Sales Idea of the Month
6 Changes in the Latest Stimulus Package to Discuss with Clients
By Debra Taylor, CPA/PFS, JD, CDFA
(from Horsesmouth – public.horsesmouth.com)
The Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (all part of the Consolidated Appropriations Act of 2021, “the Act”) contain $900 billion in spending along with several tax-related items. Although there are few showstopper items for financial planning—in contrast to the SECURE Act and even the relief packages from earlier in 2020—there are several items in the bill that advisors and their clients need to be familiar with.
The legislation includes a variety of personal income-tax-planning relief provisions, and we highlight below the most critical ones that you should be discussing with clients—and even considering for yourself.
- Charitable contribution deductions extended
The above-the-line deduction for cash contributions has been extended through 2021—but remember, this is only available for those who do not itemize. In addition, in contrast to the CARES Act, there is no more marriage penalty and now a married couple filing jointly can deduct $600 (instead of the previous $300). This extension is for 2021 only.
Also extended through 2021 is the ability to deduct up to 100% of an individual’s adjusted gross income when making a cash contribution to a qualifying charity. But remember this does not include donor-advised funds.
- Practice pointer: When using Holistiplan to review tax returns or otherwise advising clients, make sure they are aware of this extended tax break. Virtually all of your clients have a worthy cause or two that they would like to support, particularly if the government subsidizes that effort. In addition, being able to contribute to charity up to 100% of AGI could help clients obtain deductions and drive down income to offset Roth conversions.
- Medical expenses deductible in excess of 7.5% of AGI
This change is supposedly permanent, and supports the argument in favor of bunching, as it will be easier to exceed the standard deduction when all the other deductions are counted together.
- Practice pointer: Continue to discuss the benefits of bunching with clients, particularly in light of the liberalization of the medical expenses deduction.
- Business meals at restaurants 100% tax deductible
This extension is in effect through the end of 2022.
- Practice pointer: For all advisors and their clients, this is a great time for business owners to expand their reach, network and get back in touch with prospects and clients after a year of lockdown. Commit to getting out of the office (once it is safe), and reconnecting with prospects and clients in more relaxed social settings.
- Tax-free employer payments of student loans
The Act extends until 2025 the ability of an employer to pay up to $5,250 annually towards an employee’s student loan principal or interest. The payments can be made to the employee or directly to the institution.
- Practice pointer: These little known provisions are often buried in an employee benefit booklet, typically available online. Since employees are often unaware of these benefits, it is incumbent upon you to request the benefits booklet from all valued clients so you can identify these opportunities. By doing so, you could save your client over $5,000! And while we are discussing student loan relief, note that this package did not extend the relief from the CARES Act such as suspended collection efforts, suspended loan payments or 0% interest rates.
- No extension of RMD relief
Contrary to some preliminary chatter, the Act did not extend the RMD moratorium past 2020.
- Practice pointer: Make sure clients are reminded that RMDs are again required in 2021. More specifically, make sure you set them up, that you account for the taxes, and that you discuss different strategies for addressing the fact that account balances could be much higher at the end of 2020 and therefore RMDs are likely to be much higher in 2021 for many clients, particularly if they skipped their RMD in 2020! Most pointedly, for some clients, the last time they took RMDs was in 2019 and based on 2018 balances (which were likely lower due to the December swoon). Compare year-end 2018 balances with 2020 balances, and the fact that the clients are two years older and possibly skipped RMDs in 2020, and you have a potentially much larger IRA, much larger RMD and a much larger tax burden. Address two things here: when your clients would like to receive these larger RMDs and how to handle any additional tax burden.
- For small business owners (inlcuding you!)
There are a number of provisions applying to small businesses, and although this is not designed to be an exhaustive review, we include below some of the most popular items to consider.
First, the law provides that employers may voluntarily permit paid leave and receive a tax credit for wages paid during the employee’s leave through March 31, 2021. This tax credit has also been extended to self-employed taxpayers who can satisfy the existing criteria for leave.
Second, the Act also extended the period for repaying deferred employee payroll taxes from April 30, 2021 to December 31, 2021.
Third, the Act contains $284 billion in relief for a second round of Paycheck Protection Program (PPP) loan funding, some for first-timers and some for repeat applicants. Notably, businesses with 300 or fewer employees that have already spent an initial PPP loan are now eligible for a second loan for up to 2.5 average monthly payroll costs. These “second draw” loans are only available up to a maximum of $2 million.
To qualify for a second draw loan, the business must demonstrate at least a 25% reduction in gross receipts of any quarter in 2020 as compared to the same quarter of 2019.
All borrowers are now permitted to choose whether to use the eight-week or the 24-week covered period for spending down loan proceeds and the forgiveness process for loans under $150,000 has become greatly simplified.
Perhaps most exciting, Congress clarified that businesses are able to take the deduction for otherwise eligible business even if those expenses are paid out of PPP loan proceeds that are forgiven. The law also reaffirms that those forgiven amounts will not be included in income (phew).
- Practice pointer: Employers should consider whether they now wish to implement a program to continue paid FFCRA sick leave in the absence of a federal mandate—also considering whether state and local rules might require paid time off after the federal rule expires. Advisors should also discuss with their clients expanded PPP availability and the new rules to determine if their clients are able to participate in the second round of the program.
To be clear, the Act addresses a number of other issues (FSAs, earned income credits and so on). Having said that, these are the six key items we believe every advisor should put front and center on their agenda in 2021.