TAX+BUSINESS ALERT
News for your business and your life. | Hawkins Ash CPAs
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In this Edition
April 20, 2021
Business Highlights in the New American Rescue Plan Act
PODCAST: Medical Expenses
Be Prepared for Taxes on Social Security Benefits
How the CAA Affects Education Funding
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Business Highlights in the New American Rescue Plan Act |
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President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses. Here are some of the tax highlights of the ARPA.
The Employee Retention Credit (ERC)
This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.
Employer-Provided Dependent Care Assistance
In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP). Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income. Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately). This provision is effective for tax years beginning after December 31, 2020.
Paid Sick and Family Leave Credits
Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.
Grants to restaurants
Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money. Much more These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation.
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Author: Vince Schamber, CPA
Direct: 920.337.4548
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With the low rate of taxpayers who itemize and the even lower amount of people who have enough medical expenses to get over the 7.5% hurdle to make any of them deductible, there are very few people who can benefit from the itemized deduction. Many people will see a tax benefit when it comes to their companies cafeteria plan (Section 125 plan) or health savings account. |
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Be Prepared for Taxes on Social Security Benefits |
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Whether you’ve filed your 2020 tax return or soon will, you probably don’t want any surprises. One thing that takes many older people off-guard is getting taxed on their Social Security benefits.
Will you be taxed and how much will you have to pay? That depends on your other income. If you’re taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.) This doesn’t mean you’ll pay 50% to 85% of your benefits back to the government. It means you may have to include 50% to 85% of them in your income subject to regular tax rates.
Calculate Provisional Income
To determine how much of your benefits are taxed, you must calculate your “provisional income.” Doing so involves adding certain amounts (for example, tax-exempt interest from municipal bonds) to the adjusted gross income on your tax return.
If you file jointly, you’ll need to add your spouse’s income, and then further add half of the Social Security benefits that you and your spouse received during the year. The result is your joint provisional income.
If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed. If your provisional income is between $32,001 and $44,000, and you file jointly, you must report up to 50% of your Social Security benefits as income. If your provisional income is more than $44,000, and you file jointly, you need to report up to 85% of your Social Security benefits as income on Form 1040.
For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income. And if your provisional income is more than $34,000, the general rule is that you need to report up to 85% of your Social Security benefits as income.
Sidestep a Surprise
If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.
Contact us for help in accurately calculating your provisional income. We can also assist you with other aspects of tax planning before and during retirement.
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Contact: Curt Bach, CPA
Phone: 715.748.1351
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How the CAA Affects Education Funding |
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The Consolidated Appropriations Act (CAA), signed into law late last year, contains a multitude of provisions that may affect individuals. For example, if you’re planning to fund a college education or in the midst of paying for one, the CAA covers two important areas:
Student Loans
The CARES Act temporarily halted collections on defaulted loans, suspended loan payments and reduced the interest rate to zero through September 30, 2020. Subsequent executive branch actions extended this relief through January 31, 2021. The CAA leaves in place that expiration date.
Also under the CARES Act, employers can provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The payment can be made to the employee or the lender. The CAA extends the exclusion through 2025. The longer term may make employers more willing to offer this benefit.
Tax Credits
Qualified taxpayers generally can claim an education tax break with the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Previously, though, the two credits were subject to different income phaseout rules, with the AOTC available at a greater modified adjusted gross income than the LLC. In addition, before the new law, there was a “higher education expense deduction” for qualified tuition and related expenses that taxpayers could opt to claim instead of the credits.
The CAA adopts a single phaseout for both the AOTC and the LLC, effective for tax years beginning after December 31, 2020. The credits will phase out beginning at $80,000 for single filers and ending at $90,000. For joint filers, they will begin to phase out at $160,000 and disappear at $180,000. The new law also repeals the higher education expense deduction. Instead, taxpayers can claim the LLC credit.
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Contact: Colleen Scherpereel
Phone: 262.404.2115
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More Resources from CPA-HQ |
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Spring 2021 Tax Calendar
Don't miss another important Tax Deadline. This calendar notes important Tax Deadlines for the second quarter for Spring of 2021.
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Worker Classification Is Still Important
Over the last year, many companies have experienced “workforce fluctuations.” If your business has engaged independent contractors to address staffing needs, be careful that these workers are properly classified for federal tax purposes.
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Hawkins Ash CPAs Ranks as Top Accounting Firm in Region
Hawkins Ash CPAs recently was included in a list of the 25 largest accounting firms in the Milwaukee area by the Milwaukee Business Journal, as a leader in the Great Lakes Region by Accounting Today, and listed on Forbes America's Best Tax and Accounting Firms for 2021.
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