CONSOLIDATED APPROPRIATIONS ACT
Enacted December 27, 2020
Additional Recovery Rebates
New $600 recovery rebate per taxpayer ($1,200 for married filing jointly) and $600 per qualifying child. Rebate phases out starting at $75,000 of modified adjusted gross income ($112,500 for head of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income. The rebate is not available for taxpayers who qualify as a dependent of another, or for dependent adults.
Temporary Special Rule for Earned Income Tax Credit and Child Tax Credit
Taxpayers may elect to use 2019, rather than 2020 earned income for purposes of calculating 2020 earned income tax and additional child tax credits, if prior year income results in a higher credit.
Charitable Contribution Deduction for Non-Itemizers
The above-the-line charitable contribution deduction for non-itemizers is increased to $600 for married couples filing jointly, starting in 2021. This deduction is enacted as a permanent provision, is for non-itemizers only, requires receipts and does not apply to non-cash donations. Contributions to private foundations and donor advised funds do not qualify.
Increased Imposition of Tax for Overstating Charitable Contributions
The imposition of accuracy-related penalty increased from 20% to 50% for any understatement of tax by non-itemizers resulting from an overstatement of qualified charitable contributions.
Expansion of Eligible Educator Expenses
Teachers may include unreimbursed Personal Protective Equipment Expenses (PPE) in the educator $250 above-the-line deduction retroactive to 3/11/2020.
Increased Phase-out Limits for Lifetime Learning Credit
The income phase-out limit on the Lifetime Learning Credit is increased to match the phase-out limits for the American Opportunity Tax Credit, effective for the 2021 tax year. The qualified tuition deduction is repealed, effective for 2021.
Medical Expense Deduction Floor
Medical expense deduction floor is permanently established as 7.5% of adjusted gross income.
Other Extended Individual Tax Provisions:
Expanded Unemployment Assistance
Pandemic unemployment assistance benefits are extended through March 14, 2021. The federal supplement to unemployment insurance benefits for eligible individuals is $300 per week beginning Dec. 26, 2020, and ending March 14, 2021. Benefits are extended from 39 to 50 weeks. All benefits will expire on April 5, 2021.
Temporary Allowance of Full Deduction for Business Meals
Business meals are 100% deductible (rather than the current 50%), as long as the expense is for food or beverages provided by a restaurant. This provision is in effect Jan 1, 2021 through Dec 31, 2022.
Extension of Covid-19 Sick Pay and Family Medical Leave Tax Credits
Employer payroll tax credits (including self-employed taxpayers) for Covid-19 Sick Pay and Family Leave is available for wages paid (or self-employment earnings) through March 31, 2021, extended from former expiration date of December 31, 2020. Also, self-employed taxpayers may elect to use 2019 average daily self-employment income rather than 2020 income to calculate the credit.
Employee Retention Tax Credit Modifications
This credit is allowed retroactively for PPP loan recipients (but not on the same wages used for forgiveness). Also, for qualifying wages paid from 1/1/2021 – 6/30/2021 the credit is now per employee, per quarter and has been increased from 50% to 70% of the first $10,000 of wages per employee, per quarter. Also, the 2021 credit is available any calendar quarter where gross receipts are 20% or less of the corresponding 2019 quarter.
Health Flex Spending Unused Balance Carryover
Unused balances in flexible spending accounts for health care and dependent care expenses may be carried over to the following plan year, if the employer allows. This provision applies to 2020 and 2021 Flex Spending contributions. Employers may also permit employees to make a 2021 midyear prospective change in contribution amounts.
Deferral of Employees’ Portion of Payroll Tax
For employees who elected to defer 2020 withholding of employee portion of social security tax, repayment of deferred tax is extended from Apr 30, 2021 to Dec 31, 2021.
PPP and EIDL Emergency Grant Clarifications
Additional PPP Funding
Additional federal funding of $284 billion is appropriated for first or second PPP loans to qualified businesses with less than 300 employees. The additional PPP funding is expected to be offered through March 31, 2021. For the second PPP loan, an applicant must show that their gross receipts declined by at least 25% when compared to a corresponding 2019 quarter. Also, borrowers must have fully spent loan proceeds from their first PPP loan before there second PPP loan is disbursed.
THE CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES ACT)
Enacted March 27, 2020
2020 Recovery Rebates for Individuals
Eligible taxpayers received payments (subject to income limits) in the form of a credit. Maximum payment of $1,200 per individual ($2,400 for married couples filing a joint return) plus $500 per qualifying child who is under age 17. Payments will fully phase out when income reaches $99,000 for single filers, $146,500 for heads of households with one child and $198,000 for joint filers.
Penalty-Free Retirement Distributions
Up to $100,000 withdrawal from a retirement plan or IRA is permitted without incurring the 10% premature distribution penalty if the withdrawal is a coronavirus-related distribution.
Coronavirus-related distribution criteria includes:
The taxpayer can choose to spread income tax on the distribution over a 3-year period. Also, the taxpayer may choose to treat the distribution, or any portion of the distribution, as a tax-free rollover if funds are recontributed to the plan or an IRA within 3 years of the withdrawal date.
Temporary Waiver of Required Minimum Distributions (RMDs)
RMDs required to be made or that begin in 2020 are waived. Calendar year 2020 is disregarded for distributions made under the 5-year rule.
Above-the-Line Charitable Contribution Deduction
Beginning in 2020, charitable contributions of up to $300 can be deducted on page one of the 1040 for taxpayers who do not itemize. This deduction is not available for non-cash donations.
Temporary Suspension of Contribution Limitations
Percentage limits on qualified contributions are disregarded on 1040 returns. Contributions are deductible up to 100% of taxpayer AGI. Any amount disallowed because of the AGI limitation can be carried forward for 5 years.
For corporations, the 10% limitation is increased to 25% of taxable income
Exclusion for Certain Employer Payments of Student Loans
Employers offering tax-free educational assistance programs (under IRC 127) can include reimbursement of qualified student loan repayment as a tax-free benefit. Student loan repayment assistance can be offered under IRC 127 programs through Dec 31, 2020, limited to $5,250 per employee.
Employee Retention Credit
Employers are provided a refundable payroll tax credit for 50% of wages paid to employees March 13, 2020 – Dec. 31, 2020. The credit is available for the first $10,000 of qualified wages including health benefits paid to each employee and to employers whose: (1) Operations were fully or partially suspended due to a Covid-19 related shutdown or order, or (2) Gross receipts declined by more than 50% when compared to the same quarter in the prior year.
Delay of Payment of Employer Payroll Taxes
Employers and self employed individuals can elect to defer payment of the employer share of Social Security tax. 50% of the deferred tax must be paid by Dec. 31, 2021 and the remaining 50% paid by Dec. 31, 2022.
Modifications for Net Operating Losses (NOLs)
NOLs arising in a tax year beginning in 2018, 2019 and 2020 can now be carried back five years. This provision also removes the TCJA 80% taxable income limitation for NOL income offset. Taxpayers may amend eligible years to deduct NOLs not utilized.
Modifications to Excess Business Loss Rules
Excess business losses can now be deducted at the shareholder/business owner level for losses arising in 2018, 2019 and 2020. Previously, these deductions were disallowed for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026.
Modification of Minimum Tax Credit for Corporations
This Act allows corporations to recover 100% of AMT credits in 2019 and claim a refund.
Deductibility of Business Interest
The 30% of taxable income limitation on the deduction for business interest has been temporarily and retroactively increased to 50% of taxable income (with adjustments) for 2019 and 2020.
Bonus Depreciation for Qualified Improvement Property
All 15 year property is now defined as qualified improvement property and is therefore eligible for bonus depreciation. This is effective for property acquired and placed in service after September 27, 2017.
SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT (SECURE ACT)
Enacted January 1, 2020
Repeal of maximum age for traditional IRA contributions
Effective for tax years beginning after Dec 31 2019.
Increase in Age for Required Minimum Distributions from 70 ½ to 72
Effective for distributions required to be made after Dec 31 2019 for individuals attaining age 70 ½ after Dec 31 2019. Individuals turning 70½ during 2019 are still required to receive RMD distributions for 2019 and subsequent years.
Penalty-Free Withdrawals For Childbirth or Adoption
Penalty-free withdrawals from retirement plans for childbirth or adoption expenses of child under age 18 or for those physically or mentally incapable of self-support, up to a $5,000 lifetime distribution limit. Effective for distributions made after Dec 31 2019.
Expanded Use of 529 Plans
529 Plan distributions can be used to pay principal and interest on a qualified education loan of a beneficiary or beneficiary’s sibling. Student loan repayment distributions are limited to $10,000 (lifetime limit) per student. 529 Plan distributions can also be used to cover tuition, fees, books, supplies and equipment in a registered apprenticeship program.
Removal of “Stretch” IRA Option for Certain Non-Spouse Beneficiaries
Inherited IRA’s must be distributed to beneficiaries within 10 years after date of death. This rule applies whether the IRA owner dies before, on or after the required beginning date. Certain individuals are exempt from mandatory 10-year pay-out:
This new law applies to heirs of IRA account holders who die starting in 2020. Beneficiaries who inherited plans in years before 2020 are grandfathered and may continue to use the former rules.
Employer Tax Credit of $500 per year
Employers are eligible for a new $500 tax credit for adding an automatic enrollment feature to a new or existing 401(k) or Simple IRA plan, for each of the first three years the feature is effective.
SECURE ACT, 2020 – EXTENSION OF EXPIRING PROVISIONS
Exclusion From Gross Income of Discharge of Qualified Personal Residence Indebtedness
Discharges of up to $2 million of mortgage debt on taxpayer’s principal home are excluded from income. The provision expired Dec 31 2017 and is retroactively extended through Dec 31 2020.
Deduction for Mortgage Insurance Premiums
Premiums paid for qualified mortgage insurance expired Dec 31 2017 and is retroactively extended through Dec 31 2020.
Deduction for Qualified Tuition and Fees
This deduction is up to $4,000 for taxpayers whose AGI does not exceed $65,000 or $130,000 for married joint filers, or $2,000 for taxpayers whose AGI does not exceed $80,000 ($160,000 for married joint
TAX CUTS AND JOBS ACT (TCJA) 2017
Enacted December 22, 2017
This act brought some of the most significant changes to the Internal Revenue Code in decades. The law reduced tax rates for individuals and corporations and repealed many deductions, thus simplifying filing for many taxpayers. Most of the individual changes will expire at the end of 2025. Old tax code rates and deductions will return in 2026 unless Congress passes another law before then.
The personal exemption is repealed.
Child Tax Credit
The child tax credit for a qualifying dependent child under age 17 doubled to $2,000 and is subject to income phaseouts. A new credit of $500 has been introduced for other dependents (those age 17 or older, or meeting the definition of a qualifying relative). Phase-out limits increased to $200,000 for single and head of household filing status and $400,000 for married filing jointly. The refundable portion of the tax credit increased to $1,400. Phase out remains at $500 for each $1,000 of AGI exceeding the above thresholds.
With the exception of state and local income and property taxes, mortgage interest, medical expenses, disaster losses, charitable contributions, and other deductions not subject to the 2% floor, all other itemized deductions are repealed. The overall limitation on itemized deductions for upper income individuals is also repealed.
State and Local Taxes
Taxpayers can claim a deduction for a combination of state and local income tax, sales tax, or real property tax. The aggregate deduction is capped at $10,000. Foreign real property taxes are no longer deductible.
Medical expenses exceeding 7.5% of income are deductible. The 7.5% threshold remains in effect through Dec 31 2020.
Taxpayers who are able to itemize deductions can include charitable contributions. The current limitation of 50% of income is increased to 60%. Charitable contributions for college athletic seating rights are no longer deductible.
Residential Mortgage Interest
The deduction for mortgage interest is capped at $750,000 of debt ($375,000 for married filing separate). The interest deduction is allowed on a first or second home, up to the combined limit of $750,000. Interest on up to $1 million of acquisition debt for loans prior to December 15, 2017 is grandfathered.
Home Equity Interest
The interest on home equity loans will no longer be deductible, unless used:
Deductions for unexpected losses to personal property are no longer deductible unless covered by specific federal disaster declarations.
The meaning of losses from wagering transactions is clarified to include other expenses incurred by the individual in connection with the conduct of that individual’s gambling activity such as travel expenses to or from a casino.
The bill retains the present law above-the-line deduction of $250 (indexed for inflation) for out-of-pocket expenses.
Student Loan Interest Deduction
The maximum amount that you can deduct for interest paid on student loans remains at $2,500 for 2020. Phaseouts apply for taxpayers with modified adjusted gross income in excess of $70,000 ($140,000 for joint returns) and is completely phased out for taxpayers with modified adjusted gross income of $85,000 or more ($170,000 or more for joint returns).
Tuition Deduction and Education Credits
There are no changes to the current law regarding the Tuition and Fees deduction, American Opportunity or Lifetime Learning tax credits.
Section 529 Plans
Distributions of up to $10,000 per beneficiary can be used for tuition expenses for public, private or religious elementary or secondary school. The limitation applies on a per student basis.
Distributions can also be made for expenses related to homeschool. Expenses include:
• Curriculum and curricular materials
• Books or other instructional materials
• Online educational materials
• Tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student)
• Dual enrollment in an institution of higher education
• Educational therapies for students with disabilities
Discharge of Student Loan Indebtedness
The exclusion from income resulting from the discharge of student loan debt is expanded to include discharges resulting from death or disability of the student.
The deduction for moving expense has been repealed, except for members of armed services. The exclusion from gross income for employer-provided qualified moving expenses is also repealed except in the case of a member of US Armed Forces on active duty who moves pursuant to a military order.
Alimony payments to an ex-spouse are no longer deductible and not taxable to the recipient, beginning with divorce agreements executed after December 31, 2018. Divorce agreements in effect prior to December 31, 2018 are not affected, unless alimony modifications are made.
Affordable Care Act
The penalty for failing to maintain minimum essential health insurance coverage for individuals (individual mandate) is repealed beginning in 2019.
Alternative Minimum Tax
The phaseout thresholds are increased to $1,036,800 for married taxpayers filing a joint return, and $518,400 for all other taxpayers (other than estates and trusts). These amounts are indexed for inflation. AMT exemption amounts are $72,900 for single filers, $113,400 for married joint and surviving spouse and $56,700 for married filing separate.
Home Energy Tax Credits
Most home-related energy efficiency credits have been extended through 2020. You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year. The credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows). There are also other individual credit limitations.
There is a 26% credit for solar, wind and geothermal costs for property placed in service during 2020 and 22% credit for property placed in service during 2021.
Estate Tax Exemption
The estate and gift tax exemption is doubled for estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026. This is accomplished by increasing the basic exclusion amount provided in §2010(c)(3), and indexed for inflation. The exemption increases to $11,580,000 in 2020.
The generation skipping transfer (GST) tax exemption is also doubled.
The special rule allowing a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA no longer applies to a conversion contribution to a Roth IRA.
Recharacterization cannot therefore be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA.
In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the provision precludes the individual from later unwinding the conversion through a recharacterization.
CORPORATION AND BUSINESS TAX UPDATES
The tiered tax rates for C corporations have been replaced with a flat federal tax rate of 21% beginning January 1, 2018. Corporations with fiscal tax years will use a blended tax rate.
Effective for tax years beginning after 2017, corporations are no longer subject to AMT. In the case of a corporation, the bill allows the AMT credit to offset the regular tax liability for any taxable year. The AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability.
Pass-through Business Deduction
Non-corporate taxpayers, including trusts or estates, who have domestic qualified business income (QBI) from a partnership, S corporation, sole proprietorship or real estate activities that rise to the level of a trade or business are allowed to deduct 20% of business-related income, subject to certain wage limits and exceptions. The 20% deduction is not allowed in computing adjusted gross income (AGI), but rather is allowed as a deduction reducing taxable income. It does not reduce income subject to SE tax. The deduction ratably phases out for joint filers with income between $321,400 and $421,400, between $160,725 and $210,725 for married filing separate and between $160,700 and $210,700 for others. This provision provides an alternate limitation based on wages and capital. The limitation is the greater of 50% of the wages paid or 25% of the wages paid plus 2.5% of the unadjusted basis of the business' capital assets.
Domestic Production Activities Deduction (DPAD)
Repealed effective for tax years beginning after December 31, 2017.
The deferral of gain in the case of like-kind exchange of property used in a trade or business or for investment is limited to real property only. Vehicles and equipment used in a trade or business will no longer qualify for tax deferred treatment and instead result in a taxable sale. To qualify for non-recognition of gain under IRC Sec 1031, strict compliance with reinvestment rules is required regarding reinvestment of proceeds, eligibility of qualifying property as well as closing deadlines. Use of a qualified intermediary or exchange facilitator is required to ensure compliance with reinvestment requirements.
Net Operating Losses
Net operating losses are limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017. The two-year carryback and special carryback provisions are repealed except for losses incurred in the business of farming. Carryovers are allowed indefinitely.
Business Loss Limitation
The new law introduces a new limit on the amount of loss that can be deducted annually for all businesses other than C corporations. The new law suspends the deductions of losses in the current year to the extent that aggregate business losses exceed $518,000 on a joint return and $259,000 for all other filing statuses. Any unused loss can be carried forward and treated as part of the taxpayer's net operating loss. The provision applies after taking into account passive activity loss rules.
Section 179 Expensing
The maximum amount a taxpayer may expense under §179 increases to $1,040,000. The phase-out threshold amount increases to $2,590,000. The $1,040,000 and $2,590,000 amounts, as well as the $25,900 sport utility vehicle limitation, are indexed for inflation for taxable years beginning after 2018.
The definition of §179 property is expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging, such as furniture and appliances.
The definition of qualified real property eligible for §179 expensing now includes any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service:
• Heating, ventilation, and air-conditioning property
• Fire protection and alarm systems
• Security systems
Computers and peripheral equipment are removed from the definition of listed property.
The allowable first-year depreciation deduction for qualified property increased from 50% to 100%. This deduction was expanded to include used as well as new property, and allows businesses to deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. After 2022, the amount of allowable bonus depreciation is phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates will be pushed out a year).
The following property would still not qualify: property acquired as a gift or inheritance, acquired from a member of the taxpayer’s family, from a person who has a controlling interest in the business, or acquired in a non-taxable reorganization.
The cap placed on depreciation write-offs of business-use vehicles is increased and indexed for inflation. The new limits are as follows:
1st year - $10,100
2nd year - $16,100
3rd year - $9,700
Each year thereafter until cost is fully recovered - $5,760
The new, higher limits apply to vehicles placed in service after December 31, 2018 and for which additional first-year depreciation §168(k) is not claimed.
No deduction is allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items.
Taxpayers may still deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed while on business travel, or consumed with a prospective or existing client). Holiday parties or meals offered to public such as sales seminars are still 100% deductible.
ILLINOIS TAX LAW UPDATES
Effective July 1, 2017, income tax rates for individuals, trusts and estates increased from 3.75% to 4.95%. For corporations (excluding S corporations) the tax rate increased from 5.25% to 7.0%.
Effective January 1, 2017, the personal exemption allowance may not be claimed on returns exceeding gross income of $500,000 for married joint returns or $250,000 for all other returns.
Illinois Residential Property Tax Credit
Effective January 1, 2017, the residential property tax credit may not be claimed on returns exceeding gross income of $500,000 for married joint returns or $250,000 for all other returns.
Kg- 12 Education Expense Credit
Effective January 1, 2018 the maximum Kg-12 education expense credit has been increased to $750 per family. The credit cannot be claimed on returns exceeding gross income of $500,000 for married joint returns or $250,000 for all other returns.
Instructional Materials and Supplies Credit
For tax years beginning on or after January 1, 2018, educators may claim a credit for materials and supplies used in the classroom not to exceed $250 per taxpayer and spouse.
Earned Income Tax Credit
For tax years beginning on or after January 1, 2017 and before January 1, 2018, the earned income credit is increased to 14 percent of the federal earned income tax credit. For tax years beginning on or after January 1, 2018, the earned income credit increases to 18 percent of the federal earned income tax credit.