Consolidated Appropriations Act 2021 – Individual Provisions

On Sunday, December 27, 2020, the President signed into law one of the longest bills in US history. This bill, the Consolidated Appropriations Act 2021, is a sprawling 5,593 pages and contains a $900 billion relief package for aid related to the COIVD19 pandemic as well as a $1.4 trillion in annual funding for the federal government in the upcoming year.

Individual Economic Stimulus Payments

Eligible individuals are provided a refundable tax credit of:

  • $600 per taxpayer ($1,200 for married filing jointly)*
  • An additional $600 per qualifying child [dependent adults ineligible]

The credit is subject to the same income thresholds for eligibility as the first stimulus payment, but is based on 2019 income. If the credit amount on an individual’s 2020 tax return exceeds the amount of the advanced payment based on 2019 income, taxpayers will receive the difference as a refundable tax credit. The credit amount is reduced by 5% of the taxpayer’s adjusted gross income (AGI) in excess of:

  • $150,000 for a joint return
  • $112,500 for head of household
  • $75,000 for all other taxpayers

*There is pending legislation that may increase the amount of the second round of economic stimulus payments to $1,200 per individual ($2,400 for an eligible married filing joint couple). 

Unemployment Payments and New Unemployment Program

Pandemic Unemployment Assistance (PUA): The Consolidated Appropriations Act of 2021 extends the  duration of Pandemic Unemployment Assistance to 50 weeks (previously 39 weeks) for those who don’t qualify for regular compensation or extended benefits under State or Federal law or PEUC (see below).

Federal Pandemic Unemployment Compensation (FPUC): The Consolidated Appropriations Act of 2021 restores the Federal Pandemic Unemployment Compensation (FPUC) supplement to state unemployment benefits at  $300 per week (reduced from the federal supplement of $600 per week under the Section 2104 of the CARES Act that ended July 31, 2020 ). This federal supplement applies to weeks of unemployment after December 26, 2020 through March 14,2021. 

Pandemic Emergency Unemployment Compensation (PEUC): Pandemic Emergency Unemployment Compensation has been extended to March 14, 2021 and allows individuals receiving benefits as of March 14, 2021 to continue through April 5, 2021, as long as that individual has not reached the maximum number of weeks. The number of weeks of benefits an individual may claim through the PEUC program has been increased from 13to 24.

Mixed Earner Unemployment Compensation: A new unemployment program provides an additional $100 per week to “mixed earners”, those that have both wage (W-2) and self-employment (i.e. 1099) income and earned at least $5,000 in 2019 and

Individual Income Tax Changes

Decrease to the Medical Deduction Floor. The Consolidated Appropriations Act of 2021 permanently reduces the medical deduction floor for years beginning after December 31, 2020 from 10% to 7.5%. 

Extension of Charitable Contribution Deduction for Non-Itemizers. Taxpayers who do not elect to itemize deductions for any tax year beginning in 2021 can deduct up to $300 ($600 if married filing joint) in cash contributions to eligible not-for-profit organizations.

Changes to the Child Tax Credit and Earned Income Credit. Taxpayers may elect to substitute the earned income for the preceding tax year, if that is greater that the taxpayer’s earned income for 2020.

As always, if you have questions about how this bill impacts you, please contact our office.

3 Myths About Real Estate Taxation

As an active CPA, I often stumble across forums and blogs on the internet with a plethora of misinformation that makes me want to bang my head against the wall. While this blog isn’t intended to be a PSA, the tax code is complex and you should always consult with a tax professional before acting on advice of a friend, colleague, or stranger on the web.

I assembled a list of the top  3 myths about real estate taxation with the intention of setting the record straight. Here’s the top offenders:

Myth #1: You need a real estate license to be a real estate professional

While you may need a license to hold yourself out to the public as a “real estate professional”, to qualify for real estate professional tax status the IRS only requires that you meet certain annual time thresholds.

The rules are pretty simple, the IRS defines a real estate professional as a taxpayer that materially participates in real estate. Qualifications? Work 750 hours in a real estate capacity and spend more than half your time in a real estate trade or business.

So what is a real estate business or trade? The IRS lists the following: renting and leasing of realty, construction, development, buying, operating, and managing realty, as well as realty brokerage businesses.

Simple enough, right? The full text can be found in full under Code Sec. 469(c)(7)(B).

Myth #2: Flipping income qualifies as capital gain

The IRS says “real estate dealers”, individuals or business involved in the buying, improving, and selling real property (“flipping”), cannot qualify for capital gains – regardless of whether you hold the property for 1 year or longer!

Court cases have made this pretty clear – real estate dealers should treat the business of flipping property similar to any other inventory based business. Meaning, sole proprietors involved in flipping activities would also be subject to self-employment taxes. You should also be aware that “real estate dealer” status could also subject your rentals to “self-employment”.

There are several strategies a knowledgeable CPA can help employ to reduce exposure to some of the negative implications.

Don’t believe me? There are plenty of court cases that support this – email me for a list!

Myth #3: Passive losses disallowed in one year are lost forever

The IRS has rules related to “passive losses”. These rules often limit the amount of loss that can be taken in a given year for a rental property.

The good news is that if your rental shows a passive loss, no taxes are being paid on the rental income you received for the year! Hopefully, that loss being generated is just “tax loss” rather than a hard loss.

So what happens to the losses in excessive of your rents received? When you have a passive loss from your rental activities and cannot use the loss because of your income level or the passive loss rules, they become suspended until they can be used to offset future passive income or offset any gain in the year that property is disposed of in a sale.

While the key to effective tax strategy usually involves obtaining the largest benefit now, the passive loss rules can work out quite nicely in the future.

Oh, and you can and should always write off depreciation. If you don’t write off depreciation, you will run into quite a mess when you go to sell the property.

Any questions? Feel free to email me at paul@launchconsultinginc.com or leave a message in the comment section below.

 

Common Tax Forms

If you’re reading this post, you are probably wondering what tax documents you should be on the look out for, whether in your email inbox or in your postal mail box. While not exhaustive, below is a list common tax forms issued to individual taxpayers. Remember, it’s recommend you store these original documents for seven years!

  • Form W-2, Wage and Tax Statement
  • Form 1099-R, Distributions from Pensions, Annuities, or Retirement
  • Form SSA-1099, Social Security Benefit Statement
  • Form 1098, Mortgage Interest Statement
  • Form 1098-E, Student Loan Interest Statement
  • Form 1099-INT, Interest Income
  • Form 1099-DIV, Dividends and Distributions
  • Form 1099-B, Proceeds from Broker and Barter Exchange (typically stock or bond sales)
  • Form 1099-MISC, Miscellaneous Income. Typically for Rent Income or Prize Winnings
  • Forms 1099-NEC, Non-Employee Compensation
  • Schedule K-1, Reporting Pass-through Income from a Partnership or S-Corporation
  • 1099-SA, Distributions From an HSA
  • 5498-SA, Contributions to an HSA
  • Form 1098-T, Tuition Statement
  • Form 1099-G, Certain Government Payments (Typically Unemployment or State Tax Refunds)
  • 1095-A/B/C – Health Insurance Statement