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Tax season

12 tax tips for the 2021 filing season

ByRoger Russell
February 1, 2021 2:00 PM
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With the convergence of multiple layers of tax legislation and IRS guidance since 2017, this year’s filing season has the potential to confuse tax preparers as well as the clients they serve. Even for those who follow legislation day in and day out, things can get complicated.

For example, the Paycheck Protection Program was initially introduced in April, then changed in June and again in December. “It’s one program but it’s been changed twice,” observed Roger Harris, president of Padgett Business Services. “If you haven’t kept up, you can be two bills behind.”

With that in mind, a panel of tax experts convened by Accounting Today believes the following areas warrant special attention during tax preparation. Many may require the amending of prior-year returns to take advantage of a particular tax break.

(The panel includes Annie Schwab, tax services manager for Padgett Business Services; Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting; Barbara Weltman, author of “J.K. Lasser’s Small business Taxes 2021;” and Roger Harris, president of Padgett Business Services.)

Employee Retention Credit

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Erin Schaff/Bloomberg News
Originally, the CARES Act added this refundable payroll tax credit equal to 50% of qualified wages at $10,000 per year per employee paid by eligible employers from March 13, 2020, to Dec. 31, 2020 — but if the taxpayer had a PPP loan, they could not take advantage of the ERC.

The Consolidated Appropriations Act of 2021 extended and expanded the availability of the credit. Now, a company that receives a PPP loan can claim the ERC, with this caveat: A credit may not be claimed for wages paid with the proceeds of a PPP loan that has been forgiven. It may be necessary to file amended payroll tax returns to claim the credit.

Second draw PPP loans

PPP art - Paycheck Protection Program
Dongyu Xu/Tada Images - stock.adobe.com
The PPP now allows certain eligible borrowers that previously received a program loan to apply for a second draw PPP loan with the same general loan terms as their first draw loans.

Unemployment benefits taxability

Clients can no longer receive tax-free mass transit passes and parking allowances through their employers under the new law.
Michael Nagle/Bloomberg News
Federal unemployment benefits are taxable, while economic stimulus payments are not. States vary on the taxability of unemployment benefits. An enhanced unemployment benefit at the federal level ($600 in federal pandemic unemployment) was added to every weekly unemployment benefit. Together, these are expected to cause confusion for many taxpayers, particularly those who did not request withholding.

Recovery Rebate Credit

Thanks to the higher estate tax exemption under the new tax law, advisors are revisiting an old strategy called upstream planning to enable their clients to save capital gains taxes on highly appreciated assets, according to this article on Barron’s.
Daniel Acker/Bloomberg News
Individuals who were eligible for an Economic Impact Payment but did not receive one, or were eligible for a larger payment than they received, will be able to claim a Recovery Rebate Credit when they file their 2020 Form 1040 or 1040-SR. Their EIP will need to be reconciled with any rebate credit amount for which they are eligible on the recovery rebate worksheet on their 2020 Form 1040 or 1040-SR.

NOL 5-year carryback

Net operating losses that arise in 2020 have a five-year carryback, but the carryback can be waived. With potentially higher tax rates ahead, it may be more valuable to carry a loss forward, depending on the individual taxpayer’s situation.

Discharge of indebtedness on principal residence

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Konrad Fiedler
The exclusion from income for discharge of indebtedness on a principal residence has been extended through 2025. Caution: Watch for phaseouts based on adjusted gross income.

RMDs

The RMD requirement for all retirement plans has been waived for 2020.

Money taken from retirement account

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Dustin Franz/Bloomberg News
If a taxpayer pulled money out of their retirement account for coronavirus-related issues and does not intend to repay it within three years, one-third of the tax should be paid with their 2020 return.

EITC and CTC

Contributing to a dependent care flexible spending account is way parents can reduce the tax burden that comes with raising a child.
Bloomberg News
People who qualify for the Earned Income Tax Credit or the Child Tax Credit can use either 2019 or 2020 income, whichever is most beneficial to the taxpayer.

Mortgage insurance premiums

Mortgage interest tax deductions cost the federal government $68.2 billion in 2012, according to an expert.
Bloomberg News
The treatment of qualified mortgage interest premiums as qualified residence interest has been extended through 2021.

Charitable deduction for non-itemizers

Nonprofits may see a decline in revenue this year as more taxpayers are expected to opt for a standard deduction, according to this article on The Aspen Times.
Bradley C. Bower/Bloomberg News
Taxpayers who don’t itemize can still take an above-the-line deduction for charitable contributions up to $300.

Meal expenses

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Caitlin Ochs/Bloomberg
While not reflected on 2020 returns, some taxpayers will be happy that the three-martini lunch is back. A 100% business deduction (rather than the current 50%) is allowed for business meals as long as the expense is for food or beverages provided by a restaurant. This is effective for expenses incurred after Dec. 31, 2020, and expires at the end of 2022.
Roger Russell
Senior Editor, Accounting Today
This article originally appeared in Accounting Today.
Tax season Tax credits RMDs Paycheck Protection Program EITC Tax deductions Tax planning
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