The opinions set forth in this website are subject to the disclaimer pertaining to IRS Circular 230 set forth herein.
Unless expressly stated otherwise on this website, (1) nothing contained in this website was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained on this website relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this website. No one, without our express written permission, may use any part of this website in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.
Covid, 2020 & 2021 Tax Facts
Business meal and beverage expenses will be 100% deductible in 2021 and 2022, up from 50% in 2020. This applies to delivery and carryout meals as well as those in restaurants.
For 2020, you get a front-page deduction of up to $300 per tax return for credit card or check contributions. This is not available for non-cash contributions. You do not need to itemize deductions in order to take this new deduction. For 2021, it is $300 for single or $600 for married filing jointly. Also, see below.
Individual Retirement Accounts
If you qualify under the CARES Act eligibility requirements, you could withdraw up to $100,000 from your IRA before December 31, 2020 and pay the tax over three (3) years without penalty. You are allowed to repay the distribution up to the end of the third year and recoup the tax paid on amendment. You need to be affected by Covid-19. Let us know if you were eligible and made a withdrawal.
If you have not turned 70 years old by December 31, 2019, you can wait as late as April 1 of the year after you turn 72 to take Required Minimum Distributions (RMDs).
You can keep contributing to an IRA if you work beyond 70 years old.
If you inherit an IRA, for most non-spouse beneficiaries, you have a maximum of 10 years to withdraw all of it.
The IRS expanded the 10% penalty exemption for withdrawing from your IRA before age 59 ½. For either a birth or adoption during the year, you could withdraw up to $5,000 for each taxpayer.
The maximum allowed to borrow from your 401(K) increased from $50,000 to $100,000 for 2020.
Emergency Paid Sick Leave Act
Self-employed taxpayers can take a credit for caring for family members with Covid-19 or if your child’s school or daycare closed. The credit is the lesser of $200 per day or 67% of average daily self-employment income for up to 50 days. There is a distinction between “family leave” and “sick leave”. Family leave is 50 days; sick leave is 10 days.
Net Operating Loss
If you have a net operating loss in 2020 from your self-employed business, you have the option to carry the loss back five years.
Please call us if you would like assistance in applying for the loan forgiveness.
If your business is negatively affected by Covid-19 and you did not apply and receive the PPP Loan, you might be eligible for a new Employee Retention Credit. There will also be a new PPP2 Loan available at the end of January. PPP2 loans are for businesses with a decline in revenue of 25% or more in one quarter of 2020. Let us know if you need assistance with the application.
Covid Stimulus Checks – January 2021
There will be another round of stimulus checks coming - $600 per taxpayer and qualifying child. The IRS will distribute the money in the same manner as they did last summer.
The following deductions are limited:
- Current federal standard deduction is: Married filing jointly - $24,800, Single - $12,400.
- Personal exemptions are allowed only for dependents on the MN return. $4300 per dependent.
- The child tax credit has increased to $2000 per child under 17 yrs. old and $500 for 18 yrs. and older. The income limits for this credit are $400,000 Married filing jointly and $200,000 Single.
- “Kiddie tax” on unearned income over $2200 is taxed at the lower of trust tax rates or the tax rate of the parents.
- Charitable contributions - you must have receipt for any charitable deduction over $250 in your possession at the time of filing. There is a limitation of $5,000 on non-cash donations unless you have an appraisal. Your limitation for cash contributions is up to 100% of your adjusted gross income (AGI) for 2020 and 2021. For appreciated property donations such as stock, the limit remains at 30% of your AGI.
If you do not itemize, you can donate up to $100k of your RMD directly to charity. This also helps lower your AGI for Medicare premium cost calculations and lets you donate to charity with pretax dollars.
- For 2021 the RMD age remains at 72 years old.
- If you are still working, you can contribute to an IRA at any age.
Health Savings Accounts:
- Combined state and local income tax (SALT) and property taxes are limited to $10,000.
- Home mortgage interest is limited to interest on $750,000 loans used to acquire, construct or improve your primary or secondary residence – Loans written prior to 12/31/18 are grandfathered in and can total $1,000,000.
- Home equity loans where proceeds were not used to acquire, construct or improve your primary or secondary home are no longer deductible. You must allocate the use of your loan proceeds.
In order to set up an HSA, you need coverage under a high-deductible health insurance plan. The maximum contribution in 2020 for self-only was $3,550 and for a family was $7,100. You have until 4/15/21 to make this deposit. If you have attained 55 years of age by year end, you may make additional catch-up contributions of $1,000 for 2020. For 2021, the contribution limits are $3,600 for self-only and $7,200 for family. The catch-up contribution remains $1,000 for 2021.
American Opportunity Credit (AOTC):
The maximum credit is $2,500 per student per year and is available for the first four years of a student’s post-secondary education. Eligible expenses include tuition, fees, and course materials paid directly to the institution. The income phase-out for single taxpayers is $80,000 - $90,000 and for joint filers $160,000 - $180,000. You must provide the Form 1098-T from the institution in order to claim this credit.
Expanded Tax-free 529 Plan Withdrawals:
If you have a 529 Plan for education expenses, tax-free withdrawals may now be taken for the purchase of any computer technology or equipment or internet access and related services. These items must be used by the beneficiary of the Plan or the beneficiary’s family during the time the beneficiary is enrolled in a post-secondary educational institution.
Off-campus room and board expense is considered a qualified education expense and includes rent, utilities and food but is limited to the institution’s on-campus living costs. The law allows the use of 529 Plans to include withdrawals up to $10,000 per student per year, for K-12 private school tuition and student loan debt. However, these are disallowed for MN income tax.
MN offers both a tax credit and a subtraction for contributions made to qualified 529 Plans. The credit equals 50% of contributions, up to a maximum of $500. The credit is subject to income limitations. MN additionally offers a subtraction for contributions to qualified plans. A taxpayer may subtract up to $1,500 ($3,000 for married filing jointly) of contributions made to a qualified plan.
Long-Term Care Costs:
A recent court decision clarified that payments made to caregivers for providing physician-ordered assistance and supervision to a patient suffering from dementia qualified as long-term care services, and are therefore deductible as a medical expense, despite the fact that the patient was not ADL certified (unable to perform at least two of six activities of daily living: eating, toileting, transferring, bathing, dressing and continence) and the caregivers were not licensed health care providers. Also, if a patient is ADL certified, the full cost of an assisted living facility is deductible as a medical expense.
When to Start Collecting Social Security Benefits?
If you are considering whether or not to collect social security in the next year, please call us to discuss your options. It may be advantageous to wait longer than you planned.
Pension Contribution Limits:
Most retirement plans have been amended to allow for catch-up contributions for those 50 and over. Check with your plan sponsor to see if you are able to utilize this increased deduction.
|RETIREMENT PLAN (under age 70½)
|IRA* (under age 50)
|IRA* (over age 49)
|Roth** IRA* (under age 50)
|Roth** IRA* (over age 49)
|Maximum 401(K) deferral (under age 50)
|Maximum 401(K) deferral (over age 49)
|Maximum SIMPLE deferral (under age 50)
|Maximum SIMPLE deferral (over age 49)
|* A single dollar limit applies to the sum of your contributions to your Roth and regular IRAs.
** Roth IRA contributions are never deductible.
Social Security Benefit Subtraction:
Minnesota residents who receive Social Security or Railroad retirement benefits may qualify for a subtraction from income on their state return. The maximum subtraction is $4,500 for those Married Filing Jointly and $3,500 for Single filers. The subtraction is available to individuals whose taxable MN income includes Social Security or Railroad Retirement benefits subject to income limitations.
MN Estate Tax:
A decedent’s estate that exceeds the exemption must file and pay MN estate tax. For decedents dying in 2020 the exemption is $3.0 million.
Federal Estate and Gift Tax:
For 2021, the federal estate and gift tax exemption remains at $11,580,000 with a top rate of 40%. The annual gift exclusion remains the same at $15,000 for 2021.
Deductible Mileage Rates:
|MILEAGE RATES (per mile)
The IRS Sec.179 fast write-off of the cost of new and used equipment is $1,040,000 for 2020. Minnesota now conforms to federal Section 179 rules.
Under the Tax Cuts and Jobs Act, new and used equipment purchased and placed into service after 9/27/17 is eligible for a 100% write-off using bonus depreciation. This includes vehicles weighing over 6K lbs. Luxury autos (vehicles under 6K lbs.) have significantly higher depreciation. 80% of the bonus depreciation will be an add back to MN income in the current year with 20% subtracted over 5 years. First year depreciation for vehicles not weighing 6k lbs. is now $18,100.
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