UPDATES TO FILING DEADLINE, RECOVERY REBATES, SOFTWARE UPDATES, RMDs & PPP

CHANGE TO UNEMPLOYMENT TAXABILITY CALCULATION

The Rescue Plan allows the first $10,200 of unemployment received by a taxpayer (or, in the case of a joint return, received by each spouse), to be excluded from income if the Adjusted Gross Income (AGI) of the taxpayer is less than $150,000. This rule only applies to 2020. The new law does not currently extend this same income tax treatment to unemployment received in 2021, therefore taxpayers should be aware of the tax ramifications.

The IRS changed the way the $150,000 of AGI is calculated. Originally, taxpayers were required to include unemployment compensation when calculating AGI for purposes of the $150,000 limitation. New guidance issued last week changes this and taxpayers do not have to include unemployment received. This increases the number of taxpayers that are eligible to exclude unemployment benefits from taxable income.

You must keep in mind that not every state has decided to exempt the first $10,200 of unemployment compensation received from taxable income. Currently, New Jersey my home state, never includes unemployment compensation as taxable income, same with Pennsylvania. New York, however, does not exempt the first $10,200. All unemployment compensation is currently taxable in New York.

 PPP

Last week (Thursday March 25th) the Senate voted 92-7 to extend the Paycheck Protection Program (PPP) from March 31, 2021 to May 31, 2021.

All that remains at this point before this becomes law is the President’s signature which should come sometime this week.

With the changes made to the program both recently (an example would be Schedule C filers being allowed to use Gross income instead of net profit) and since the Consolidated Appropriations Act passed on December 27th, it makes sense to extend the deadline.

The changes made since passing the Act in December are, among other items, error codes put in place by the SBA to reduce fraud. While that is a very good idea, these codes have caused significant delays on applications that are legitimate. The extended time gives borrowers, the SBA, and professionals, like me, that are assisting borrowers much needed time to properly file necessary paperwork.

This also potentially allows taxpayers that received a first draw loan in 2021 to receive a second draw loan if their covered period for the first draw loan has expired and all funds have been expended.

RECOVERY REBATES

The IRS announced that as of March 18, 2021 the Recovery Rebate Credit will no longer be applied to past due federal income tax debts. While the IRS has the authority to offset these payments against prior tax obligations, they will not do so. This announcement does not apply to debts owed to other federal government or state agencies. This means money recovery rebates may be applied to debts owed to federal agencies (other than for income tax debt) as well as state agencies.

Below is a brief description of the current Recovery Rebate program:

The IRS has started sending recovery rebate checks, also known as Economic Impact Payments ($1,400 per person) to individuals ever since the President signed the American Rescue Plan Act into law on March 11th.

Many individuals have or will receive payment without having to do anything. Payments are based on either taxpayer 2020 income tax returns or 2019 if 2020 has not been filed. Individuals that have provided the IRS with banking information on their income tax returns or through the non-filer tool last year will most likely receive a direct deposit. Some taxpayers will receive paper checks.

As with the rebates issued in 2020 if taxpayers have not received their payments, then they may go to the “Get My Payment” site (https://www.irs.gov/coronavirus/get-my-payment)to to check the status. If the taxpayer is unable to use this tool (sometimes it doesn’t work), then ultimately the payment will be reconciled on the 2021 income tax return. This is the same way the rebates issued last year have worked. If taxpayers did not receive the payments in 2020, they may take credit on their 2020 income tax return. The downside with reconciling this on the 2021 return is taxpayers will be waiting over a year to receive this money. The other issue is if taxpayers receive payments based on their 2019 or 2020 income tax return that they would not have been entitled to because their 2021 income exceeds the limits for eligibility, they will not have to repay it, if these same taxpayers do not receive the money and reconcile on their 2021 returns they will not receive it if their income exceeds eligibility limits.

Below are the AGI limitations for the Recovery Rebate

Single taxpayers with AGIs of no more than $75,000 are fully eligible for the credit. The credit phases out for those with AGI in excess of $75,000 until they reach $80,000. There is no credit allowed for those with AGI of $80,000 or more.

Married taxpayers filing jointly must substitute the figures $150,000 for $75,000 and $160,000 for $80,000. 

Taxpayers classified as Head of Household must substitute the figures $112,500 for $75,000 and $120,000 for $80,000. 

Mortgage Interest Deduction

This past week I has a client inquire as to the amount of mortgage interest that is allowed for a taxpayer in 2020.

For mortgages that originated prior to December 16, 2017, the limit was interest on mortgages of up to $1,000,000 ($500,000 for married couples filing separately). For mortgages originating after December 15, 2017 these figures are reduced to $750,000 and $375,000, respectively.

If a mortgage originated prior to December 16,2017 is refinanced, then any remaining balance of the original loan is still eligible to be deducted. For example, if a taxpayer originated a $1,000,000 mortgage prior to December 16, 2017 and refinanced when the mortgage balance was $850,000, then interest on the $850,000 remains deductible, even though it exceeds the current limitation of $750,000. The key here is the loan was originated prior to December 16, 2017, even though it was refinanced.

In my example, if the taxpayer had refinanced and taken $1,000,000, then only interest on the $850,000 (remaining balance of original mortgage) would be deductible. Interest on the additional $150,000of debt would not be. The taxpayer would have to reduce mortgage interest incurred by 15% ($150,000 / $1,000,000) to calculate the portion that is tax deductible.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation