions are includible in income and subject to income tax penalties when they are used for other than qualified medical expenses and fail to meet specific exceptions. An HSA distribution includible in an account holder’s income is subject to a 20% penalty tax levied on the amount of the distribution

includible in income, unless one of the following exceptions applies:

• The distribution is received while the account holder is disabled; • The distribution is received following the account holder’s death; or • The distribution is received by the account holder after reaching the eligibility age for

Medicare.

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Even if these exceptions apply, however, a distribution not used to pay qualified medical expenses is

includible in the distributee’s income for tax purposes.

Individual Retirement Accounts Affected by SECURE Act

The SECURE Act, which became law on December 20, 2019, affected individual retirement arrangements (IRA) with respect to:

• contributions; and • distributions.

IRA Contribution Changes

The IRA contribution changes include:

• elimination of the age cap on traditional IRA contributions; • addition of taxable non-tuition fellowship and stipend payments to the definition of

“compensation” for purposes of IRA contributions; and

• the ability of certain foster care payment recipients to make nondeductible IRA contributions based on those payments.

Elimination of Age Cap on Traditional IRA Contributions

Before passage of the SECURE Act, traditional IRA contributions could be made only by taxpayers who had not yet reached age 70½ and were otherwise eligible to make a contribution. The age cap, however, never applied to Roth IRA contributions. Under the new tax rules effective for years after December 31, 2019, all taxpayers, regardless of age, who have earned income are eligible to make a traditional IRA contribution. (Spousal IRA contributions may be made despite the spouse for whom made having no earned income in an amount not to exceed the working spouse’s earned income reduced by the working spouse’s IRA contribution.)

The elimination of the IRA age cap is effective for years after December 31, 2019.

Taxable Non-Tuition Fellowship and Stipend Payments Considered Compensation for IRAs

For purposes of retirement savings, the SECURE Act added “any amount included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study” to the definition of compensation for purposes of making a contribution to an IRA. Accordingly, such payments may make the taxpayer (and spouse) eligible to make a traditional and/or Roth IRA

contribution.

The ability to include non-tuition fellowship and stipend payments for graduate or postdoctoral study in income for purposes of IRA contribution is effective for years after December 31, 2019.

Certain Foster Care Payments as Basis for Non-Deductible IRA Contribution

In some cases, a state may pay additional compensation to individuals who provide foster care to others whose physical, mental or emotional handicap is such that additional compensation is warranted as a qualified foster care payment. Although the additional compensation is excluded from

gross income, the recipient may make non-deductible IRA contributions based on the excluded compensation. The individual’s total IRA contribution, however, cannot exceed the IRA contribution limits when added to amounts contributed based on compensation.

The ability to make non-deductible IRA contributions is effective on the date of passage of the legislation, i.e. December 20, 2019.

IRA Distribution Changes

The changes to the IRA rules affecting distributions are the following:

• required minimum distributions must be made at age 72; • qualified birth or adoption distributions of up to $5,000 taken within one year avoid early

distribution tax penalty; and • inherited IRA balances following death of IRA holder before the required beginning date for

other than certain designated beneficiaries must be entirely distributed within ten years.

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Minimum Distributions Required at Age 72

Traditional IRAs (but not Roth IRAs) must meet required minimum distribution (RMD) rules during the holder’s lifetime. Under prior law, that initial RMD was required for the year the holder reached age 70½, but the holder could delay receiving the initial RMD until April 1st of the following year, a date

referred to as the “required beginning date.” The problem in so doing is that the second RMD is required by December 31st of the same year, resulting in the need to include two year’s worth of RMDs in the same yearly income.

Under the SECURE Act, RMDs are pushed back to age 72. However, that increase in the age at which RMDs must begin only applies to those traditional IRA holders who reach age 70½ in 2020. The same concept with respect to the first RMD continues to apply. Thus, traditional IRA holders who must begin RMDs at age 72 may defer their receipt of their first RMD until April 1st of the year

following the year in which they attain age 72.

The change to age 72 for the commencement of RMDs is effective for years after December 31, 2019.

Certain Qualified Birth or Adoption Distributions Avoid Early Distribution Penalty

In most cases, taxpayers who receive a distribution from a traditional IRA before age 59½ or a nonqualified distribution of gain from a Roth IRA before age 59½ are liable for a premature distribution tax penalty of 10% of the amount of the distribution included in income unless an

exception to the tax penalty applies. The SECURE Act adds an additional exception to the tax penalty for qualified birth or adoption distributions.

A qualified birth or adoption distribution is a distribution of up to $5,000 from an IRA occurring within one year following the birth or the date the adoption of an eligible adoptee is finalized. In order to be considered a qualified birth or adoption distribution, the distribution must be made after the birth or the adoption is finalized. The language of the Act makes clear that the term “eligible adoptee” means any individual (other than a child of the taxpayer’s spouse) who:

• has not attained age 18; or • is physically or mentally incapable of self-support.

In addition, the taxpayer who has taken a qualified birth or adoption distribution may repay the

distribution in one or more “repayments” in an aggregate amount not exceeding the amount of the qualified birth or adoption distribution.

The SECURE Act provision eliminating the premature distribution tax penalty for qualified birth or adoption distributions is effective for years after December 31, 2019.

Certain Inherited IRA Balances Must be Fully Distributed within 10 Years

The SECURE Act has revised the distribution requirements of inherited IRA balances for certain designated beneficiaries. Under the revised regulations, death of an original IRA owner before the annuity starting date occurring later than December 31, 2019 requires that the plan assets be distributed in their entirety by the end of the 10th year following the owner’s death. Thus, for these beneficiaries, the option to stretch the IRA or retirement account assets over life expectancy has

ended.

Certain designated beneficiaries, however, are not affected by the change in the law. Those unaffected designated beneficiaries are:

• spousal beneficiaries;

• disabled beneficiaries;

• chronically-ill beneficiaries; and

• designated beneficiaries who are not more than 10 years younger than the decedent.

For these beneficiaries, the options available under prior tax law to take distributions over life expectancy or, in the case of spousal beneficiaries, to take a spousal rollover, continue. Additionally, certain minor children of the original deceased plan participant or IRA owner are temporarily unaffected during their minority. However, when these minor children reach the age of majority, the 10-year rule applies.

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The change to the distribution requirements for affected designated beneficiaries following the death

of an IRA owner is effective for years after December 31, 2019.

Individual Retirement Accounts Affected by CARES Act

The CARES Act provides for broader distribution options and more favorable tax treatment for up to $100,000 in withdrawals, in aggregate, from certain retirement accounts, including IRAs when deemed to be coronavirus-related. The 10 percent early distribution penalty is waived for these coronavirus-related withdrawals.

Although the customary treatment of taxable IRA withdrawals calls for such distributions to be

included in income in the year taken, coronavirus-related distributions may be included in income ratably over a three-year period unless the taxpayer elects to include the income in the year of distribution. Furthermore, such distributions may be repaid within three years of distribution and will enable taxpayers to avoid current taxation up to the amount repaid.

Thus, with respect to individual retirement arrangements, the CARES Act:

• Waives the early distribution tax penalty for IRA distributions up to $100,000; • Extends the permitted taxation of IRA distributions over a three-year period;

• Allows repayment, i.e., rollover, of IRA withdrawals within three years of their distribution; and

• Suspends required 2020 minimum distributions (RMDs).

Let’s consider each of these changes.

Early Distributions

Contributions to IRAs are afforded special tax benefits under the Internal Revenue Code—benefits including possible deductibility of contributions, tax-deferred accumulations, possible tax-free

distributions—principally to encourage individuals to participate in such plans that will provide them with retirement income. In an attempt to limit the use of such funds to producing retirement income, early distributions—taxable distributions from an IRA before the account holder becomes age 59 ½—are generally subject to a 10% penalty tax.

This penalty is usually waived only in the following circumstances:

• The taxpayer plans to use the funds to purchase a first home;

• The taxpayer becomes disabled before the distribution occurs; • A beneficiary receives assets after the account owner’s death; • The taxpayer uses the funds for unreimbursed medical expenses, health insurance costs

incurred after job loss; • The taxpayer uses the funds for adoption or higher education expenses; • The distribution results from an IRS levy; • The distribution is from returns on non-deductible contributions;

• The taxpayer is in the military and is called to active duty for more than 179 days; or • The distribution is part of a SEPP (substantially-equal periodic payments) program.

In addition to these specified exceptions to imposition of the penalty that traditionally apply, the CARES Act adds coronavirus-related distributions. As a result of the CARES Act, the 10% tax penalty is waived for any coronavirus-related early distributions up to $100,000 from an individual’s IRA made

in 2020. This $100,000 limit applies to the aggregate of distributions to a single person – not per account. A retirement plan administrator may rely on an employee’s certification that the early

distribution is related to the coronavirus.

Taxation of IRA Withdrawals Over Three-Year Period

Not only is the tax penalty waived in the case of any coronavirus-related distribution, such a distribution is afforded additional special tax treatment. Under the CARES Act, unless the taxpayer elects to have the entire amount included in income in the year of withdrawal, any withdrawal amount required to be included in gross income for the taxable year—in most cases, the entire amount

withdrawn is includible in gross income—will be included ratably over the three-taxable-year period beginning with the taxable year in which the withdrawal was made.

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Example

Tina Taxpayer receives a $12,000 coronavirus-related distribution on May 1, 2020. She must begin including the distribution as income in 2020. Unless she elects to include the entire distribution in 2020 income, she must include at least $4,000 for 2020, at least $4,000 for

2021, and any remainder in 2022. That is, Tina may elect to report the entire $12,000 distribution for 2020 or spread out its reporting over three years, as long as at least $4,000 has been reported for 2020 and $4,000 reported for 2021 (and the remaining $4,000 reported for 2022.)

IRS guidance indicates that although plan administrators may rely on participants’ self-certification that they are eligible for CARES Act distributions, a taxpayer who takes such a distribution may owe penalties at a later date if it is shown that he or she made misrepresentations about eligibility for a

distribution. That is, taxpayers may later be disqualified from the 10% penalty waiver and the ability to spread income recognition over three years. Although a particular distribution may be disqualified, a plan will not be disqualified due to taxpayers’ misrepresentations about eligibility for COVID-related distributions.

Rollover of IRA Withdrawals Within Three Years of Distribution

Most retirement plan distributions may be rolled over and, thereby, avoid current taxation.

Coronavirus-related plan distributions enjoy a similar benefit in that they do not have to be included in income to the extent the taxpayer subsequently redeposits the distribution. In such a case, the redepositing will be treated, for tax purposes, as though the taxpayer had made a direct transfer of the redeposited funds from trustee to trustee.

Any IRA account holder who receives such a distribution is permitted to redeposit the distribution. Under the CARES Act, the recipient of a coronavirus-related distribution may make a single repayment contribution or multiple contributions in an aggregate amount not to exceed the amount of the

coronavirus-related distribution to an eligible retirement plan.

The repayment must occur during the three-year period beginning on the day after the date on which it was received. The redeposited withdrawals, for tax purposes, will be treated as if the redeposited distribution had been transferred to an eligible retirement plan in a direct trustee to trustee transfer

within 60 days of the distribution; in short, it will avoid taxation.

Example

Tina Taxpayer’s May 1, 2020 distribution of $12,000 will be treated as redeposited as long as

she makes a direct transfer or transfers on or before May 2, 2023. She may transfer a maximum of $12,000 (the original distribution amount) and keep tax-favored treatment for her funds. Any funds up to that $12,000 that she transfers in this manner will be treated as though it had been repaid within 60 days of the original distribution.11

Coronavirus-Related Distribution

The term ‘‘coronavirus-related distribution’’ means a distribution not exceeding $100,000 in the

aggregate from an IRA made in 2020 to an individual:

• Who is diagnosed with the virus SARS–COV-2 or with coronavirus disease 2019 (COVID– 19) by a CDC-approved test,

• Whose spouse or dependent is diagnosed with such virus or disease by such a test, or

• Who experiences adverse financial consequences as a result of – o being quarantined, being furloughed or laid off or having work hours reduced due to

such virus or disease, or

o being unable to work due to – o lack of child care due to such virus or disease, o closing or reducing hours of a business owned or operated by the individual

due to such virus or disease, or o other factors as determined by the Secretary of the Treasury.

11 IRC Section 408(d)(3) covers the otherwise applicable 60-day repayment requirement

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Suspension of 2020 Required Minimum Distributions

Traditional IRA owners must take required minimum distributions (RMDs) annually once that person reaches age 72 (formerly age 70 ½ prior to passage of the SECURE Act in the closing days of 2019). The CARES Act suspends this requirement for 2020 for individual retirement plans.

Roth IRA Eligibility

A Roth IRA is a personal retirement savings plan, funded by an annuity or trust/custodial account, which provides income tax deferral and may provide tax-free distribution of earnings through qualified distributions. It does not provide for contribution deductibility. Eligibility for a Roth IRA is limited to

individuals, regardless of age or qualified plan participation, whose income does not exceed certain modified adjusted gross income limits.

Limits on Contributions

The maximum amount an individual can contribute to a Roth IRA is $6,000 (in 2021) or, if he or she is age 50 or older, $7,000, less any amount contributed to a traditional IRA. The maximum contribution

that may be made to a Roth IRA is reduced, based on the individual’s modified adjusted gross income, according to the following formula:

Contribution reduction

= MAGI – applicable dollar amount

$15,000 ($10,000 if married filing a separate return or jointly)

x Maximum contribution

The “applicable dollar amount” in the Roth IRA formula is based on the individual’s filing status, as

shown in the following chart:

Federal Income Tax Filing Status

Applicable Dollar Amount (2020)

Applicable Dollar Amount (2021)

Single & head of household $124,000 $125,000

Married, filing a joint return $196,000 $198,000

Married, filing separately $0 $0

Traditional IRA Contributions by Active Participants

Every taxpayer who has earned income may make a traditional IRA contribution. In most cases, traditional IRA contributions are deductible by the taxpayer. However, when the taxpayer is an active participant in an employer-sponsored retirement plan, the usual deductibility of traditional IRA contributions may be changed, depending on the participant’s MAGI and filing status.

Tax Treatment of Contributions by Active Participants

There are three possibilities with respect to the tax deductibility of a traditional IRA contribution made by an active participant in an employer-sponsored retirement plan. The traditional IRA contribution

may be:

• Fully deductible, or • Partially deductible, or • Not deductible

The tax status of the traditional IRA contribution for an active participant depends entirely on his or

her modified adjusted gross income and filing status. Traditional IRA contributions made by active participants whose MAGI does not exceed the applicable dollar amount for his or her filing status are fully deductible.

The applicable dollar amounts for tax year 2021 are as shown in the chart below:

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Active Participants – Applicable Dollar Amounts - 2021

Taxable Year Married Filing Jointly Return Single or Head of Household

Return

2017 $99,000 $62,000

2018 $101,000 $63,000

2019 $103,000 $64,000

2020 $104,000 $65,000

2021 $105,000 $66,000

Reduced Deductibility of Traditional IRA Contributions for Active Participants

The reduction of the deductible amount of a traditional IRA contribution for an active participant filing

a single or head-of-household federal tax return is determined by using the following formula:

Reduction of Deduction (Single or HOH)

= Maximum contribution

X MAGI – applicable dollar amount $10,000

The reduction of the deductible amount of a traditional IRA contribution for an active participant filing a joint federal tax return is determined by using the following formula:

Reduction of Deduction (Married filing jointly)

= Maximum contribution

X MAGI – applicable dollar amount $20,000

(Note: The difference between the two formulas shown above is in the denominator of the fraction. For active participants filing single or head-of-household federal tax returns, the denominator is $10,000; for active participants filing a joint federal tax return, it is $20,000.)

If the taxpayer is an active participant in an employer-sponsored retirement plan and files his or her federal income tax return as single or head-of-household, the applicable dollar amount for 2021 is $66,000.

Notice that the formula is NOT a formula for determining the extent of the tax-deductibility of a traditional IRA contribution. It is the formula for determining an active participant’s (or spouse’s) REDUCTION in his or her traditional IRA deductibility.

Thumbnail Summary of 2021 Changes

Subject 2021 Change

MSA limits Individual: Deductible - $2,400 to $3,600 Out-of-pocket maximum - $4,800

Maximum contribution – 65% of deductible

Family:

Deductible - $4,800 to $7,150 Out-of-pocket maximum - $8,750 Maximum contribution – 75% of deductible

HSA limits Individual:

Minimum deductible - $1,400 Out-of-pocket maximum - $7,000 Maximum contribution* - $3,600

Family: Minimum deductible - $2,800 Out-of-pocket maximum - $14,000

Maximum contribution* - $7,200

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* HSA account holders age 55 or older may contribute up to an additional $1,000 annually

IRA contribution maximum Regular - $6,000

Catch-up - $1,000

Roth IRA contribution income limits

Single & head of household: Maximum MAGI for full contribution - $125,000 Contribution eliminated at MAGI of - $140,000

Married Filing Jointly: Maximum MAGI for full contribution - $198,000

Contribution eliminated at MAGI of - $208,000

Traditional IRA deductibility for active participants in employer-sponsored qualified retirement plan

Single & head of household: Maximum MAGI for full deductibility - $66,000 All deductibility eliminated at MAGI of - $76,000

Married Filing Jointly:

Maximum MAGI for full deductibility - $105,000

All deductibility eliminated at MAGI of - $125,000

CARES Act-related IRA changes • Coronavirus-related distributions receive favorable tax treatment: o No early withdrawal penalty for distributions up to

$100,000

o Taxpayer may choose ratable 3-year income recognition o Distribution may be repaid within 3 years of

distribution, resulting in no income recognition o RMDs suspended for 2020

Chapter Review

1. Ellen has maintained self-only health insurance coverage with a $2,500 deductible under her Archer MSA throughout 2021. What is the maximum tax-deductible contribution she can make to the MSA in 2021?

A. $1,875

B. $1,625

C. $4,800

D. $3,600

2. Peter, age 45, had $5,000 in qualified medical expenses in 2021 and took an $8,000 Archer MSA distribution during the year. If the excess distribution fails to meet a specific exception applicable to the tax penalty, for what tax penalty will he be liable?

A. $1,000

B. $1,600

C. $600

D. $0

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Chapter 5 – Pandemic-Related

Economic Stimulus

Introduction

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), legislation designed to provide economic relief for those impacted by COVID19, became law. This chapter

provides a general review of the principal provisions of the CARES Act and of other federal tax-related stimulus legislation passed during 2020. In addition, a discussion of the principal tax-related provisions of the American Rescue Plan Act of 2021 that became law on March 11, 2021 will be provided.

Chapter Learning Objectives

After completing this course, students should be able to:

• Describe the tax treatment of payments to small businesses under the Paycheck Protection

Program;

• Recognize the rules related to unemployment benefits under the American Rescue Plan Act;

• Identify the rules concerning expanded tax-favored use of retirement funds;

• Apply the changes in charitable contribution rules;

• Describe the changes in health savings account (HSA) rules related to first-dollar payment for

telehealth and COVID-19 testing and treatment; and

• Recognize the tax-related provisions of the American Rescue Plan Act (ARPA).

Recovery Rebates (Economic Impact Payments)

Direct payments to taxpayers are authorized under Section 2201 of the CARES Act. These rebates are referred to in the CARES Act as “2020 recovery rebates” and in IRS materials and elsewhere as

“stimulus payments” or “economic impact payments.” Subject to adjusted gross income (AGI) limitations, these refundable tax credit payments are authorized not exceeding:

• $1,200 for single filers and heads of household;

• $2,400 for joint filers; and

• $500 for each qualifying dependent child age 16 or under by the end of the tax year.

As a tax credit, the recovery rebate is nontaxable and is not counted as income with respect to determining a taxpayer’s eligibility for income-based programs such as Medicaid or health insurance Marketplace subsidies. A refundable credit is one that might reduce a taxpayer’s liability to less than $0, resulting in a refund. That is, an eligible taxpayer who does not even owe tax can receive a

payment from the Treasury in the case of a refundable credit. Recovery rebate payments will not be reduced to pay past-due taxes under a payment agreement with the IRS or to pay other state or federal debts. In general, creditors cannot get access to the

money for reduction or offset and direct payment to themselves. The CARES Act only allows offsets to cover past-due child support payments. Additional recovery rebates are authorized under the American Rescue Plan of 2021.

Paycheck Protection Program

Section 1102 of the CARES Act addresses the Paycheck Protection Program, a program managed by the U.S. Small Business Administration (SBA) designed to provide a direct incentive for small businesses to keep workers on the payroll. Under the program, a federally-guaranteed loan not exceeding specified limits may be made to a small business, and the SBA will forgive the loan if

certain requirements are met.

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Maximum Loan Amount

The maximum amount with respect to a covered loan under the program, as published April 15, 2020 in the Federal Register, is the lesser of A or B in which:

A. Is equal to – (Annual payroll costs – compensation over $100,000)

12 x 2.5 + (Outstanding amount of EIDL made

between 1/31/20 and 4/3/20 minus any EIDL advance)

B. Is equal to $10 million

Note that this formula refers to an “EIDL” or an “economic injury disaster loan.” As you will see later in this course, the availability of such loans is not the result of creation of a new program. Instead, it is an existing Small Business Administration (SBA) program and is the principal means of federal assistance for repairing and rebuilding non-farm, private sector disaster losses. It is assumed that an EIDL will be refinanced by the PPP loan.

Small Business Association Covered Loan Forgiveness

The loan forgiveness amount may be up to the full principal amount of the loan and any accrued interest, provided the borrower uses all the loan proceeds for forgivable purposes. In order for the entire loan proceeds and accrued interest to be forgiven, the following requirements must be met:

• All employees must be kept on the payroll for eight weeks, and • The money must be used for –

o payroll (at least 60% of loan12),

o rent, o mortgage interest, or o utilities.

For example, if the employer borrows $100,000 and uses at least $60,000 for the purposes listed above, the entire $100,000 plus any accrued interest will be forgiven. In a June 8, 2020 joint statement issued by the Treasury and the SBA, rules related to partial loan forgiveness were set

forth. If the borrower in the $100,000 example uses only $50,000 for payroll costs, only the $50,000 will be forgiven. Prior to this rule clarification, the understanding was that there would be no loan

forgiveness if the indicated threshold was not met.13

On October 8, 2020, the SBA and Treasury issued new interim final rules concerning PPP forgiveness for small loans. Under the interim final rules, a borrower* of a PPP loan of $50,000 or less may use SBA Form 3508S to apply for loan forgiveness. A borrower that uses Form 3508S (or the lender’s equivalent form) is exempt from any reduction in the forgiveness amount based on:

• Reductions in full-time equivalent (FTE) employees; or • Reductions in employee salary or wages.

Important Note on Applicability of Exemption of Reduction *Note: The exemption from reduction in forgiveness applicable to a PPP loan of $50,000 or less does not apply to a borrower that, together with its affiliates, received loans totaling $2 million or greater.

Tax Treatment of Loan Forgiveness

If a taxpayer borrows money that he or she is legally obligated to repay, that taxpayer has incurred

debt. When debt is forgiven or discharged for less than the full amount owed, the canceled portion is generally considered income for federal tax purposes. There are some exceptions to the taxation of cancelation of debt income (CODI). CODI normally would be reported in income for the year in which

the associated debt was canceled unless an exception applies.

Exceptions to taxability of canceled debt are as follows:

• Debt canceled in a Title 11 bankruptcy case; • Debt canceled to the extent insolvent; • Cancellation of qualified farm indebtedness;

12 The original threshold was 75%. It was lowered to 60% on June 5, 2020. 13 See https://home.treasury.gov/news/press-releases/sm1026

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• Cancellation of qualified real property business indebtedness; and

• Cancellation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2021.

When debt is canceled based on one of these exceptions, certain tax attributes (credits, losses,

carryovers, and others) are lost. These attributes must be reduced by the amount of debt canceled. The canceled indebtedness resulting from a forgiven covered loan under the Paycheck Protection Program is excluded from the borrower’s gross income. Absent this provision for exclusion, PPP loan forgiveness would be includible in income.

In Notice 2020-32, providing tax-preparation guidance related to the Paycheck Protection Program (PPP), the IRS stated “… section 265(a)(1) of the Code disallows any otherwise allowable deduction under any provision of the Code, including sections 162 and 163, for the amount of any payment of an

eligible section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because such payment is allocable to tax-exempt income. Consistent with the purpose of section 265, this treatment prevents a double tax benefit.” In short, the expenses used to obtain forgiveness under the PPP—expenses that would otherwise be deductible—are not tax-

deductible.

In Revenue Ruling 2020-27, the IRS addressed the issue of timing with respect to PPP loan

forgiveness and held that “[a] taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.” (Italics added.)

Thus, a taxpayer may not take a tax deduction for expenses paid or accrued:

• That were used as the basis for PPP loan forgiveness; or • Which the taxpayer reasonably expects to use as the basis for PPP loan forgiveness.

The holding of non-deductibility applies even if the tax-exempt income—the covered loan forgiveness, in other words—was neither accrued nor received by the taxpayer by the end of the taxable year. That

position was reversed under TRA 2020. Accordingly, expenses used as the basis for PPP loan forgiveness may be deducted as though the loan forgiveness had not occurred.

Unemployment Benefits

The Pandemic Unemployment Assistance (PUA) provisions of the CARES Act provide for federal unemployment benefits of $600 per week in addition to any state-provided unemployment assistance. The federal program also extends the maximum period of unemployment benefits by 13

weeks from the customary 26-week state-provided assistance to a maximum period of 39 weeks. States are not permitted to reduce their unemployment benefits—either in amount or duration—during the extended period provided under the Act.

Department of Labor guidance indicates that employees are eligible for up to an additional 10 weeks of paid expanded family and medical leave at 2/3 the employee’s regular pay rate if that employee must care for a child whose school or child care provider is closed or unavailable for COVID-19 related

reasons.14 Eligibility for benefits is far broader than under typical state unemployment laws. Self-

employed persons and those with limited employment history are eligible for certain benefits provided under the CARES Act. Unemployment benefits are further extended under the American Rescue Plan Act of 2021, discussed later in this chapter.

Benefits may be available for individuals who may be otherwise able to and available for work but are unemployed, partially unemployed, or unable or unavailable to work because of the need to care for

14 DOL guidance may be accessed at https://www.dol.gov/agencies/whd/pandemic/ffcra-

employee-paid-leave and

https://www.dol.gov/sites/dolgov/files/WHD/Pandemic/Quick%20Tip%20Poster%20FFCRA.

pdf

53

family or household members for COVID-19 related reasons. Additionally, primary caregivers for

children or other household members may be eligible for PUA due to school or other facility closures.

Tax Treatment of Unemployment Benefits

Both regular unemployment insurance benefits and the unemployment insurance benefits expanded

under the CARES Act are includible in gross income and subject to income taxes.

Generally, tax treatment of unemployment benefits depends on the type of program paying the benefits. Unemployment compensation includes amounts received under an unemployment compensation law of the United States or of a state. IRS Publication 525, Taxable and Nontaxable Income, provides that “all unemployment compensation” must be included in income. That is, the federal government taxes unemployment income received from federal programs, state programs, and other governmental programs.15 Note that it is unemployment compensation that is included.

The recipient generally may elect to have federal income taxes withheld at 10% at the time of receipt.16 If this election is not made, the recipient should be mindful of quarterly estimated tax payment requirements. Estimated tax payments are paid quarterly by a taxpayer to cover income

taxes on amounts not subject to tax withholding.

If a taxpayer repays unemployment compensation in the same year in which it was received, he or she should subtract that repaid amount from the total received. In contrast, if a taxpayer repays

unemployment compensation in a subsequent year, that amount can be reported on Schedule A of Form 1040, line 16, if the repaid amount exceeds $3,000. For tax years beginning after 2017, taxpayers cannot claim any miscellaneous itemized deductions; accordingly, if the amount repaid was $3,000 or less, the taxpayer cannot deduct it from income in the year repaid.

The American Rescue Plan Act of 2021 suspends the federal income tax on up to $10,200 of 2020 unemployment compensation if the taxpayer’s adjusted gross income is less than $150,000.

Charitable Contributions

The CARES Act temporarily suspends some of the limitations imposed by the Internal Revenue Code with respect to certain individual taxpayer cash contributions. In general, qualified contributions are

disregarded in applying IRC section 170 as it pertains to percentage limits17 and carryovers of excess contributions.18

A qualified contribution is allowed as a deduction to the extent the total amount of such contributions doesn’t exceed the excess of the taxpayer’s contribution base—a taxpayer’s adjusted gross income (computed without regard to any net operating loss carryback)—over the amount of all other charitable contributions allowed under the Code. In other words, an individual taxpayer may make a tax-deductible cash contribution of up to 100% of his or her AGI, i.e. an increase from the current 60% of AGI.

Prior to passage of the CARES Act, the 60% limitation had been in place only since 2018 after passage

of the 2017 Tax Cuts and Jobs Act (TCJA). The 60% was an increase from the 50% limit applicable before the TCJA changes.

If the aggregate amount of qualified contributions made in the contribution year exceeds the limitation, i.e. it exceeds 100% of the individual taxpayer’s AGI, the excess may be carried over to the succeeding five years.

15 IRC Section 85. 16 To make this election, Publication 525 indicates that the taxpayer must file Form W-V4

and provide it to the paying office. 17 Section 170(b) 18 Section 170(d)

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Non-cash charitable contributions made by an individual taxpayer may be deducted by up to 50

percent of AGI (without regard to NOL carrybacks). The CARES Act did not provide for a 100%-of-AGI limit for personal property.19

The charitable contribution provisions of the CARES Act also increase the percentage of corporations’

taxable income that may be deducted as a charitable contribution. In the case of a corporation, the deduction of qualified contributions is increased from 10% to the extent that the total of such contributions does not exceed the excess of 25% of the taxpayer’s taxable income over the amount of all other charitable contributions allowed.

As in the case of individual taxpayers, qualified contributions made by the corporation in the contribution year exceeding the limitation, i.e. it exceeds 25% of the corporate taxpayer’s taxable income, may be carried over to the succeeding five years.

Qualified Contributions

The term ‘‘qualified contribution’’ means a charitable contribution meeting the following two requirements:

1. The contribution is paid in cash during calendar year 2020 to an organization described in section 170 of the Internal Revenue Code,20 and

2. The taxpayer has elected the application of this section with respect to the 2020 contribution.

However, the term “qualified contribution” doesn’t include a contribution by a donor if the contribution is—

• To a supporting organization described in section 509(a)(3) of the Internal Revenue Code, or • For the establishment of a new, or maintenance of an existing, donor advised fund.21

A “supporting organization” is a charity that supports other exempt organizations (usually public charities).22 An entity that meets 501(c)(3) and 509(a)(3) requirements is treated for tax purposes as a public charity rather than a private foundation. Private foundations are subject to more restrictive

regulations and receive less tax-favored treatment than public charities do.

The Taxpayer Relief Act of 2020 (TRA 2020) extends the period during which an otherwise eligible

contribution will be considered a qualified contribution to include 2021.

Partial Above-the-Line Deduction for Charitable Contributions

A new charitable deduction is available to taxpayers who do not itemize deductions. Sometimes referred to as a “universal deduction,” this CARES Act provision permits a non-itemizing taxpayer to take an above-the-line deduction of up to $300 for charitable contributions made in taxable years

beginning in 2020. A deduction that is “above the line” reduces AGI. It is a deduction that is made in calculating AGI in the first place. Such deductions may be taken regardless of whether a taxpayer itemizes deductions.

TRA 2020 extends the above-the-line charitable deduction for taxpayers who do not itemize to include 2021 and increases the maximum deductible limit to $600 for married taxpayers filing jointly.

19 https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-

contribution-deductions 20 Section 170(b)(1)(A)

21 In general, the term “donor advised fund” means a fund or account—

• Which is separately identified by reference to contributions of a donor or donors,

• Which is owned and controlled by a sponsoring organization, and

• With respect to which a donor (or any person appointed or designated by such

donor) has, or reasonably expects to have, advisory privileges with respect to the

distribution or investment of amounts held in such fund or account by reason of the

donor’s status as a donor. 22 At https://www.irs.gov/charities-non-profits/section-509a3-supporting-organizations

55

Relaxation of Retirement Fund Tax Rules

As noted earlier with respect to distributions from an IRA, the CARES Act provides for broader distribution options and more favorable tax treatment for up to $100,000 in withdrawals, in aggregate, from retirement accounts. Those coronavirus-related distribution options also apply to

employer-sponsored defined contribution qualified retirement plans. The 10 percent early distribution penalty is waived for these coronavirus-related withdrawals.

Coronavirus-related distributions may be included in income ratably over a three-year period unless the taxpayer elects to include the income in the year of distribution. IRA and qualified plan withdrawals may be rolled over within three years of distribution.

To provide temporary relief for the 2020 economic crisis, section 2202 of the CARES Act addresses changes affecting retirement plan funds and sets forth special distribution options, provides for

relaxed IRA and other retirement account rollovers, and expands permissible loans from retirement plans.

Qualified Plan Loan Maximum Increased

Not all qualified plans permit participants to borrow from the plan, and, under the law prior to passage of the CARES Act, those that offered such loans were required to limit them to the lesser of $50,000 or one half of the present value of the plan participant’s vested accrued benefit. In addition to meeting

other requirements—formal documentation, loan term, level amortization, etc.—a borrower must meet the specified repayment schedule or risk having the loan considered a taxable distribution and subject to an early distribution tax penalty.

Pursuant to the provisions of the CARES Act with respect to qualified plan loans made for a period of 180 days beginning on the date of passage of the Act:

• The maximum qualified plan loan permitted is increased to the lesser of – o $100,000, or

o The present value of the plan participant’s nonforfeitable, i.e. vested, accrued benefit; • Repayment of the loan is changed as follows –

o The due date of any repayment occurring during the period beginning on March 27, 2020 and ending on December 31, 2020 is delayed for one year,

o Subsequent loan principal and interest repayment due dates are adjusted to reflect the delayed repayment(s), and

o Neither the resulting non-level amortization nor the greater-than-five-year term of the

plan loan caused solely by the authorized changes in loan repayment will cause the loan to be considered a taxable distribution.

Early Distributions

Contributions to qualified retirement plans are afforded special tax benefits under the Internal Revenue Code—benefits including possible deductibility of contributions, tax-deferred accumulations, possible tax-free distributions—principally to encourage employer sponsorship of and employee

participation in such plans. To limit the use of such funds to producing retirement income, early distributions—i.e., distributions from a qualified plan or IRA before the plan participant or IRA account holder becomes age 59 ½—would generally be subject to a 10% penalty tax unless an exception to the penalty applies.

In addition to the specified exceptions to imposition of the penalty that traditionally applies to early distributions, the CARES Act adds coronavirus-related distributions. As a result of the CARES Act, the 10% tax penalty is waived for any coronavirus-related early distributions up to $100,000 from a

qualified plan made in 2020. This $100,000 limit applies to the total of all distributions to a single person – not per plan. A retirement plan administrator may rely on an employee’s certification that the early distribution is related to the coronavirus.

Taxation of Qualified Plan Distributions Over Three-Year Period

Not only is the tax penalty waived in the case of any coronavirus-related distribution, such a distribution is afforded additional special tax treatment. Under the CARES Act, unless the taxpayer elects to have the entire amount included in income in the year of withdrawal, any withdrawal amount

required to be included in gross income for the taxable year—in most cases, the entire amount

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withdrawn is includible in gross income—will be included ratably over the three-taxable-year period

beginning with the taxable year in which the withdrawal was made.

Rollover of Qualified Plan Withdrawals Within Three Years of Distribution

Most retirement plan distributions may be rolled over and, thereby, avoid current taxation.

Coronavirus-related plan distributions enjoy a similar benefit in that they do not have to be included in income to the extent the taxpayer subsequently redeposits the distribution. In such a case, the redepositing will be treated, for tax purposes, as though the taxpayer had made a direct transfer of the redeposited funds from trustee to trustee.

The repayment must occur during the three-year period beginning on the day after the date on which it was received. The redeposited withdrawals, for tax purposes, will be treated as if the redeposited distribution had been transferred to an eligible retirement plan in a direct trustee to trustee transfer

within 60 days of the distribution; in short, it will avoid taxation.

Coronavirus-Related Distribution

The term ‘‘coronavirus-related distribution’’ means a distribution not exceeding $100,000 in the aggregate from a qualified retirement plan made in 2020 to an individual:

• Who is diagnosed with the virus SARS–COV-2 or with coronavirus disease 2019 (COVID– 19) by a CDC-approved test,

• Whose spouse or dependent is diagnosed with such virus or disease by such a test, or • Who experiences adverse financial consequences as a result of –

o being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, or

o being unable to work due to – o lack of child care due to such virus or disease, o closing or reducing hours of a business owned or operated by the

individual due to such virus or disease, or o other factors as determined by the Secretary of the Treasury.

Suspension of 2020 Required Minimum Distributions

IRC Section 401(a)(9) requires a retirement plan participant to take required minimum distributions (RMDs) annually once that person reaches age 72 or retires from the employer sponsoring the plan, if later. The CARES Act suspends this requirement for 2020 for participants in defined contribution plans.

Modifications for Net Operating Losses (NOLs)

A business’s profit and loss volatility can cause fundamentally unequal income tax treatment among different business entities. The ability of a firm to carryover net operating losses helps to equalize that treatment.

Example

Consider the tax treatment of two firms—firm XYZ whose net income is stable from year to year and firm ABC whose net income is characterized by significant variability—but whose net income over two years is identical. Suppose the XYZ firm has $50,000 net income in each of years one and two while the ABC firm has a $100,000 loss in year one and $200,000 net income in year two. Although both

firms have the same net income over the two-year period, ABC has a substantially larger tax bill, as shown below:

Firm Yr. 1 Net Income Yr. 2 Net Income Yr. 1 Tax Yr. 2 Tax Combined Effective Rate

ABC ($100,000) $200,000 $0 $42,000 42%

XYZ $50,000 $50,000 $10,500 $10,500 21%

However, when ABC takes a net operating loss (NOL) deduction in year two, it equalizes the two-year tax rate between the two firms as shown in the next chart (below):

57

Firm Yr. 1 Net

Income

Yr. 2 Net Income Yr. 1

Tax

Yr. 2 Tax Combined Effective

Rate

ABC ($100,000) ($200,000 - $100,000) $0 $21,000 21%

XYZ $50,000 $50,000 $10,500 $10,500 21%

Under the Internal Revenue Code prior to the passage of the CARES Act, firms:

• Could not carry back losses to a previous year,

• Could carry losses forward for an unlimited number of years, • Were limited to an NOL deduction of up to 80% of their taxable income, and any additional

loss needed to be carried forward, and • Organized as pass-through businesses were limited to using no more than $250,000

($500,000 for joint filers) of losses to offset taxable income earned outside of the pass-through business.

The CARES Act alleviates some of the inequality for firms with volatile incomes by:

• Providing for a five-year carryback for losses occurring in 2018 through 2020, • Temporarily removing the 80% NOL deduction limit, and • Permitting owners of pass-through businesses to disregard the prior $250,000/$500,000 limits

to offset non-business income for years 2018 through 2020.

Thus, a NOL arising in tax years beginning in 2018, 2019, and 2020 generally would be carried back, under IRC Section 172, to each of the five years preceding the tax year in which the loss was incurred.

A 2018 loss can be carried back as far as 2013, when the highest corporate tax rate was 35%. Prior year returns may be amended and tax refunds collected. A taxpayer may make an irrevocable election to waive the carryback period for the NOL for any tax year.23

For the owner of certain pass-through entities, the TCJA had placed a limitation on the amount that could be used for these losses. A single taxpayer was limited to $250,000 and a joint filer was limited to $500,000. These limits were removed, as noted above, so that taxpayers may offset non-business income by greater than those amounts to the extent they had income in the years to which NOLs are

carried back.

Qualified Medical Expenses

Only certain medical expenses are considered “qualified medical expenses” for which a taxpayer may receive a tax deduction and which may be considered qualified medical expenses under various healthcare programs, such as medical flexible spending accounts (FSAs), HSAs and Archer MSAs. The

CARES Act adds over-the-counter drugs and medical products as qualified medical expenses effective after December 31, 2019. In addition, the Taxpayer Relief Act of 2020 (TRA 2020) permanently reduces the AGI threshold for deduction of unreimbursed medical expenses to 7.5%.

High Deductible Health Plans and COVID-19-Related Expenses

Section 223 of the Internal Revenue Code authorizes HSAs and a tax deduction for contributions to them, and it requires that coverage be provided by a high deductible health plan (HDHP). HDHPs, as the name suggests, impose a high deductible that must normally be met before benefits are paid for

covered charges. IRS Notice 2020-15 provides that a taxpayer who is otherwise eligible to establish and maintain an HSA will not be considered ineligible even though the health plan covers testing for and treatment of COVID-19 without a deductible or with a deductible below the minimum HDHP deductible.

Additional Health Care Related Provisions

Section 125 cafeteria plans maintained by employers permit employee-taxpayers to allocate pre-tax income to the plan and to subsequently use those funds to pay certain healthcare and dependent

23 At https://www.irs.gov/pub/irs-drop/rp-20-24.pdf

58

assistance expenses. The operation of a cafeteria plan is characterized by inflexibility with respect to

amounts that may be allocated, the expenses that are reimbursable and the general prohibition against making changes during a coverage period.

The CARES Act provides temporarily increased flexibility in making mid-year changes (in 2020) to

taxpayers’ Section 125 cafeteria plan elections. IRS Notice 2020-29 indicates that taxpayers may change certain elections related to employer-sponsored health insurance coverage, flexible spending accounts for health care, and dependent care assistance. Eligible employees may increase their pre-tax contributions, revoke elections, enroll in plans, and otherwise change their existing elections.

Cafeteria plan administrators may also extend the period of time covered by these accounts as well as the grace period for filing claims for medical and dependent care expenses incurred during calendar year 2020 (and any extended coverage date). A taxpayer would otherwise have to forfeit funds not

used by the end of the calendar year.

Section 911 Foreign Earned Income

Internal Revenue Code § 911 provides an exclusion from income for a portion of foreign earned income and housing costs for persons living in a foreign country. The permitted exclusion applies to an

individual who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year or is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

Because of the COVID-19 pandemic and the travel bans imposed to limit its spread, the Treasury Department and the IRS released Revenue Procedure 2020-27. Revenue Procedure 2020-27 provides that qualification for the foreign earned income exclusion and foreign housing cost amount from gross income will not be impacted as a result of days spent away from a foreign country due to the COVID-

19 pandemic.

Pursuant to the Revenue Procedure, the COVID-19 emergency is an adverse condition that precluded the normal conduct of business:

• In the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau, as of December 1, 2019; and

• Globally, as of February 1, 2020.

Absent an extension, the period covered by the Procedure ends on July 15, 2020. Individuals seeking to qualify for the § 911 exclusion because they could reasonably have been expected to have been in a foreign country for 330 days except for the COVID-19 emergency and have met the other requirements for qualification may use any 12-month period to meet the qualified individual requirement.

Section 1031 Timing Relief

A Section 1031 exchange involves selling one investment property and replacing it with another in a manner that allows for capital gains on the sale to be deferred. Most 1031 exchanges will result in no tax (or limited tax) being due at the time of the swapping of properties. The properties have to be like-kind (no swapping of a vacation rental house for a jewelry collection, in other words). The TCJA tightened the like-kind requirement so that the deferral only applies to real estate.24

Capital gains may be deferred on the sale of property by rolling over the gains from one property to another like-kind property under an exchange referred to as a 1031 exchange. The like-kind exchange authorized under § 1031 of the Internal Revenue Code demands that certain actions—referred to as “Specified Time Sensitive Actions”—occur as required in order to accomplish the tax deferral provided for under the statute.

These time sensitive actions are:

1. Within 45 days of the sale of the property, the seller must identify a replacement property;

and

24 https://www.irs.gov/newsroom/like-kind-exchanges-now-limited-to-real-property

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2. Within 180 days of the sale the seller must purchase the replacement property.

IRS Notice 2020-23 provides relief from these time sensitive actions that are due to be performed on or after April 1, 2020 and before July 15, 2020. Under the relief provided in the Notice, the due date is extended to July 15, 2020.

When the 45- and 180-day deadlines and other Section 1031 requirements are met, any capital gain on the sold property can be rolled over to the purchased property. Capital gains tax will be avoided until the purchased property is sold. If the replacement property is sold much later, it could qualify for long-term capital gains treatment rather than short-term tax treatment. In many years, the long-term capital gains tax rate is lower than that for short-term capital gains.

Technical Amendments Regarding Qualified Improvement Property

The CARES Act makes qualified improvement property (QIP) eligible for bonus depreciation. The Tax Cuts and Jobs Act had provided for 39-year depreciation of qualified improvement property (QIP) rather than the intended 15 years. Additionally, the TCJA made such property ineligible for bonus

depreciation. Accordingly, the CARES Act sets the depreciable life of qualified improvement property at 15 years, thereby enabling taxpayers to take advantage of bonus depreciation. This correction is

retroactive.

Limitation on Losses for Non-Corporate Taxpayers

The Tax Cuts & Jobs Act (TCJA) disallowed the deduction of “excess business losses” for tax years beginning after December 31, 2017 and ending before January 1, 2026 by non-corporate taxpayers.

Accordingly, non-corporate taxpayers were generally required to carry forward losses in excess of $250,000 ($500,000 for joint filers) as NOLs. Such carryovers were limited to 80% of net income for tax years beginning after December 31, 2017.

The CARES Act retroactively defers the effective date of this rule to tax years beginning after December 31, 2020. Because of that deferral, a non-corporate taxpayer now can recognize those losses for the 2018, 2019, and 2020 tax years. The CARES Act removes the 80% limitation for tax years beginning before January 1, 2021. The 80% limitation returns for tax years beginning January

1, 2021 and later.

Note that the American Rescue Plan Act of 2021 extends the excess business loss limitation applicable to non-corporate taxpayers to January 1, 2027.

Modifications of Limitation on Business Interest Expense

Internal Revenue Code § 163(j)(1) provides that business interest expense is deductible in an amount

not exceeding the sum of the following:

1. The business’ interest income for the year, 2. 30% of the business’ adjusted taxable income25 (ATI), plus 3. The business’ floor plan financing26 interest for the year.

The CARES Act modifies the calculation for determining deductible business interest expense by:

• Increasing item 2 (above) to 50% of the business’ ATI for regular (C) corporations and S

corporations for taxable years beginning in 2019 and 2020, and • Increasing item 2 (above) to 50% of the business’ ATI for partnerships for taxable years

beginning in 2020.

Additionally, the CARES Act permits taxpayers to elect to use their 2019 ATI as their ATI in 2020.

25 Adjusted taxable income (ATI) is the business’ taxable income before interest expense,

income tax expense, depreciation, amortization and depletion. 26 “Floor plan financing indebtedness” is indebtedness a) used to acquire motor vehicles held

for sale or lease, and b) secured by the inventory so acquired, i.e. the motor vehicles.

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Special Partnership Rules

Rather than increasing the percentage of ATI in 2019 for purposes of determining deductible interest in the case of partnerships, the 2019 excess business interest—the business interest in excess of 30% of the business’ ATI, in other words—is split. Half of the 2019 excess business interest is treated as

paid or accrued in 2020 and deductible by the partner without regard to the § 163(j) limitation, and the balance is subject to the existing rules.

Exclusion of Certain Employer Payments of Student Loans

The Internal Revenue Code, prior to passage of the CARES Act, permitted employers to assist their

employees with tax-free reimbursement up to $5,250 for tuition and books. However, any money in excess of that amount counted as income for the employee. In addition, funds received toward student loans would also be deemed income which means the employee would be required to pay taxes on the amount, and, if the employee’s student loan repayment was being repaid in accordance with an income-based repayment plan, the employee’s monthly payment could increase due to the

resulting higher income.

The CARES Act enables employers to contribute toward the principal or interest on an employee’s

qualifying student loan, and those student loan payments are tax-free up to $5,250 if made at any time after March 27, 2020 through December 31, 2020. Neither an employer’s payroll tax or an employee’s income tax is affected by payment of the student loan.

In order for the payment to be tax-free, the employee must not have the option to receive the funds as taxable income. Furthermore, unless the employer’s student loan payment is identified as payment of the loan principal only—the interest expense being paid by the employee—the employee will not be able to deduct the loan interest since it would have been paid by the employer.

The American Rescue Plan Act of 2021 modifies the tax treatment of student loan forgiveness through 2025, as discussed later in this chapter.

Economic Injury Disaster Loans (EIDL)

The Economic Injury Disaster Loan (EIDL) program is an existing Small Business Administration (SBA)

program and the principal means of federal assistance for repairing and rebuilding non-farm, private sector disaster losses. The SBA may provide up to $2 million under the program for EIDL assistance to small businesses or private non-profit organizations located in a presidentially-declared disaster area that have sustained economic injury. No front-end fees or early payment penalties apply, and the term of repayment is determined by the borrower’s ability to repay the loan.

The EIDL program has been expanded by the CARES Act and, with the emergency declaration on March 13, 2020 under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, all of the

United States has been declared a disaster area. Thus, any small business in the United States that meets the balance of requirements can be eligible.

The CARES Act provides for emergency EIDL grants to eligible entities during the covered period which extends from January 31, 2020 through December 31, 2020.

Eligible entities include:

• Small business concerns,

• Private non-profit organizations, • Small agricultural cooperatives, • Businesses with not more than 500 employees27, • Individuals who operate under a sole proprietorship, with or without employees, or as an

independent contractor, • Cooperatives with not more than 500 employees, • ESOPs with not more than 500 employees, and

• Tribal small business concerns with not more than 500 employees.

27 Restaurants and hospitality businesses may qualify if they have not more than 500

employees per location.

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The CARES Act also waives certain rules and requirements for loans made in response to COVID-19

during the covered period, including:

• Rules related to the need for personal guarantees on advances and loans not exceeding $200,000,

• The requirement that an applicant have been in business for the one-year period before the disaster, except that no waiver may be made for a business not in operation on January 31, 2020, and

• The requirement that an applicant be unable to obtain credit elsewhere.

With respect to small-dollar loans made during the covered period in response to COVID-19, the CARES Act provides for additional flexibility. Pursuant to that additional flexibility, the SBA may:

• Approve an applicant based solely on the applicant’s credit score, or

• Use alternative appropriate methods to determine an applicant’s ability to repay.

Emergency Grants

During the covered period, an eligible entity that applies for an SBA loan under the CARES Act in response to COVID-19 may request that the SBA provide an advance of up to $10,000 within three days of application. An advance provided may be used for any allowable purpose described in the Small Business Act, including:

• Providing paid sick leave to employees unable to work due to the direct effect of COVID-19, • Maintaining payroll to retain employees, • Meeting increased costs to obtain materials unavailable from the applicant’s original source

due to interrupted supply chains, • Making rent or mortgage payments, and • Repaying obligations that cannot be met due to revenue losses.

No repayment of an advance provided pursuant to the provisions of the CARES Act is required, even if

the applicant is subsequently denied a loan under the program.

Taxpayer Relief Act of 2020

The Taxpayer Relief Act of 2020 (TRA 2020), which became law on December 27, 2020, made numerous changes to existing tax law, among which are those affecting:

• Medical expense deduction threshold; • Education tax benefits; • Deductibility of expenses used as the basis for PPP loan forgiveness; • Qualified charitable contributions; • Business meal expense deductions; and • Flexible spending arrangements.

Unreimbursed Medical Expense Threshold Lowered

The threshold for deduction of unreimbursed medical expenses has been scheduled to increase from 7.5% of AGI to 10% of AGI several times but has been forestalled repeatedly by temporary tax extenders and was again expected to increase to 10% again in 2021. However, TRA 2020 makes permanent the 7.5% AGI floor for deduction of unreimbursed medical expenses.

Education Tax Benefits

TRA 2020 repealed the tax deduction for qualified tuition and related expenses and has increased the income phase-out limits applicable to the lifetime learning credit to equal the phase-out limits

applicable to the American opportunity credit.

Tax Treatment of Expenses used for PPP Loan Forgiveness

The rebate-related provisions of the CARES Act were modified by TRA 2020 to provide an additional refundable tax credit. The additional tax credits provide a second round of direct payments and are authorized not exceeding:

• $600 per individual taxpayer;

• $1,200 for married taxpayers filing jointly; and

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• $600 per qualifying child under age 17.

The IRS position declaring business expenses non-deductible to the extent used as the basis for forgiven PPP debt has been reversed by TRA 2020. Under the provisions contained in § 278 of TRA 2020 providing for clarification of tax treatment, the law states:

For purposes of the Internal Revenue Code of 1986—

(1) no amount shall be included in the gross income of a borrower by reason of forgiveness of

indebtedness described in section 1109(d)(2)(D) of the CARES Act,

(2) no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall

be denied, by reason of the exclusion from gross income provided by paragraph (1), and (3) in the case of a borrower that is a partnership or S corporation—

(A) any amount excluded from income by reason of paragraph (1) shall be treated as

tax exempt income for purposes of sections 705 and 1366 of the Internal Revenue

Code of 1986, and

(B) except as provided by the Secretary of the Treasury (or the Secretary’s delegate),

any increase in the adjusted basis of a partner’s interest in a partnership under

section 705 of the Internal Revenue Code of 1986 with respect to any amount

described in subparagraph (A) shall equal the partner’s distributive share of

deductions resulting from costs giving rise to forgiveness described in section

1109(d)(2)(D) of the CARES Act.

Accordingly, normally-deductible business expenses used as the basis for PPP loan forgiveness continue to be tax-deductible.

Qualified Charitable Expenses

TRA 2020 extends the period during which an otherwise eligible charitable contribution will be considered a qualified contribution to include 2021. In addition, it increases the above-the-line charitable deduction for married taxpayers filing jointly who don’t itemize to $600.

Temporary Increase in Business Meal Deductibility

TRA 2020 provides for temporarily increased deductions for business meals. Pursuant to TRA 2020, businesses are permitted a 100% tax deduction for business meals—up from the current 50%—if the

food or beverages are provided by a restaurant. The increased business meal deduction is available for 2021 and 2022.

Flexible Spending Arrangements

Under the CARES Act, cafeteria plan administrators may extend the period of time covered by flexible spending accounts as well as the grace period for filing claims for medical and dependent care expenses incurred during calendar year 2020. Otherwise, a taxpayer would normally have to forfeit

funds not used by the end of the calendar year.

To provide further taxpayer flexibility, TRA 2020 also permits taxpayers to roll over any unused FSA amounts from 2020 to 2021 and from 2021 to 2022 as well as to make midyear prospective contribution changes in 2021.

American Rescue Plan Act of 2021

Congress passed the $1.9 trillion American Rescue Plan Act (ARPA) that became law on March 11, 2021. The provisions of ARPA likely to be of particular interest to tax preparers and advisors are those

that provide for:

• Partially tax-free unemployment benefits in 2020;

• Advance payment of recovery rebates in the form of refundable tax credits available to

taxpayers meeting certain income criteria;

• COBRA tax-free refundable advance payment premium assistance;

• Enhanced child tax credit (CTC) for eligible taxpayers;

• Enhanced earned income tax credit (EITC);

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• Temporarily increased child and dependent care tax credit and employer-provided dependent

care assistance;

• Temporary expansion of the § 36B premium tax credit and relaxation of excess credit

repayment requirements;

• Temporary non-inclusion in income of student loan discharge; and

• Limited extension of the § 461(l) limitation on excess business losses of noncorporate

taxpayers.

Unemployment Benefits

ARPA extends the federal unemployment compensation benefits of $300 weekly through September 6,

2021 in addition to any state unemployment benefits. Additionally, ARPA § 9042 suspends the federal income tax on up to $10,200 of 2020 unemployment compensation (received by each spouse in the case of a joint tax return) if the adjusted gross income of the taxpayer is less than $150,000.

Recovery Rebates

ARPA provides tax-free, refundable, recovery rebate tax credits of up to $1,400 for each eligible individual ($2,800 for married taxpayers filing jointly), plus $1,400 for each dependent, as defined in IRC § 152, including qualifying relatives and college students. An eligible individual means any

individual other than:

• A nonresident alien;

• An individual who is a dependent of another taxpayer for a taxable year beginning in the

calendar year in which the individual’s taxable year begins; and

• An estate or trust.

Limitation Based on Adjusted Gross Income

The amount of the recovery rebate tax credit is phased out for:

• Single taxpayers with AGIs beginning at $75,000, and is eliminated entirely at an AGI of

$80,000;

• Married taxpayers filing jointly with AGIs beginning at $150,000 and is eliminated entirely at

an AGI of $160,000; and

• Heads of household with AGIs beginning at $112,500 and is eliminated entirely at an AGI of

$120,000.

For a single taxpayer having an AGI of more than $75,000, the amount of the reduction in the rebate for which he or she is eligible is determined by the following equation.

Rebate x (AGI - $75,000) $5,000

= Rebate reduction

So, for a single taxpayer with an AGI of $77,000, the reduction in the rebate would be $560, as shown below:

$1,400 x ($77,000 - $75,000) $5,000

= $560

For married taxpayers filing jointly with an AGI more than $150,000, the amount of the reduction in

the rebate for which they are eligible is determined by the following equation.

Rebate x (AGI - $150,000) $10,000

= Rebate reduction

Married taxpayers with an AGI of $155,000, would have a reduction in the rebate amounting to $1,400, determined as shown below:

$2,800 x ($155,000 - $150,000) $10,000

= $1,400

Since the rebate for a taxpayer filing as HOH phases out over a $7,500 range, a taxpayer filing as

HOH with an AGI exceeding $112,500 would have a reduction in the rebate determined by the following equation.

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Rebate x (AGI - $112,500)

$7,500

= Rebate reduction

A taxpayer filing as HOH with an AGI of $114,000, would have a reduction in the rebate amounting to $280, determined as shown below:

$1,400 x ($114,000 - $112,500) $7,500

= $280

The taxpayer’s 2019 AGI is used to determine eligibility unless the taxpayer has already filed a federal income tax return for 2020.

COBRA Premium Assistance

ARPA § 9501 provides premium assistance for COBRA continuation coverage during the period from April 1, 2021 through September 30, 2021. In order to be considered an “assistance eligible

individual” eligible for this ARPA benefit, the covered employee must have, with respect to covered employment:

• Been terminated (other than for gross misconduct), or

• Experienced a reduction of hours

An ‘‘assistance eligible individual’’ means a qualified beneficiary who is eligible for COBRA continuation and elects COBRA continuation.

Child Tax Credit

The child tax credit, before passage of ARPA, was limited to no more than $2,000 for each child who qualified, i.e., a child who, in addition to meeting other requirements, was under the age of 17 by the end of the year. If the child met the requirements—and the taxpayer’s modified adjusted gross income (MAGI) did not exceed specified amounts—the taxpayer could claim the tax credit in an amount not exceeding his or her federal income tax liability. The passage of ARPA, specifically § 9611, made

several changes to the child tax credit applicable to 2021:

1. The credit is increased to $3,000 per qualifying child age 6 or older ($3,600 per qualifying

child who has not attained age 6) for taxpayers whose MAGI does not exceed the applicable

threshold amount;

2. A qualifying child is one who, in addition to meeting other existing requirements, is under the

age of 18 by the end of the year;

3. The child tax credit will no longer require that the taxpayer have any federal income tax

liability in order to receive it, i.e., the child tax credit is refundable; and

4. The credit may be paid monthly in advance28 and reconciled when filing the tax return.

Child Tax Credit Increase Subject to Separate Phase-Out

The increased child tax credit amount begins phasing out at higher incomes. Thus, the increased

portion of the aggregate credit is reduced by $50 for each $1,000 (or fraction) of MAGI in excess of the following amounts:

• $150,000 for married taxpayers filing jointly;

• $112,500 for taxpayers filing as head of household; and

• $75,000 for other taxpayers.

Reduction Limitation

The child tax credit for 2021 may be estimated, based on the taxpayer’s most recent tax return—2019 tax return if 2020 tax return was not yet filed—and 1/12th of the annual credit paid each month beginning in July 2021 and ending in December 2021. Although the periodic payments made between July and December are such that the total amount advanced will not normally exceed 50% of the child

28 The IRS will create an Internet portal to enable taxpayers to opt out of the monthly periodic

payment regime.

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tax credit, if the credit is paid in advance, the possibility exists that some or all of the child tax credit

may need to be repaid when the advanced credit is reconciled at the time the 2021 tax return is filed.

In such a case, the amount of the tax credit reduction based on the taxpayer’s MAGI will not generally exceed the lesser of:

a. The applicable credit increase amount, or

b. 5% of the applicable phaseout threshold range.

Earned Income Tax Credit

ARPA § 9621 to § 9626 significantly expands the earned income tax credit. The expansion of the credit applies to the following:

• Taxpayers with no qualifying children, applicable to 2021;

• Taxpayers with qualifying children who fail to meet identification requirements;

• Separated spouses;

• Investment income test; and

• Temporary special rule for determining earned income for purposes of the earned income tax

credit.

Taxpayers with no Qualifying Children

ARPA, § 9621, provides special rules applicable only in 2021 designed to strengthen the tax credit for individuals with no qualifying children. The special rules provide for the following:

• A decrease in the minimum age at which a taxpayer is eligible for the credit to –

o age 19,

o age 24 in the case of a specified student, i.e., an individual who is an eligible student

during at least five calendar months in the taxable year,

o age 18 in the case of a qualified former foster youth29 or homeless youth;30

• Elimination of the maximum age for the credit (normally younger than 65); and

• An increase in the maximum earned income tax credit available to individuals with no

qualifying children from $543 to $1,502.

Taxpayers with Qualifying Children who Fail to Meet Identification Requirements

Under Internal Revenue Code § 32(c)(1)(F), no earned income tax credit was permitted to an

otherwise eligible individual with one or more qualifying children if no qualifying child was taken into account due to a failure to meet the existing identification requirements. ARPA, § 9622, eliminates this restriction by providing that a taxpayer with a qualifying child who fails to meet the earned income tax credit identification requirements (that is, the child fails to meet the identification requirements) will, nonetheless, be eligible for a childless earned income credit. This provision is effective for years beginning after December 31, 2020.

Separated Spouses

Internal Revenue Code § 32(d) requires that otherwise eligible married individuals file a joint tax return in order to claim the earned income tax credit. ARPA, § 9623, effectively eliminates this requirement for a separated spouse by a special rule, effective for taxable years beginning after

December 31, 2020, providing that the individual will not be treated as married, for purposes of the credit, if he or she meets the following requirements:

• The individual is married and does not file a joint tax return for the year;

• The individual resides with a qualifying child for more than one half of the taxable year; and

• Either of the following is true –

29 a “qualified former foster youth” is defined as an individual who, on or after age 14, was in foster

care and who provides consent for disclosure of that status. 30 a "qualified homeless youth" is defined as an individual who certifies as either an unaccompanied youth who is a homeless child or youth, or is unaccompanied, at risk of homelessness, and self-supporting.

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o during the last six months of the taxable year, the individual does not have the same

principal place of abode as the individual’s spouse, or

o the individual has a separation agreement with respect to the individual’s spouse and

is not a member of the same household by the end of the taxable year.

Investment Income Test

Internal Revenue Code § 32(i) denies the earned income tax credit to those taxpayers having excessive investment income. For 2021, prior to the passage of ARPA, “excessive investment income”

was investment income in excess of $3,650 ($2,200, increased by inflation after 2015). ARPA modifies § 32(i) and provides that, for 2021, excessive investment income is that income in excess of $10,000, subject to inflation adjustment for years beginning after 2021.

Temporary Special Rule for Determining Earned Income

ARPA, § 9626, provides a special rule for determining a taxpayer’s earned income for purposes of the earned income tax credit. Specifically, if the taxpayer’s earned income for 2021 is less than his or her

earned income in 2019, the earned income tax credit may be determined based on the income

providing the higher credit.

Child and Dependent Care Tax Credit

Internal Revenue Code § 21 offers assistance to taxpayers responsible for child and dependent care who are, or are seeking to become, gainfully employed. Under the Code prior to the passage of ARPA, taxpayers may qualify for a nonrefundable tax credit of up to 35 percent of their qualifying employment-related expenses31 not exceeding a specified

limit. The limit on qualifying expenses is generally $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents.

ARPA, § 9631, makes various changes to the child and dependent care tax credit that are effective only for 2021. These changes include:

• Making the credit refundable; • Increasing the percentage from 35% to 50% of eligible expenses;

• Increasing the maximum credit to –

o $4,000 for one qualifying individual, and o $8,000 for two or more qualifying individuals;

• Changing the threshold income at which credit reduction begins from $15,000 to $125,000; and

• Changing the maximum possible credit reduction to less than 20% for household incomes exceeding $400,000.

Premium Tax Credit Expansion

Under the Affordable Care Act, taxpayers who obtain qualifying health insurance from a marketplace and who meet certain household income levels relative to the federal poverty line are eligible to receive premium subsidies. For 2021, prior to ARPA passage, premium subsidies were to be as shown in the following table:

31 In general, employment-related expenses incurred by a taxpayer with a qualifying dependent are those that enable the taxpayer to engage in gainful employment and include expenses for:

• household services, and

• care of a qualifying individual.

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In the case of household income (expressed as

a percent of poverty line) within the following

income tier:

The initial

premium

percentage

is—

The final

premium

percentage is—

Up to 133% 2.0% 2.0%

133% up to 150% 3.0% 4.0%

150% up to 200% 4.0% 6.3%

200% up to 250% 6.3% 8.05%

250% up to 300% 8.05% 9.5%

300% up to 400% 9.5% 9.5%.

ARPA, § 9661, significantly expands the subsidies provided under the ACA in two ways:

1. By increasing the level of subsidy to those taxpayers who currently qualify for a subsidy; and

2. By including taxpayers who, solely because their income, would not qualify for a subsidy under

the law prior to passage of ARPA.

Under ARPA, the above chart is revised for years 2021 and 2022 to be as follows:

As can be seen from the above chart, applicable taxpayers whose household income is 150% of the

federal poverty level or less will not normally be required to pay any premium when purchasing a health plan whose premium does not exceed the premium for a benchmark plan through an ACA marketplace. Those applicable taxpayers with household income exceeding 150% of the federal

In the case of household income (expressed as

a percent of poverty line) within the following

income tier:

The initial

premium

percentage

is—

The final premium

percentage is—

Up to 150% 0.0% 0.0%

150% up to 200% 0.0% 2.0%

200% up to 250% 2.0% 4.0%

250% up to 300% 4.0% 6.0%

300% up to 400% 6.0% 8.5%

400% and higher 8.5% 8.5%

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poverty level but less than 400% will have an expected contribution of gradually increasing

percentages up to 8.5% for such a plan, and those taxpayers with household incomes of 400% or more of the federal poverty level will have expected contributions of 8.5% of household income.

ARPA also addresses repayment of excess advanced subsidies. Specifically, under the ACA prior to

passage of ARPA, taxpayers who were granted advanced subsidies were required to reconcile the advance credit when filing their federal tax return, and, in the case of overpayment, a limitation on repayment was applied to those whose household income was less than 400% of the federal poverty line. The limitation for 2021 is as shown in the chart below:

If the household income (expressed as a

percent of poverty line) is:

Limitation Amount

for Unmarried

Individuals (other

than surviving

spouses or heads of

households)

Limitation

Amount for All

Other Taxpayers

Less than 200% $325 $650

At least 200% but less than 300% $800 $1,600

At least 300% but less than 400% $1,350 $2,700

As a result of the passage of ARPA, § 9662, no repayment of excess advanced premium tax credit received in 2020 is required.

Additionally, under § 9663 of ARPA, a taxpayer who has received, or who has been approved to

receive, unemployment compensation for any week beginning during 2021 will be eligible to receive health insurance premium tax credits in an amount sufficient to cover the entire cost of ACA marketplace insurance premiums for a plan whose premiums do not exceed those for a benchmark plan.

Student Loan Discharge

ARPA, § 9675, modifies the tax treatment of student loan forgiveness occurring in 2021 through 2025. Pursuant to the act, no amount of student loan forgiveness taking place in years 2021 through 2025 that would be includible in income except for passage of ARPA is includible in income, provided the loan discharge is not made on account of services performed.

Noncorporate Excess Business Loss

ARPA, § 9041, extends the § 461(I) limitation on excess business losses of noncorporate taxpayers an additional year, from January 1, 2026 to January 1, 2027.

Summary

• Recovery rebates are nontaxable and not counted as income with respect to determining a taxpayer’s eligibility for income-based programs.

• The Paycheck Protection Program (PPP) provides payments to small businesses as a direct incentive for them to keep workers on the payroll. Under the program, a federally-guaranteed loan not exceeding specified limits may be made to a small business, and the SBA will forgive the loan if specified requirements are met.

• The forgiven loans under the PPP are tax-free, and the expenses paid or accrued that are used, or are reasonably expected to be used, as the basis for loan forgiveness are, nonetheless, deductible.

• The CARES Act provides for federal unemployment benefits of $600 per week in addition to any state-provided unemployment assistance and extends the maximum period of

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unemployment benefits to 39 weeks. Both regular unemployment insurance benefits and the

unemployment insurance benefits expanded under the CARES Act are includible in gross income and subject to income taxes.

• An individual taxpayer may make a tax-deductible qualified cash contribution of up to 100% of

his or her AGI, i.e. an increase from the current 60% of AGI. If the aggregate amount of qualified contributions made in the contribution year exceeds the limitation, the excess may be carried over to the succeeding five years. Non-cash charitable contributions made by an individual taxpayer may be deducted up to 50 percent of AGI.

• The deduction of corporate qualified contributions is increased from 10% to the extent that the total of such contributions does not exceed the excess of 25% of the taxpayer’s taxable income over the amount of all other charitable contributions allowed.

• A non-itemizing taxpayer may take an above-the-line deduction of up to $300 for charitable contributions made in taxable years beginning in 2020.

• The CARES Act provides for broader distribution options and more favorable tax treatment for up to $100,000 in coronavirus-related withdrawals, in aggregate, from retirement accounts. The 10 percent early distribution penalty is waived for these coronavirus-related withdrawals.

• Coronavirus-related distributions may be included in income ratably over a three-year period

unless the taxpayer elects to include the income in the year of distribution. • IRA and qualified plan coronavirus-related distributions may be rolled over within three years

of distribution. • RMDs for 2020 are waived. • The CARES Act a) provides for a five-year carryback for losses occurring in 2018 through

2020, b) temporarily removes the 80% NOL deduction limit, and c) permits owners of pass-through businesses to disregard the prior $250,000/$500,000 limits to offset non-business

income for years 2018 through 2020. • The CARES Act adds over-the-counter drugs and medical products as qualified medical

expenses effective after December 31, 2019. • An HSA owner will not be considered ineligible even though the health plan covers testing for

and treatment of COVID-19 without a deductible or with a deductible below the minimum HDHP deductible.

• The CARES Act provides temporarily increased flexibility in making mid-year changes (in

2020) to taxpayers’ Section 125 cafeteria plan elections. • Qualification for the exclusion of foreign earned income and foreign housing cost amount from

gross income will not be impacted as a result of days spent away from a foreign country due to the COVID-19 pandemic.

• the CARES Act sets the depreciable life of qualified improvement property at 15 years, thereby enabling taxpayers to take advantage of bonus depreciation. This correction is retroactive.

• The CARES Act removes the 80% limitation for non-corporate taxpayers to recognize losses for tax years beginning before January 1, 2021. The 80% limitation returns for tax years beginning January 1, 2021 and later.

• Business interest expense is deductible in an amount not exceeding the sum of a) the business’ interest income for the year, b) 30% of the business’ adjusted taxable income (ATI), and c) the business’ floor plan financing interest for the year. The CARES Act modifies the calculation by Increasing the business’ ATI to 50% for corporations for taxable years beginning

in 2019 and 2020, and to 50% for partnerships for taxable years beginning in 2020. • The CARES Act enables employers to contribute toward the principal or interest on an

employee’s qualifying student loan, and those student loan payments are tax-free up to

$5,250 if made at any time after March 27, 2020 through December 31, 2020. • The CARES Act waives certain rules and requirements for EIDL loans made in response to

COVID-19 during the covered period, including a) the rules related to the need for personal guarantees on advances and loans not exceeding $200,000, b) the requirement that an

applicant have been in business for the one-year period before the disaster (no waiver may be made for a business not in operation on January 31, 2020), and c) the requirement that an applicant be unable to obtain credit elsewhere.

• During the covered period, an eligible entity that applies for an SBA loan under the CARES Act in response to COVID-19 may request that the SBA provide an advance of up to $10,000 within three days of application. No repayment of an advance provided pursuant to the

provisions of the CARES Act is required, even if the applicant is subsequently denied a loan under the program.

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• The American Rescue Plan Act of 2021 (ARPA) provides for –

o Partially tax-free unemployment benefits in 2020 of up to $10,200 for taxpayers with

AGIs of less than $150,000,

o Advance payment of recovery rebates available to –

▪ Married taxpayers filing jointly with AGIs less than $160,000,

▪ Head of household taxpayers with AGIs less than $120,000, and

▪ All other taxpayers with AGIs less than $80,000,

o COBRA tax-free refundable advance payment premium assistance from April 1 through

September 30, 2021,

o Enhanced refundable child tax credit (CTC) of $3,000 per child ages 6 through 17 and

$3,600 for children younger than age 6 for eligible taxpayers;

o Enhanced earned income tax credit (EITC) for –

▪ Taxpayers with no qualifying children, applicable to 2021,

▪ Taxpayers with qualifying children who fail to meet identification requirements,

▪ Separated spouses,

▪ Taxpayers with investment income not exceeding $10,000, and

▪ Temporary special rule for determining earned income for taxpayers whose

2021 earned income is less than 2019 earned income,

o Increased child and dependent care tax credit and employer-provided dependent care

assistance for 2021 –

▪ Making the credit refundable, ▪ Increasing the percentage from 35% to 50% of eligible expenses,

▪ Increasing the maximum credit to $4,000 for one qualifying individual and $8,000 for two or more qualifying individuals,

▪ Changing the threshold income at which credit reduction begins from $15,000 to $125,000, and

▪ Changing the maximum possible credit reduction to less than 20% for household incomes exceeding $400,000,

o Expansion of the § 36B premium tax credit and relaxation of excess credit repayment

requirements for 2021 and 2022,

o Temporary non-inclusion in income of student loan discharges occurring between 2021

and 2025, and

o Extension of the § 461(l) limitation on excess business losses of noncorporate

taxpayers to 2027.

Chapter Review

1. If a business receives a loan of $200,000 under the Paycheck Protection Act, how much of this

amount must be used for payroll and related purposes in order for the borrower to have the full

amount of the loan forgiven?

A. $60,000

B. $120,000

C. $75,000

D. $150,000

2. Kendrick Cuomo makes charitable contributions of personal property which was worth $200,000

when she first bought it and has a fair market value of $20,000 at the time of donation. Assuming

her AGI is $180,000, how much is tax-deductible?

A. An amount based on limits that were not changed by the CARES Act

B. $180,000

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C. $200,000

D. $20,000

3. Genie Glassware Corporation suffered a $100,000 net operating loss for tax year 2018. Which of

the following is true with respect to this NOL under the CARES Act?

A. The NOL may be carried back for five years (to 2013)

B. The NOL is subject to an 80% NOL deduction limit

C. The CARES Act disallows carrybacks by owners of pass-through entities

D. The CARES Act requires carried-back NOLs to be treated as though 2020 tax rates had

been in place for carryback years

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Glossary Active participant An active participant for traditional IRA purposes is an individual that

participates in his or her employer’s retirement plan. An employer-sponsored retirement plan includes a pension plan, profit sharing plan, 401(k) plan, 403(b) tax sheltered annuity plan, SEP or SIMPLE.

Alternative

minimum tax

A special tax applicable to taxpayers who benefit from the tax law by being

afforded special treatment or special deductions and credits. The alternative minimum tax is designed to ensure such taxpayers are required to pay at least a minimum amount of federal tax.

Benchmark plan A benchmark plan is the second-lowest-cost health insurance plan that would cover a family at the silver level of coverage.

Catch-up IRA contributions

Additional contributions for individuals who have attained age 50 before the close of the taxable year for which the IRA contribution is made.

Citizen or resident test

Although an exception applies in the case of adopted children who meet certain conditions, a taxpayer cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, or U.S. national or a resident of Canada or Mexico.

Deductible moving expenses

Suspended under the Tax Cuts and Jobs Act of 2017 for other than authorized military relocations involving a permanent change of duty station.

Deductible unreimbursed employee expenses

Suspended under the Tax Cuts and Jobs Act of 2017 for other than authorized military relocations involving a permanent change of duty station. These formerly deductible unreimbursed employee expenses include the employee’s car expenses incurred in traveling:

• From one workplace to another; • In order to meet with customers; • To attend business meetings at a location away from the taxpayer’s

regular workplace; and • From the taxpayer’s home to a temporary place of work.

Dependent A person who meets either the qualifying child test or the qualifying relative test.

Dependent exemption

Exemptions are suspended under the Tax Cuts and Jobs Act of 2017.

Dependent

taxpayer test

If a taxpayer can be claimed as a dependent by another taxpayer, he or she

is not permitted to claim another person as a dependent.

Exemption Exemptions are suspended under the Tax Cuts and Jobs Act of 2017.

Individual mandate

The individual shared responsibility provision of the PPACA—sometimes referred to as the “individual mandate”—imposed a tax penalty for a non-exempt individual’s failure to maintain minimum essential coverage. The tax penalty is reduced to zero for years after 2018.

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Joint return test Although certain exceptions apply, the joint return test generally prohibits a taxpayer from claiming as a dependent any married person if the married person’s filing status is “married filing jointly.”

Main home (first-

time homebuyer’s credit)

A home in which the taxpayer lives most of the time. It can be a house,

houseboat, mobile home, cooperative apartment or condominium.

Minimum essential coverage

Minimum essential coverage refers to basic health insurance coverage that may be provided as a) employer-sponsored coverage, b) individual health insurance coverage, or c) coverage provided under government-sponsored programs.

Personal

exemption

Exemptions are suspended under the Tax Cuts and Jobs Act of 2017.

Premature IRA distribution tax penalty

In order to ensure that traditional IRAs are used for the purpose they were designed—specifically to accumulate retirement savings—Congress imposed a limitation on their liquidity by specifying a penalty for premature distributions. Usually, in order to avoid a premature withdrawal penalty, the individual must be at least age 59 1/2 before receiving a distribution from a

traditional IRA.

Premium tax credit

A tax credit provided for purchase of a qualified health plan available to individuals who cannot be claimed as a dependent by another person and whose household income is between 100% and 400% of the federal poverty level.

Qualified distribution from

Roth IRA

A qualified distribution from a Roth IRA is one that is made no earlier than five years after the year for which the owner made his or her first Roth IRA

contribution and:

• The individual is age 59 1/2 or older; • The distribution is a qualified first-time homebuyer distribution; • The individual is disabled; or • The distribution is made to a beneficiary on or after the individual’s

death.

Roth conversion A qualified rollover contribution from a traditional IRA or any eligible

retirement plan to a Roth IRA or rollover from a 401(k) or 403(b) plan to a designated Roth account.

Roth IRA A Roth IRA is a personal retirement savings plan, funded by an annuity or trust/custodial account, which provides income tax deferral and may provide tax-free distribution of earnings. Eligibility for a Roth IRA is limited to individuals, regardless of age or qualified plan participation, provided their

AGI doesn’t exceed certain limits.

Saver’s credit The saver’s tax credit is a nonrefundable credit that is designed to encourage certain lower-income individuals to contribute to a retirement savings plan and is limited to the applicable percentage of such contributions but not more than $1,000 per taxpayer.

Short-term coverage gap

A gap in healthcare coverage for less than three consecutive months.

Silver level plan A silver level plan as one designed to provide benefits that are actuarially equivalent to 70 percent of the full actuarial value of the benefits provided under the plan.

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Small business tax credit

A nonrefundable tax credit available to an employer equal to a percentage of premiums paid for employee health insurance coverage provided the employer a) paid average annual wages for the tax year of less than $50,000

per full-time equivalent employee (inflation adjusted), b) employed fewer than 25 full-time equivalent employees for the tax year, and c) paid premiums for employee health insurance coverage under a qualifying arrangement, i.e. one in which the employer pays at least 50% of the premium for employee-only coverage.

Standard deduction

eligibility

With certain exceptions, any taxpayer generally may elect to take a standard deduction rather than itemize deductions.

Standard mileage

rates

Per-mile amounts that a taxpayer may use to deduct car expenses in lieu of

deducting the actual expenses incurred by the taxpayer.

Tax deferral Tax deferral is a favorable tax treatment under which an account’s earnings are not subject to income taxation until distributed.

Traditional IRA A traditional IRA is a personal retirement savings plan, funded by an annuity

or a trust that meets certain requirements and may permit tax-deductible contributions and tax-deferral of earnings.

U.S. national An individual who is not a U.S. citizen but who owes allegiance to the United States, such as an American Samoan or Northern Mariana Islander who chooses to be a U.S. national rather than a U.S. citizen.

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Answers to Review Questions

Chapter 1

Question 1 Feedback

A. Your answer is incorrect. Although not all charitable expenses may be deductible, such

expenses are normally deductible. Please try again.

B. Your answer is incorrect. Your answer identifies only the mileage as being deductible when using a personal vehicle for charitable purposes. However, more than just the mileage deduction is available. Please try again.

C. Your answer is correct. Philip’s unreimbursed charitable expense deduction is limited to $296. Taxpayers are permitted to deduct personal vehicle expenses when used for charitable purposes. Since Philip traveled 1,400 miles, paid $40 for parking and $60 for tolls and

chooses to use the standard mileage deduction, he may deduct $296. The money spent on gas and oil is not deductible, however, since the standard mileage deduction was elected.

D. Your answer is incorrect. Not all charitable expenses associated with a taxpayer’s use of his personal vehicle are deductible. In this case, Philip elected to use the standard mileage deduction rather than actual costs. Since he did not choose to deduct actual costs, his expenses for gas and oil are not deductible. Please try again.

Question 2 Feedback

A. Your answer is incorrect. Qualified long term care insurance benefits are includible in the recipient’s income to the extent such benefits exceed the greater of a per diem amount which is $400/day in 2021 or the actual costs for the care. Since the amount of benefits received exceeds those limits, some benefits must be included in income. Please try again.

B. Your answer is correct. Karl need include only $20 per day in his income. Benefits received under qualified long term care insurance policies that may be excluded from income are those

benefits not exceeding the greater of:

• The applicable per diem limitation for the year; or • The costs incurred for qualified long term care services provided for the insured.

The applicable per diem limitation for 2021 is $400.

C. Your answer is incorrect. It erroneously suggests that the difference between the per diem limitation and the actual expenses, if less, would be includible in income. In contrast, the amount includible is the amount of the benefit that exceeds the greater of the actual costs or

the per diem amount. Please try again.

D. Your answer is incorrect. The amount of the difference between the long term care insurance benefits received and the actual expenses incurred for the care is not necessarily includible in income. Only the amount by which such insurance benefits exceed the greater of the expenses or the applicable per diem amount needs to be recognized as income. Please try again.

Chapter 2

Question 1 Feedback

A. Your answer is correct. Hank qualifies for a 10% retirement savings contribution tax credit. Since the credit is based on his retirement savings contribution during the year, his saver’s credit is $100. ($1,000 x 10% = $100)

B. Your answer is incorrect. The saver’s credit for which Hank qualifies is based on his

contribution to the 401(k) plan multiplied by the percentage credit to which he is entitled. However, the employer match is not considered in determining the credit. Please try again.

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C. Your answer is incorrect. Your answer indicates that Hank’s saver’s credit would be based on a

20% rate. Although he would qualify for a 20% saver’s credit if he filed as head of household, the saver’s credit rate for a single taxpayer is not 20%. Please try again.

D. Your answer is incorrect. Although Hank would be eligible for a saver’s credit equal to 50% of

his $1,000 401(k) deferral if he were married and filed a joint tax return, the saver’s credit to which he is entitled as a single taxpayer is less. Please try again.

Question 2 Feedback

A. Your answer is incorrect. Sally’s receipt of a saver’s credit does not eliminate her deduction of a traditional IRA contribution. Please try again.

B. Your answer is incorrect. The saver’s tax credit for which Sally is eligible does not reduce the deductible portion of her traditional IRA contribution. Please try again.

C. Your answer is incorrect. Sally’s traditional IRA deduction is not netted by the saver’s credit she receives. Please try again.

D. Your answer is correct. Sally may deduct the entire traditional IRA contribution, provided she is otherwise eligible to take the deduction. The retirement savings contribution tax credit, if any, for which a taxpayer is eligible does not affect the tax treatment to which the contribution would normally be subject.

Chapter 3

Question 1 Feedback

A. Your answer is incorrect. Although the tax credit for which a taxpayer may be eligible can reduce the amount required to purchase a qualified health plan, a taxpayer whose household

income is 110% of the federal poverty level is required to make some contribution towards the cost. Please try again.

B. Your answer is incorrect. The taxpayer’s expected contribution, as the term is used with

respect to the tax credit, is a specified percentage of the taxpayer’s household income. The applicable percentage of the taxpayer’s household income increases—from 2.07% of income for families at less than 133% of the federal poverty level to 9.83% of income for families at

400% of the federal poverty level—as the taxpayer’s income increases. Please try again. C. Your answer is correct. The taxpayer’s expected contribution if he or she has a household

income equal to 110% of the federal poverty level in 2021 is 2.07% of such income. The taxpayer’s expected contribution, as the term is used with respect to the tax credit, is a specified percentage of the taxpayer’s household income. The applicable percentage of the taxpayer’s household income increases—from 2.07% of income for families at less than 133% of the federal poverty level to 9.83% of income for families at 400% of the federal poverty

level—as the taxpayer’s income increases. D. Your answer is incorrect. The taxpayer’s expected contribution, as the term is used with

respect to the tax credit, is a specified percentage of the taxpayer’s household income. The applicable percentage of the taxpayer’s household income increases—from 2.07% of income for families at less than 133% of the federal poverty level to 9.83% of income for families at

400% of the federal poverty level—as the taxpayer’s income increases. Please try again.

Question 2 Feedback

A. Your answer is correct. Burger Barn must pay at least $2,500. In order for an employer to be eligible to receive the small employer health insurance premium credit, the employer must pay employee health insurance premiums under a qualifying arrangement. Although certain variations may be qualifying arrangements under the PPACA, a “qualifying arrangement” is generally one under which the employer is required to pay a uniform percentage—at least 50%—of the premium for the employee enrolled in health insurance coverage.

B. Your answer is incorrect. Although Burger Barn may elect to pay the entire employee monthly premium for health insurance coverage, it is not required to do so in order to qualify for the health insurance premium credit. Please try again.

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C. Your answer is incorrect. Burger Barn is not required to pay any part of the premium for

dependent coverage to qualify for the credit. Please try again.

D. Your answer is incorrect. A small employer need not pay any part of the premium for dependent coverage to qualify for the credit. Please try again.

Chapter 4

Question 1 Feedback

A. Your answer is incorrect. Ellen has self-only coverage under her MSA; accordingly, she is

limited to a tax-deductible MSA contribution of no more than a specified percentage of her deductible. However, the answer chosen is based on an incorrect percentage. Please try again.

B. Your answer is correct. Ellen can contribute up to $1,625 to her MSA in 2021. An eligible taxpayer with self-only coverage may deduct the contributions he or she makes to an Archer

MSA during the taxable year in an amount not to exceed 65% of the annual HDHP deductible.

C. Your answer is incorrect. That is the maximum out-of-pocket permitted under Ellen’s high deductible health plan in 2021; however, it is not her maximum contribution. Please try again.

D. Your answer is incorrect. That is the maximum deductible Ellen could have under her Archer MSA in 2021; it is not the maximum contribution permitted her this year. Please try again.

Question 2 Feedback

A. Your answer is incorrect. The tax penalty is not applied to the portion of the distribution that is NOT in excess of the account holder’s qualified medical expenses. Only the part of the distribution in excess of those expenses may be subject to it. Please try again.

B. Your answer is incorrect. Your selected answer would apply the tax penalty to the entire

distribution. However, Peter’s liability is assessed only against the amount of MSA distribution in excess of his qualified medical expenses. Please try again.

C. Your answer is correct. The tax penalty is $600. Only the $3,000 excess distribution is subject to the applicable tax penalty. Archer MSA distributions are includible in income and subject to a 20% income tax penalty when they are used for other than qualified medical expenses and fail to meet specific exceptions.

D. Your answer is incorrect. Although Archer MSA distributions are tax-free when used to pay qualified medical expenses, they are subject to a tax penalty when taken in excess of such expenses unless a specific exception applies. Please try again.

Chapter 5

Question 1 Feedback

A. This answer is incorrect. A minimum of 60% of the loan amount must be used for payroll and related purposes.

B. That is correct! A minimum of 60% of such a loan must be used in order for the entire

amount to be forgiven. $200,000 × 60% is $120,000. (Note: Forgiveness of a PPP loan of less than $50,000 is generally unaffected by reductions in full-time equivalent (FTE) employees or reductions in employee salary or wages.)

C. This answer is incorrect. The minimum of 60% of the loan amount must be used for such purposes in order to have the entire amount forgivable.

D. This answer is incorrect. Although $150,000 is 75% of the $200,000 loan amount, the minimum required amount is 60% toward payroll and related costs in order to have the full amount forgivable.

Question 2 Feedback

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A. That is correct! Kendrick is making a contribution of personal property. The temporary 100

percent deduction does not apply.

B. This answer is incorrect. The temporary 100 percent CARES Act deduction applies only to

cash donations.

C. This answer is incorrect. The contribution is of personal property, not cash.

D. This answer is incorrect. Personal property contribution limits were not changed by the

CARES Act.

Question 3 Feedback

A. That is correct! Under the CARES Act, NOLs incurred in 2018 through 2020 may be carried

back for five years from the year incurred.

B. This answer is incorrect. The CARES Act temporarily suspended the 80% NOL deduction

limit.

C. This answer is incorrect. The CARES Act provides for disregard of previously in-place

limitations of $ 250,000/$500,000 for owners of certain pass-through entities.

D. This answer is incorrect. The CARES Act requires use of the tax rates applicable to the

year the NOL is carried back to.

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Index

Active participant, 48, 49, 67 Adjusted gross income, 16, 17, 48, 49, 68 Adjusted monthly premium, 28 Adoption assistance phase-out, 23 Adoption assistance program - child with

special needs, 23 Adoption assistance program - eligible adopted

child, 22 Adoption assistance program - qualified

adoption expenses, 22 Adoption assistance program timing, 22 Advance premium tax credits - reconciling, 29 Age 55+ HSA contributions, 41

Alternative minimum tax (AMT), 8 Alternative minimum taxable income (AMTI), 8 Alternative minimum taxable income

exemption, 8 Applicable dollar amount, 48, 49 Archer MSA, 35, 37, 38, 39 Archer MSA contributions, 38

Archer MSA distribution tax penalty, 39

Archer MSA distributions, 37 Archer MSA excess contributions, 37 Archer MSA high-deductible health plan, 35 Archer MSA installed by an employer, 37 Archer MSA maximum deductible contribution,

36

Archer MSA qualified medical expenses, 37 Archer MSA rollovers, 37 Archer MSA transfer at death, 38 Archer MSA transfer due to divorce, 37 Average annual wage limitation, 30 Benchmark plan, 27, 67

Business interest expense deductibility calculation modified, 61, 65

Cafeteria plans, mid-year changes (2020), 59

Charitable contributions, partial above-the-line deduction, 56

Charitable contributions, qualified contribution, 56

Charitable contributions, suspension of limitations, 55

Chronically-ill, HIPAA definition, 12 Course learning objectives, 2 Death, 68 Earned income credit, 18 Economic injury disaster loan (EIDL) program

expanded, 62

Education savings bond program, 9, 10, 11 Education savings bond program eligibility, 10 EIC adjusted gross income limits, 18 EIC qualifying child of another taxpayer rule,

20

EIC qualifying child of more than one person rule, 20

EIC qualifying child rules, 19 EIC rules applicable to a taxpayer with no

qualifying child, 20 EIC rules that apply to everyone, 18 EIC, figuring the amount of the credit, 21 Eligibility to receive refundable tax credits,

individuals, 26, 68 Eligible educational institution, education

savings bond program, 9 Employee’s car expenses, 67 Employer-sponsored retirement plan, 49, 67 Excess business loss limitations for non-

corporate taxpayers delayed, 61

Federal poverty level, 26

Full-time equivalent employee limitation, 30 Health FSA contribution limitation, 25 Health insurance portability and accountability

act, 35 Health savings accounts, 39 Health savings accounts, covid-19 testing and

treatment, 59 High-deductible health insurance policy, 35, 39 Higher capital gain and qualified dividend tax

rates, 13 HSA account transfer at death, 42 HSA account transfer due to divorce, 42

HSA contribution rules, 40 HSA contribution tax treatment, 43 HSA distribution tax penalties, 43

HSA distribution tax treatment, 43 HSA distributions, 41 HSA eligibility, 40 HSA excess contribution, 41

HSA high-deductible health plan, 40 Individual mandate, 25, 67 Large employer shared responsibility, 31 Medical transportation costs, 6 Modified adjusted gross income (MAGI), 11 Moving expenses, military relocation, 6 Net operating loss modifications, 58

Nonrefundable tax credit, 16

82

Pandemic unemployment assistance, benefits,

54 Paycheck protection program, 2, 52, 53, 54,

64

Paycheck protection program, loan forgiveness, 53

Paycheck protection program, loan forgiveness tax treatment, 53

Paycheck protection program, maximum loan amount, 53

PPACA individual shared responsibility

provision, 25, 67 Premature distributions, 68 Qualified distribution, 68 Qualified education expenses, education

savings bond program, 9

Qualified improvement property, depreciation

correction, 61 Qualified long term care insurance benefits

(tax free), 13 Qualified long term care insurance premium

deduction, 12 Qualified medical expenses, addition to, 59 Qualified retirement plans, loan maximum

increase, 57 Qualified U.S. savings bonds, 9 Recovery rebates, 52 Refundable tax credits for lower income

individuals, 26 Retirement plans, 2020 required minimum

distribution suspension, 48, 58

Retirement plans, coronavirus-related distribution, 47, 57, 58

Retirement plans, coronavirus-related distribution rollovers, 47, 58

Retirement plans, relaxation of tax rules, 46, 57, 65

Retirement savings contribution tax credit, 16

Roth IRA, 16, 17, 48, 68 Roth IRA contribution limits, 48 SBA loan, emergency grants up to $10,000,

63, 65 Section 1031 exchange, timing relief, 60 Section 911 foreign earned income change, 60 Short gap in coverage, 68 Small employer health insurance premium tax

credit, 30, 69 Social Security taxable earnings limit, 13

Standard deduction, 2, 4, 6, 7, 69 Standard deduction eligibility, 7 Standard deduction for elderly and/or blind

taxpayers, 7 Standard deduction ineligibility, 7

Standard deductions for blind and senior

taxpayers, 7 Standard medical mileage rate, 6 Standard mileage rates, 2, 4, 69 State average premium limitation, 31 State premium subsidy and tax credit

limitation, 31 Student loan repayment, limited exclusion of

employer payments, 62 Tax deferral, 69 Tax preference items, 8 Tax treatment of Archer MSA distributions, 38 Tax treatment of HSA contributions, 42 Taxpayer’s expected contribution, 27, 71 Traditional IRA, 48, 49, 67, 68, 69

Traditional IRA contributions by active participants, 48

Unemployment insurance benefits, taxability, 55, 64

Unreimbursed employee expenses, 5, 67 Vehicle use for charitable purposes, 5

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Appendix A

Form 8815 Department of the Treasury

Internal Revenue Service (99)

Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989

(For Filers With Qualified Higher Education Expenses) ➢ Attach to Form 1040

OMB. No. 1545-0074

20XX Attachment

Sequence No. 167

Name(s) shown on return Your social security number

1 (a)

Name of person (you, your spouse, or your dependent) who was enrolled at or attended an eligible education institution

(b)

Name and address of eligible educational institution

If you need more space, attach a statement.

2 Enter the total qualified higher education expenses you paid in 201X for the person(s) listed in column (a) of line 1. See the instructions to find out which expenses qualify. . . . . . . . . . . . . . . . . .

2

3 Enter the total of any nontaxable educational benefits (such as nontaxable scholarship or fellowship grants) received for 201X for the person(s) listed in column (a) of line 1 (see instructions)

3

4 Subtract line 3 from line 2. If zero or less, stop. You cannot take the exclusion. . . . . . . . . . . . . . . 4

5 Enter the total proceeds (principal and interest) from all series EE and I U.S. savings bonds issued after 1989 that you cashed during 201X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

6 Enter the interest included on line 5 (see instructions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

7 If line 4 is equal to or more than line 5, enter “1.000.” If line 4 is less than line 5, divide line 4 by line 5. Enter the result as a decimal (rounded to at least three places). . . . . . . . . . . . . . . . . . . . . .

7

8 Multiply line 6 by line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 8

9 Enter your modified adjusted gross income (see instructions). . . 9

10

Note: If line 9 is $98,200 or more if single or head of household, or $154,800 or more if married filing jointly or qualifying widow(er) with dependent child, stop. You cannot take the exclusion.

Enter: $83,200 if single or head of household; $124,800 if married filing jointly . . . . . . . . . . . . . .

10

11 Subtract line 10 from line 9. If zero or less, skip line 12, enter -0- on line 13, and go to line 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

12 Divide line 11 by: $15,000 if single or head of household; $30,000 if married filing jointly or qualifying widow(er) with dependent child. Enter the result as a decimal (rounded to at least three places) . . . . . 12

13 Multiply line 8 by line 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13

14 Excludable savings bond interest. Subtract line 13 from line 8. Enter the result here and on Form 1040 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .> 14

Return to text

Copy of Final Exam on next page

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FINAL EXAM

Federal Income Tax Changes - 2021

The following exam is attached only for your convenience. To access the official exam for this self-study course, please log into your account online and take the Final Exam from the course details page. A passing score of 70 percent or better will receive course credit and a Certificate of Completion.

1. What is the 2021 standard deduction for a 50 year-old married couple filing jointly, neither of whom is blind?

A. $8,100

B. $12,550

C. $25,100

D. $18,800

2. Julian is age 60 and paid $1,700 in premiums for qualified long-term care insurance in 2021, how much of the premium can he include in his medical expenses?

A. $0

B. $1,060

C. $1,690

D. $1,700

3. Lloyd is chronically-ill and received tax-qualified long-term care insurance benefits in 2021 amounting to $8,600 to cover a 30-day nursing home stay. What amount, if any, must he include

in income if actual nursing home costs for the 30 days amounted to $8,100 and the applicable per diem limitation was $400?

A. $0

B. $500

C. $8,100

D. $8,600

4. Barbara is a single taxpayer who had a 2021 adjusted gross income of $25,000 and who contributed $4,000 to her traditional IRA. Assuming she has a $2,000 income tax liability for the year, what is her maximum retirement contribution savings credit?

A. $200

B. $800+

C. $1,000

D. $2,000

5. Gail and Bob are married and file a joint tax return in 2021. They had a $34,000 adjusted gross income and each deferred $2,000 into their employer’s 401(k) plan. If they have a $500 income tax liability, what is the amount of their retirement contribution savings credit?

A. $0

B. $500

C. $1,000

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D. $2,000

6. Lois, a single taxpayer, contributed $1,200 to her traditional IRA in 2021. If she received a $240 saver’s credit and was not an active participant in an employer-sponsored retirement plan, how much of the contribution can she deduct?

A. $0

B. $240

C. $960

D. $1,200

7. Under the American Rescue Plan Act, a taxpayer with a household income of at least 400% of the federal poverty level who purchases a health insurance plan from an ACA Exchange that would cover the family at the silver level of coverage would not be required to contribute more than ___

of household income for it.

A. 4.3%

B. 8.5%

C. 9.5%

D. 11.6%

8. Joyce and Bob, a married couple filing jointly, received an advance insurance premium tax credit in 2021. When reconciling the tax credit it was determined they received an excess credit of $3,000. If their household income is 300% of the federal poverty line, what is the total amount of credit that must be repaid as additional tax?

A. $0

B. $1,000

C. $2,700

D. $3,000

9. Al owned a family high deductible health policy as part of his MSA for the entire year. What is his maximum permitted contribution to the MSA in 2021 if his deductible is $5,000?

A. $3,350

B. $3,750

C. $5,000

D. $6,650

10. How frequently may an Archer MSA be rolled over?

A. Every 6 months

B. Every 12 months

C. Every 24 months

D. An Archer MSA cannot be rolled over

11. Jack is age 45 and owns a self-only high deductible health policy with a $5,000 deductible under

his HSA. What is his maximum permitted HSA contribution in 2021?

A. $3,250

B. $3,600

C. $3,750

D. $7,200

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12. Cheryl took early retirement at age 55 in 2021 and received a $10,000 taxable distribution from

her Archer MSA during the year. What, if any, tax penalty will be imposed on her MSA distribution if no exception to the penalty applies?

A. $500

B. $1,000

C. $2,000

D. $5,000

13. Linda, age 58, contributed $3,000 to her traditional IRA in 2021. If her permitted Roth IRA contribution is not reduced because of her income, what is the maximum amount she can contribute to it in 2021?

A. $7,000

B. $6,000

C. $4,000

D. $2,000

14. Pablo’s PPP loan for $100,000 was forgiven because he paid $25,000 in office rent, $60,000 in payroll and $15,000 in utility expenses. What amount of these expenses may he deduct? A. $0

B. $15,000

C. $40,000

D. $100,000

15. Phil took a $60,000 coronavirus-related distribution from his qualified retirement plan in 2020. What is the minimum amount of the distribution he may recognize in 2020?

A. $10,000

B. $20,000

C. $40,000

D. $60,000