In COVID Tax Tip 2021-123, the IRS clarifies some of the confusion surrounding the powerful but complex Employee Retention Credit.
The IRS is addressing changes made by the American Rescue Plan Act of 2021 that apply to the third and fourth quarters of 2021.
These changes include:
For business managers who had questions and needed authoritative answers, the IRS is answering various questions about the credit for tax years 2020 and 2021, including:
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns, generally, Form 941 Employer's Quarterly Federal Tax Return, for the applicable period. If a reduction in the employer's employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
This is just a summary of a series of detailed and technical provisions. The IRS has provided all the details in Notice 2021-49. Managers should consult with a qualified tax professional to make sure they get all the benefits they're entitled to without inadvertently violating the provisions.
employee retention credit
American Rescue Plan
COVID Tax Tip
The Child and Dependent Care Tax Credit is available to parents and caregivers who are either working or looking for work and who claim dependents on their tax return. The credit is available to those who care for children under age 13 or a spouse or dependent of any age who is physically or mentally incapable of caring for himself or herself.
The CTC was created in 1997 and has been expanded several times since, most recently in 2020. The COVID-19 pandemic profoundly affected how, where and when people work. The incredible disruption this caused affected people's incomes and livelihoods, and the federal government responded by approving pandemic relief legislation that included changes to the child care tax credit.
The latest of these changes were mandated by the American Rescue Plan Act (ARPA), which increased the maximum amount of eligible expenses as well as the maximum percentage of eligible expenses for which the credit may be taken. ARPA also modified how the credit is phased out for higher earners.
Perhaps the most important changes for eligible taxpayers planning to claim this credit for 2021 is that
Who Can Claim the Credit?
To be eligible to claim the enhanced child care credit, taxpayers must meet all these requirements:
How the advance child tax credit work
Eligible taxpayers will receive 50% of their credit in equal monthly installments starting in July 2021. The remaining 50% will be applied on their 2021 taxes after they file next year.
The advance credit is phased out or eliminated completely for taxpayers whose AGI is above $150,000 for married taxpayers filing jointly and qualifying widows or widowers, $112,500 for those who file as head of household, and $75,000 for single filers or married taxpayers filing separately.
The IRS will make the advance payments automatically for July, August, September, October, November and December. Eligible taxpayers do not have to enroll.
Taxpayers who do not wish to receive advance payments because they are close to the income-eligibility limits, pay estimated taxes or expect to owe taxes with their 2021 tax return can opt out by using the Child Tax Credit Update Portal on the IRS website and clicking on "Unenroll from Advance Payments." However, as of now, taxpayers cannot choose to opt out and then change their minds and opt in.
The specific rules relating to this credit, such as the definition of a work-related expense, are complex. Make sure to consult with a tax adviser to discuss your specific situation.
You can claim the potentially lucrative federal Work Opportunity Tax Credit (WOTC) for some of the wages paid to the individual who is part of a targeted group.
Here’s what you need to know to make the WOTC a tax saver for your business
The credit generally equals 40 percent of qualified first-year wages paid to an eligible employee, up to a maximum wage amount of $6,000.
The maximum credit is $2,400 (40 percent x $6,000).
The credit is reduced to 25 percent of qualified first-year wages for an employee who completes at least 120 but fewer than 400 hours of service.
In this situation the maximum credit is $1,500 (25 percent x $6,000).
You can claim the WOTC only if you hire a member of a targeted group. Targeted groups include the following:
This link contains links to the names, addresses, phone and fax numbers, and email addresses of the WOTC coordinators for each of the SWAs.
Exceptions to the General Rule on Credits
There’s a higher limit of $12,000 for first-year wages paid to a qualified veteran who is entitled to compensation for a service-connected disability and was discharged or released from the military within the past year.
There’s an even higher limit of $14,000 for first-year wages paid to a qualified veteran who was unemployed for at least six months in the prior year.
If a qualified veteran both has a service-connected disability and was unemployed for at least six months in the prior year, the limit for first-year wages is $24,000.
The WOTC for a long-term family assistance recipient equals 40 percent of qualified first-year wages, up to a maximum wage amount of $10,000.
In addition, for long-term family assistance recipients, the WOTC can be claimed for 50 percent of qualified second-year wages, up to a maximum wage amount of $10,000.
The WOTC for a qualified summer youth employee (a 16-year-old or 17-year-old who lives in an empowerment zone) equals 40 percent of first-year wages paid during any 90-day period between May 1 and September 15, up to a maximum wage amount of $3,000.
If you would like my help with the WOTC, please don’t hesitate to contact us at email@example.com.
IRS extends additional tax deadlines for individuals to May 17
With Tax Day officially moved to May 17, 2021, there were several associated deadlines that normally go hand in hand with the individual tax deadline but were not specially addressed.
On March 29 the IRS addressed the most pressing of these with Notice 2021-21, which specified that the following tax related deadlines were also moved to May 17, 2021, to correspond with the individual income tax deadline.
The most item not covered with Notice 2021-21 is First Quarter 2021 Estimated Tax Payments which are currently still due April 15. Were monitoring this situation and will provide and update should this date also change to May 17.*
For more information, a link to the IRS announcement is here [LINK] along with a downloadable copy of Notice 2021-21 below.
* correction from early posting which incorrectly listed stated Q1 2021 Estimated Tax Payments were due May 17.
The mileage rate decreased 1.5 cents from 2020 for Business use mileage, and 1 cents for medical, or moving purposes for qualified active duty members.
December 22, 2020
WASHINGTON — The Internal Revenue Service today issued the 2021 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station. For more details see Moving Expenses for Members of the Armed Forces.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Taxpayers can use the standard mileage rate but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.
contains the optional 2021 standard mileage rates, as well as the maximum automobile cost used to calculate the allowance under a fixed and variable rate (FAVR) plan. In addition, the notice provides the maximum fair market value of employer-provided automobiles first made available to employees for personal use in calendar year 2021 for which employers may use the fleet-average valuation rule in or the vehicle cents-per-mile valuation rule.
As many employers look to closeout and forget 2020, Maryland employers face yet another challenge as a sizeable hike in unemployment tax rates is coming in 2021.
It's important to note that Governor Hogan signed an executive order (copy below, FAQs) that excludes 2020 employer data from the formula used to determine the 2021 unemployment rate. If the Governor had not done this, all employers would have had an even higher tax rate for 2021.
For employers with zero claims over the prior three (3) years (the measurement period will remain 2017, 2018, and 2019, for 2021) the per annual amount due per employee will increase from $25.50 to $187 per employee for 2021, which is almost 7.5 times the 2020 experience rate.
While obviously not good news, at first glace it might not sound all that punitive at first glance. However, imagine you have 50 employees, all of which require an unemployment contribution. That comes out to an extra $8,075 that employers will have to pay in for 2021. In higher turnover businesses such as retail and hospitality, it's very possible to have on average 10 to 15 employees per year, but because of attrition this equals 50 or more total employees per year, all of which require their own unemployment contribution.
While unemployment rates will reduce over time as we saw a similar situation occur during and after the financial crisis (great recession). Unfortunately, in the short term, this is one more hit businesses are going to have to contend with.
Consider these tips to help offset these costs:
1) Have a plan for 2021, as no plan almost always means no success, and those who are successful are just incredibly lucky.
2) Investigate ways to streamline operations & improve efficiency in the short and medium term. No is not the time for long term decision making if possible, as there is still much uncertainty.
3) Review and make cash savings measures (both for the business, and personally), and do the easiest ones immediately. This doesn't mean slash essential services, but it means giving up the luxuries.
Contact us if you need help with these or similar small business savings strategies.
1) Make sure your mileage log is in order for the first 10 Months of 2020. Waiting is only going to give you more work to do later, plus it will give you a good idea of your total mileage expense for the year.
2) Get W-9's now from contractors you need to 1099 at year-end. Waiting until after year-end makes it much more likely that you'll never get them, especially if the contractor will not be working with you again.
3) Identify expenses to be paid by year-end to lower your taxes. This is a key tax planning step and one of the easiest to do, as paying expenses by year-end, vs. in January will give you a deduction in 2020.
Courtesy of the Tax Foundation | https://ramlcpa.link/jq2
2021 Federal Income Tax Brackets and Rate
In 2021, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Tables 1). The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $523,600 and higher for single filers and $628,300 and higher for married couples filing jointly.
2021 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households
2021 Standard Deduction and Personal Exemption
The standard deduction for single filers will increase by $150 and by $300 for married couples filing jointly (Table 2).
The personal exemption for 2021 remains eliminated.
2021 Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.
The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subject to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.
The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly (Table 3).
In 2021, the 28 percent AMT rate applies to excess AMTI of $199,900 for all taxpayers ($99,950 for married couples filing separate returns).
AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. In 2021, the exemption will start phasing out at $523,600 in AMTI for single filers and $1,047,200 for married taxpayers filing jointly (Table 4).
2021 Alternative Minimum Tax Exemption Phaseout Thresholds
2021 Earned Income Tax Credit Parameters
The maximum Earned Income Tax Credit in 2021 for single and joint filers is $543, if the filer has no children (Table 5). The maximum credit is $3,618 for one child, $5,980 for two children, and $6,728 for three or more children. All these are relatively small increases from 2020.
2021 Child Tax Credit
The child tax credit totals at $2,000 per qualifying child and is not adjusted for inflation. However, the refundable portion of the Child Tax Credit is adjusted for inflation but will remain at $1,400 for 2021.
2021 Capital Gains Tax Rates & Brackets (Long-Term Capital Gains)
Long-term capital gains are taxed using different brackets and rates than ordinary income.
2021 Qualified Business Income Deduction (Sec. 199A)
The Tax Cuts and Jobs Act includes a 20 percent deduction for pass-through businesses against up to $164,900 of qualified business income for unmarried taxpayers and $329,800 for married taxpayers (Table 7).
2021 Annual Exclusion for Gifts
In 2021, the first $15,000 of gifts to any person are excluded from tax. The exclusion is increased to $159,000 for gifts to spouses who are not citizens of the United States.
Travis Raml, CPA