Article Highlights:

Charitable Contributions
Educator Expenses
Performing Artist Expenses
State and Local Government Officials’ Expenses
Health Savings Account Contributions
Moving Expenses for Members of the Armed Forces
Student Loan Interest Deduction
Tuition and Fees Deduction
Deduction for Early Withdrawal of Savings
Deductible Part of Self-employment Tax
Self-employed Health Insurance Deduction
Alimony Deduction (pre-2019 divorce agreements)
Business Pass-through Deduction
Retirement Plan Deductions

Most taxpayers think they have to itemize their deductions to claim them on their tax return. However, that is not entirely true. There are certain deductions that can be claimed while still using the standard deduction. Here is a list of those deductions: Charitable Contributions

For 2020, non-itemizers can deduct up to $300 of cash contributions above-the-line. The $300 limits apply both to single and married taxpayers. Donations to donor-advised funds and private foundations aren’t eligible for the above-the-line deduction (2020 and 2021). The term “above-the-line” is a shorthand way of saying that the deduction reduces gross income when figuring adjusted gross income (AGI). Eligibility for many credits, some other deductions and sometimes the phaseout of the amount of the credit or deduction are based on AGI or modified AGI.
For 2021, non-itemizers filing a joint return can deduct up to $600 of cash contributions, while taxpayers using the other filing statuses continue to be limited to $300. Unlike the 2020 version of this deduction, which is an above-the-line deduction, the 2021 deduction is claimed after the AGI is determined.

Educator Expenses – A qualified educator can annually deduct above-the-line to a maximum of $250 of qualified unreimbursed classroom expenses. These expenses include:

Books,
Supplies (other than nonathletic supplies for courses of instruction in health or physical education),
Computer equipment (including related software and services) and other equipment,
Supplementary materials used by the eligible educator in the classroom,
Professional development courses that are beneficial to the students for whom the educator provides instruction, and
Personal protection equipment (PPE), disinfectant and other supplies used for the prevention of the spread of coronavirus after March 12, 2020.

A qualified educator is generally a kindergarten through grade 12 teacher, instructor, counselor, principal or aide and works in a school at least 900 hours during the school year. Performing Artist Expenses – Some performing artists are allowed to deduct their employment-related expenses as an adjustment to gross income. For taxpayers to qualify for this special rule, all of the following criteria must be met:
(1) They must have had two or more employers in the performing arts field during the tax year (don’t count nominal employers who pay less than $200), (2) Their business expenses must be more than 10% of their gross income earned as a performing artist, and (3) Their AGI before deducting the performance-related expenses can’t be more than $16,000. Married performers must file joint returns unless they lived apart all year. The two-employer requirement and 10%-of-gross-income requirement are applied to each spouse separately. However, the $16,000-AGI requirement applies to married performers’ joint income.
State and Local Government Officials’ Expenses – Employee business expenses for a state or local government official are deductible above-the-line if the official is compensated in whole or in part on a fee basis. This provision is intended for officials who provide certain services to the government and who hire employees and incur expenses in connection with their official duties. Health Savings Account Contributions – Contributions to Health Savings Accounts (HSA) are also an above-the-line deduction. HSAs can only be established by eligible individuals who are covered by high-deductible health plans and generally not covered under any other health plan. There are statutory limits to the amounts that can be contributed to an HSA. Subject to statutory limits, eligible individuals may make contributions to HSAs, and employers as well as other persons (e.g., family members) may contribute on behalf of eligible individuals. An account holder gets a deduction for contributions to their HSA even if someone else (e.g., a family member) makes the contributions. However, since an employer’s contributions to an employee’s HSA are excludable from the employee’s income, the employee can’t also claim a deduction for those contributions. Amounts in HSAs accumulate tax-free, and distributions are tax-free if used to pay or reimburse qualified medical expenses. Some individuals use HSAs as supplemental retirement plans when they are maxed out on other available tax beneficial retirement plans. Moving Expenses for Members of the Armed Forces – Although an above-the-line deduction for taxpayers’ moving expenses in general has been suspended until after 2025, deduction of moving expenses is still allowed for members of the armed forces that have to move as a result of a permanent change of station. There are no requirements for distance or length of time at the new station. Student Loan Interest Deduction – A taxpayer can deduct up to $2,500 above-the-line of interest paid by the taxpayer on a student loan on behalf of the taxpayer, spouse or dependents. The student must be at least half-time. However, the deduction is phased out for higher-income taxpayers. The $2,500 limit applies per year per return, regardless of the number of eligible students or number of loans. Tuition and Fees Deduction – This above-the-line deduction is allowed for qualified tuition and related expenses for any year only to the extent the expenses are in connection with enrollment at an institution of higher education during that tax year. The expenses are limited to $2,000 or $4,000 depending upon the taxpayer’s adjusted gross income. For joint returns with an AGI below $130,000, the maximum deduction is $4,000. Between $130,000 and $160,000, the maximum deduction is $2,000, and above $160,000, it is zero. For other filing statuses, the AGI limits are half of those for joint filers, except that married taxpayers using the married separate filing status aren’t eligible for any deduction. The same expenses can’t be used for this deduction and the American Opportunity Credit or the Lifetime Learning Credit, and 2020 is the last year for this deduction. Deduction for Early Withdrawal of Savings – When someone closes a savings account or CD prematurely, they may get penalized by the financial institution. This is referred to as an interest penalty and is deductible above-the-line. Deductible Part of Self-employment Tax – A self-employed taxpayer can deduct one-half of the self-employment tax computed on Schedule SE for the year. Self-employed Health Insurance Deduction – A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) may be able to deduct 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse and dependents as an above-the-line expense. However, the deduction is limited to the amount of the individual’s net SE income and the individual, spouse or dependent can’t have participated in a health plan subsidized by an employer. Alimony Payments May Be Deductible – For divorce or separation instruments entered into before 2019 that haven’t been modified to include the tax law change effective for post-2018 instruments, an individual may be able to claim an above-the-line deduction for alimony payments made during the year if certain requirements (not covered in this article) are met. Effective for divorce or separation instruments entered into after 12/31/2018, alimony payments aren’t deductible by the payer and aren’t taxable to the recipient. Business Pass-through Deduction – As part of the 2018 tax reform, certain businesses are allowed a deduction that is generally equal to 20% of their qualified business income (QBI). This deduction is most commonly known as a pass-through income deduction because it applies where the business income passes through to the individual’s, partner’s or stockholder’s 1040 income tax return. This category includes income from sole proprietorships, partnerships, S-corporations, rentals, farms, real estate investment trusts (REITs) and pass-through income from publicly traded partnerships. While not an above-the-line deduction because it doesn’t reduce gross income, this pass-through deduction, like the standard and itemized deductions, is subtracted from AGI to figure taxable income. Retirement Plan Deductions – Contributions to traditional IRAs, self-employed SEPs, SIMPLEs and other qualified retirement plans are above-the-line deductions. However, the deduction for some of these contributions for an employee won’t appear as a line item on the tax return because the tax benefit has already been applied by reducing their taxable wages. The most common example of this treatment is 401(k) plan contributions in which the employee designates a percentage of their wage that is contributed to the plan and their gross wages are reduced by the contribution amount, leaving the balance of the wages as taxable. If you have questions about how any of these deductions might apply to your tax return, please give this office a call.

Article Highlights:

Credit Amounts
Deceptive Advertising
Refundability
Worth the Cost?
Qualifying Property
When Is the Credit Available?
Who Gets the Credit
Multiple Installations
Battery
Installation Costs
Basis Adjustment
Association or Cooperative Costs
Mixed-Use Property
Newly Constructed Homes
Utility Subsidy

A federal tax credit for the purchase and installation costs of a residential solar system has been extended through 2023. The credit for 2021 and 2022 is 26% of the cost of the solar installation but drops to 22% for 2023, the final year of the credit (unless extended again by Congress). The credit is nonrefundable, meaning it can only reduce your tax liability to zero. However, the portion of credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year. The tax code infers that any credit carryover can be added to the credit allowed in the subsequent year. However, what is unclear is whether any carryover will be allowed in 2024 once the credit expires at the end of 2023. In addition to the credit reducing the regular tax, it also reduces the alternative minimum tax, should you be subject to it. When you see those TV ads for home solar power, you may get the impression that Uncle Sam is going to pick up 26% of the cost, and you only have to come up with the other 74%. That is not necessarily the whole picture. It is true that the federal government has a 26% tax credit for the cost of a qualified solar installation (some states also have solar credits or other incentives). However, the federal credit is non-refundable and can only be used to offset your current tax liability; any excess carries over to future years, as long as the credit still applies in future years. Currently, the credit is allowed through 2023. This means that you may not get all the credit in the first year, as you might have been led to believe or assumed based upon the TV ads or a salesperson’s pitch.
For example, suppose in 2021, your solar installation costs $25,000. That would qualify you for a solar tax credit of $6,500. But suppose the income tax on your tax return is only $4,000. Then, the credit would reduce your tax liability to zero, and the other $2,500 ($6,500–$4,000) of the credit is carried over to 2022’s tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or expires.
Compare the cost of the system (and the interest you will be paying, if you are financing it) to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system really worth the cost? Electricity costs can vary significantly according to locale. Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages; you may simply want to go green or go off the grid where electric service is not reliable. If you plan to go ahead with a solar installation, here are some of the issues you need to be aware of. Qualifying Property – Only the following solar power systems are eligible for the credit:

Qualified solar electric property – property that uses solar energy to generate electricity for use in a main or second residence.
Qualifying solar water heating property – qualifies if used in a dwelling located in the U.S. used as a main or second residence where at least half of the energy used to heat water is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The solar equipment must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed.

When is the Credit Available? – The credit may be claimed on the tax return of the year during which the installation is completed. So, for example, if you purchase and pay for a system completed in 2022, the credit will be 26% of the cost. But if the project isn’t completed until 2023, the credit will only be 22%. This becomes an even a bigger issue for systems installed during 2023 that aren’t completed before 2024, when the credit rate will be zero. If you plan to purchase a solar system in 2023, the purchase should be made early enough in the year to ensure the installation is completed before 2024. Who Gets the Credit? – It may come as a surprise, but you need not own the residence where the solar property is installed to qualify for the credit; you need only be a ‘resident’ of the home. The tax code does not specify that an individual has to own the home, only that it is their residence. For example: A son lives with his mother, who owns the home. The son pays to have the solar system installed; the son is the one who qualifies for the credit. Multiple Installations – The credit is available for multiple installations. For instance, after the initial installation, if you add additional panels to increase capacity, these would be treated as original installations and qualify for credit at the credit rate applicable for the year the additional installation was completed, provided that the installation is done before 2024. On the other hand, if you had to replace damaged panels or perform other maintenance on the system, these items would not be an original system and their costs would not qualify for the credit. Battery – A battery qualifies for the credit if it’s charged only by solar energy and not off the grid. Storage batteries have become popular in areas where there are frequent power outages. However, this may be more of a convenience than a necessity, so consider the cost carefully. A software-management tool—whether part of the original installation or added later (before 2024)—also qualifies for the credit in cases in which the software is necessary to monitor the charging and discharging of solar energy from a battery attached to solar panels. Installation Costs – Amounts paid for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit—or for piping or wiring connecting the property to the residence—are expenditures that qualify for the credit. This includes expenditures relating to a solar system installed on a roof or ground-mounted installations. Basis Adjustment – With respect to a home, the term ‘basis’ generally refers to the cost of the home plus improvements and is the amount subtracted from the sales price to determine the gain or loss when the home is sold. The cost of a solar system adds to a home’s basis, but because the solar credit is a tax benefit, the credit reduces the basis. This will generally create a different basis for federal and state purposes where a state does not provide a solar credit, or it differs from the federal solar credit amount. Association or Cooperative Costs –If you are a member of a condominium association for a condominium you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any qualifying solar system costs incurred by the condo, cooperative association, or corporation. Mixed-Use Property – In cases in which you use a portion of your residence for deductible business or rent part of your home to others, the expenses must be prorated, and only your personal portion of the qualified solar costs can be used to compute the credit. There is an exception if less than 80% of the property is used for nonbusiness purposes, in which case the full amount of the expenditure is eligible for the credit. Newly Constructed Homes – If you are planning on purchasing a newly constructed home that includes a solar system, you may be entitled to claim the solar credit. However, to do so, the costs of the solar system must be separate from the home construction costs and certification documents must be available. Utility Subsidy – Some public utilities provide a nontaxable subsidy (rebate) for the purchase or installation of energy-conservation property. In that case, the cost of the solar system eligible for the credit must be reduced by the amount of the nontaxable subsidy that was received. As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right financial move for you? Please call for a consultation before signing any contract to make sure a solar system is appropriate for you.

March 1 – Payers of Gambling Winnings File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2020. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was February 1.
March 1 – Information Returns Filing Due File government copies of information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2020, other than the 1099-NECs that were due February 1. There are different 1099 forms for different types of payments.
March 1 – Farmers and FishermenFile your 2020 income tax return (Form 1040 or 1040-SR) and pay any tax due. However, you have until April 15 to file if you paid your 2020 estimated tax by January 15, 2021.March 1 – Applicable Large Employer (ALE) – Form 1095-C If you’re an Applicable Large Employer, file 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you’re filing any of these forms with the IRS electronically, your due date for filing them will be extended to March 31. See the Instructions for Forms 1094-B and 1095-B and the Instructions for Forms 1094-C and 1095-C for more information about the information reporting requirements.
March 1 – Large Food and Beverage Establishment Employers File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31.
March 2 – Applicable Large Employers (ALE) & Self-Insuring Employers Provide employees with annual information statement of health insurance coverage, Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. This date reflects an extension from the statutory due date of January 31 provided by the IRS (Notice 2020-76). This extended due date also applies to insurers who are required to provide Form 1095-B, Health Coverage, to individuals. The government’s copies of these forms were due March 1 (or March 31 if filed electronically).
March 15 – Partnerships File a 2020 calendar year return (Form 1065). Provide each partner with a copy of their Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15. March 15 – S-Corporations
File a 2020 calendar year income tax return (Form 1120-S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120-S), Shareholder’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1 (Form 1120-S). To request an automatic 6-month extension of time to file the return, file Form 7004 and pay the tax estimated to be owed. Then file the return; pay any tax, interest, and penalties due; and provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) by September 15.
March 15 – S-Corporation Election File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2021. If Form 2553 is filed late, S treatment will begin with calendar year 2022.March 15 – Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in February. March 15 – Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in February.
March 31 – Electronic Filing of Forms 1098, 1099 and W-2G If you file Forms 1098, 1099 (other than 1099-NEC), or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, February 1 or March 1 was the due date, depending on the form filed. The due date for giving the recipient these forms was February 1.March 31 – Applicable Large Employers (ALE) – Form 1095-C If filing electronically, file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, with the IRS. If filing on paper the due date was March 1, 2021.
March 31 – Large Food and Beverage Establishment Employers If you file Forms 8027 for 2020 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, March 1, 2021 was the due date.

March 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
March 15 – Time to Call For Your Tax Appointment
It is only one month until the April due date for your individual income tax returns. If you have not made an appointment to have your taxes prepared, we encourage you to do so before it becomes too late.
Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.
Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.
We look forward to hearing from you.

Article Highlights:

The Extension
About the Credit
Advance Payment
Employer Qualifications
Qualified Wages
Impact on Other Tax Provisions
Claiming the Credit

In order to help trades and businesses to retain employees and keep them employed during the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit for 2020. As part of the Consolidated Appropriations Act, 2021 (CCA), the credit has been extended through June 2021. The credit is actually a government-sponsored program to keep workers employed and is funded by providing qualifying employers with a refundable credit against certain employment taxes equal to 70% (up from 50% prior to 2021) of the qualified wages that an eligible employer pays to employees after March 12, 2020, and before July 1, 2021. (Before the extension, the credit ended on December 31, 2020.) If the employer’s employment tax deposits are insufficient to cover the credit, the employer may get an advance payment from the IRS by filing Form 7200, Advance of Employer Credits Due to COVID-19. For each employee, up to $10,000 in wages (including certain health-plan costs) per quarter (versus $10,000 per year in 2020) can be counted to determine the amount of the 70% credit. Employers, including tax-exempt organizations, are eligible for the 2021 credit if they operate a trade or business between January 1, 2021, and June 30, 2021, and experience either:
the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
a significant decline in gross receipts.
A significant decline in gross receipts for 2021 occurs when an employer’s gross receipts for a calendar quarter are less than 80% of its gross receipts for the same calendar quarter in 2019 (in other words, when gross receipts for the 2021 quarter are reduced by more than 20% of the corresponding 2019 quarter’s gross receipts).

If the business didn’t exist at the beginning of the same calendar quarter in calendar year 2019, substitute ‘2019’ for ‘2020.’
Employers, by election, can apply the gross-receipts test by using the immediately preceding calendar quarter. For example, instead of comparing the gross receipts of the first quarter of 2021 with those of the first quarter of 2019, an employer can elect to compare the gross receipts of the fourth quarter of 2020 to the gross receipts from the fourth quarter of 2019.

The credit applies to qualified wages (including certain group health-plan expenses) paid during this period or any calendar quarter when operations were suspended. Eligible health-plan expenses are the amounts paid by the employer to provide and maintain group health-plan coverage, to the extent that the amounts are nontaxable to the employees. Qualified Wages – The definition of qualified wages depends on how many employees an eligible employer has. For the 2021 credit, if an employer averaged more than 500 full-time employees during 2019 (versus 100 for the 2020 credit), qualified wages are generally the wages, including eligible health-care costs (up to $10,000 per employee per quarter) paid during that quarter to employees who were not providing services because they were laid off or furloughed. If an employer averaged 500 or fewer full-time employees during 2019 (versus 100 for the 2020 credit), qualified wages are wages, including eligible health-care costs (up to $10,000 per employee per quarter), paid to any employee during the quarter when operations were suspended or for which the decline in gross receipts applies, regardless of whether its employees were providing services. The rules for claiming credits based on the payment of ‘qualified health plan’ expenses for eligible employees are retroactive to March 23, 2020. If, as a result of these changes, additional credits are due to an employer for prior calendar quarters based on the payment of qualified health-plan expenses, then those credits are to be claimed when filing IRS Form 941 for the fourth quarter of 2019. Impacts of Other Credit and Relief Provisions – An eligible employer’s ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:

If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program, as authorized under the CARES Act, then the employer was not eligible for the Employee Retention Credit in 2020. However, the CCA changed this rule, retroactive to March 23, 2020, and borrowers of PPP loans are now eligible to claim the Employee Retention Credit. However, to the extent that an eligible employee’s wages are used to substantiate the forgiveness of a PPP loan, those same wages cannot also be used to claim the Employee Retention Credit.
Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
Wages counted for this credit can’t be counted toward the credit for paid family and medical leave.
Employees are not counted toward this credit if the employer is allowed a Work Opportunity Tax Credit.

Claiming the Credit – In order to claim the new version of the Employee Retention Credit, eligible employers must report their total qualified wages and the related health-insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers. The credit is taken against the employer’s share of Social Security tax, but the excess is refundable under normal procedures. If you have questions about whether or how this credit might apply to your business, please give this office a call.

Article Highlights:

Legislation for Major Disasters
Definitions
Qualified Disaster Distributions
Re-Contributing Withdrawals for Home Purchases
Retirement Plan Loans
Loss Limitations, Revised
Relief for Non-Itemizers
Employee Retention Credit
Other Disaster Area Tax Issues

Most of us will always remember the year 2020, as much as we may like to forget it. On top of the COVID-19 emergency, street protests (both peaceful and not), and hotly contested election races, the U.S. has had numerous natural disasters – hurricanes, an unprecedented number of wildfires, severe windstorms, flooding, and what seems like everything except a plague of locusts (so far, the gigantic swarms of the insects that have invaded Africa and the Middle East haven’t made it across the Atlantic). Congress typically passes legislation to provide some temporary tax relief to the victims of major disasters. Recently, Congress did just that when it passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which the president signed on December 27, 2020. If you were a victim of one of the disasters covered by this bill, you may be interested to see if any of the tax benefits may be of help for you. First, a few definitions: “Qualified disaster area” means any area in which a major disaster was declared by the president, during the period beginning on January 1, 2020, and ending on February 25, 2021, if the incident period of the disaster began on or after December 28, 2019 and on or before December 27, 2020. However, any area in which a major disaster was declared only because of COVID-19 is not included. “Qualified disaster zone” is the portion of any qualified disaster area that the president, during the date parameters noted above, determined to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act because of the qualified disaster in that disaster area. “Incident period” means, with respect to any qualified disaster, the period specified by the Federal Emergency Management Agency (FEMA) as the period when a disaster occurred. (However, for the purposes of this act, that period shall not be treated as beginning before January 1, 2020, or ending after January 26, 2021.) For a current listing of all affected areas and the dates of storms, floods, wildfires, and other disasters occurring in 2020 in federal disaster areas, go to https://www.irs.gov/newsroom/tax-relief-in-disaster-situations Here are the highlights of the tax-relief measures included in the Taxpayer Certainty and Disaster Tax Relief Act of 2020: Qualified Disaster Distributions – If you have sustained an economic loss because of a qualified disaster, you are allowed to withdraw from your eligible retirement plans – such as a 401(k) or 403(b) – and IRAs up to $100,000, less the aggregate amounts treated as qualified disaster distributions in prior years, without paying the 10% early-withdrawal penalty that applies if you are under age 59½. The distribution is still taxable, but if you choose to, the income from the qualified distribution can be spread over a three-year period beginning with the year of distribution, rather than you paying all of the tax in the distribution year. Re-contribution Option – Further, you can re-deposit any amount of the qualified disaster distribution in one or more re-contributions over the three-year period beginning on the day after the date of the distribution. For example, let’s say you take a qualified disaster distribution of $30,000 from your IRA on Dec. 10, 2020, and opt to spread the tax over years 2020, 2021, and 2022 by including $10,000 of the distribution amount in each year’s return. In 2022, you are financially able to re-deposit the $30,000 to your IRA, which you do on Nov. 1, 2022. You would then need to amend your 2020 and 2021 returns to remove the $10,000 income from each year and claim a refund of the taxes paid on those parts of the distribution. None of the distribution would be reported on your 2022 return. Waived 20% Withholding Requirement – Normally, 20% of a retirement plan distribution is withheld as income tax. This 20% withholding rule will not apply to a qualified disaster distribution. Distribution Timing – Only distributions made on or after the first day of the incident period of a qualified disaster and before June 25, 2021, can qualify. Special Rule for Individuals Affected by More Than One Disaster — The $100,000 limitation is applied separately to distributions made with respect to each qualified disaster. Re-Contributing Withdrawals for Home Purchases – If you are under 59½, the general rule is that you’ll owe a 10% penalty on the taxable part of a distribution from an IRA (or an employer’s retirement plan). However, this 10% early-withdrawal penalty doesn’t apply to a distribution (lifetime maximum $10,000) from an IRA used by a first-time homebuyer to pay the qualified acquisition costs for a principal residence, if the funds are spent within 120 days of receiving the distribution. When disaster strikes, the taxpayer’s plans to purchase or construct a home sometimes are upended, and the funds from the withdrawal can’t be spent during the allotted time period. To prevent the 10% penalty from kicking in when this happens, the act provides that any individual who received a qualified distribution during the period beginning 180 days before the first day of the incident period of a qualified disaster and ending 30 days after the last day of the incident period may make one or more contributions to an eligible retirement plan that total no more than the amount of the qualified distribution. The re-deposit must occur during the period beginning on the first day of the incident period of the qualified disaster and ending on June 25, 2021. To qualify to make the recontribution, the amount distributed must have been intended to be used to purchase or construct a principal residence in a qualified disaster area but was not so used due to the qualified disaster in that area. If the funds are re-contributed, then the taxpayer can amend their tax return for the year when the distribution was taxed for a refund of the taxes paid on the withdrawal.Increased Limit on Retirement Plan Loans – Generally, a loan from a qualified employer plan to a participant or beneficiary is treated as a plan distribution unless the loan amount is at least the lesser of $50,000 or half of the present value of the employee’s nonforfeitable accrued benefit under the plan. An exception allows a loan up to $10,000 without regard to the accrued benefit rule – such a loan must be repaid within five years (longer repayment can be used for a principal residence plan loan). The act eased the requirements for qualified individuals who sustained an economic loss because of the qualified disaster, by doing the following:

Increasing the maximum amount a plan participant or beneficiary can borrow from a qualified employer plan from $50,000 to $100,000. The “half of present value” test was changed to “the present value of the nonforfeitable accrued benefit of the employee.”
Allowing a longer repayment period, generally of one year.

To be eligible for this relaxation of the plan-loan rules, the individual’s principal place of abode at any time during the incident period of any qualified disaster must have been located within the qualified disaster area of the qualified disaster. Loss Limitations Revised – Generally, to deduct a personal casualty or disaster loss, each event must be reduced by $100, and the overall loss must be reduced by 10% of the taxpayer’s adjusted gross income. The act modifies these rules by eliminating the 10% reduction and increasing the $100 reduction to $500.Relief for Non-Itemizers – The personal casualty loss deduction is part of the itemized deductions claimed on Schedule A, so normally, a taxpayer who doesn’t itemize because their standard deduction is greater than the total of their itemized deductions won’t have any tax benefit from the casualty loss. However, under the act, a taxpayer claiming a “net disaster loss” who does not itemize their deductions may add their “net disaster loss” to their standard deduction. Employee-Retention Credit – The act provides an employee-retention credit for an employer that conducted an active trade or business in a qualified disaster zone at any time during the incident period of the qualified disaster AND when the trade or business became inoperable as a result of damage sustained because of the qualified disaster at any time during the period beginning on the first day of the incident period and ending on December 27, 2020. The credit is 40% of the qualified wages of each eligible employee of the eligible employer for the taxable year. The amount of qualified wages for any individual is limited to no more than $6,000. As a result, the maximum credit is $2,400 per employee. To be an eligible employee, the employee’s principal place of employment with the employer just before the qualified disaster must have been in the qualified disaster zone. Qualified wages are wages paid by the employer starting when the trade or business became inoperable at the principal location where the employee was employed and through the date when the business resumed significant operations at the employee’s principal place of employment or, if earlier, 150 days after the last day of the incident period of the qualified disaster.

Qualified wages include wages paid without regard to whether the employee performed no services, performed services at a different place of employment than their principal place of employment, or performed services at their principal place of employment before significant operations resumed.
Qualified wages generally do not include wages paid to the employer’s relatives or wages that the employer uses in computing other tax credits, such as for the Work Opportunity Tax Credit, Research Credit, and others.

Other Issues – Briefly, here are a few other items that were already in the tax code that those affected by qualified disasters should be aware of: Extended Deadlines – The IRS has the authority to postpone certain tax deadlines by up to one year for taxpayers affected by a federally declared disaster. Examples of deadlines the IRS will postpone in disaster areas include those for filing income, excise, and employment tax returns; paying income, excise, and employment taxes; and contributing to IRAs. When to Claim Disaster Losses – Special rules apply to losses that occur in areas that the president declares eligible for federal disaster assistance. The losses must result from the disaster. The FEMA website lists the designated disaster areas. Taxpayers may elect to claim the loss
On the return for the year when it occurs, or
On the preceding year’s return (either the original or an amended return).
When to take the loss depends upon a number of factors and should be analyzed carefully to determine which year will be the most beneficial. Some of the factors to consider include the tax brackets for each year, the need for immediate cash, the effect on self-employment tax for those with business-disaster losses, and whether the loss will be used up against other income for the year. If the disaster loss is not fully used up in the year when it is first deducted, then it can create a net operating loss, which can be deducted on either a prior year or future year return (depending on which year the loss occurred). Insurance Proceeds – A taxpayer whose principal residence (or its contents) is damaged in a disaster can qualify for special tax treatment regarding certain insurance proceeds received as a result of the casualty. To qualify, the residence must be located in a presidentially declared disaster area. If you have been in a qualified disaster and have questions about the new provisions in the 2020 disaster legislation or want more information about the special tax rules for claiming disaster losses, please contact this office.