Dissecting the Consolidated Appropriations Act, 2021 (CAA)

 A bipartisan group of representatives and senators passed the CAA, and it was signed into law on December 27, 2020.  The law extended numerous provisions of the CARES act that was passed earlier in the year to provide financial relief for individuals and small business due to the Coronavirus pandemic.  The CAA created a new Paycheck Protection Program (PPP), new refundable tax credits and an Economic Injury Disaster Loan (EIDL) program. 

 For the millions of Americans still collecting unemployment benefits, the CAA provides for an extra $300 per week until March 14, 2021.  An additional $284 billion is earmarked to reinstate the CARES Act PPP loan program which will run until March 31, 2021. The CAA clarifies that forgiveness of PPP loans and EIDL loans/grants will not be treated as gross income for tax purposes.  There is also clarification that qualified expenses for which PPP funds were used, will be fully deductible.   

 With regard to retirement plan relief, the provisions of the CARES act providing penalty free withdrawals for those under the age of 59 ½, spreading the federal income tax due over three years and the ability to recontribute funds withdrawn in 2020 terminated on December 30, 2020, and were not extended.  Additionally, required minimum distributions (RMDs) have been reinstated for 2021. 

 Looking Ahead to Potential Tax Legislation in 2021 

 Before the election, the Biden campaign outlined some proposed tax changes.  We expect Congress to begin debating the merits of a bill sometime this Summer or early Fall.  Whether or not the changes will be retroactive to January 1, 2021 remains to be seen.  Many lawmakers are already advocating to NOT make the changes retroactive due to continuing disruptions in the US economy caused by the Coronavirus pandemic.  Here are some of the proposed changes that we believe stand a good chance of becoming law: 

  • Increasing the top federal income tax bracket to 39.6% from the current rate of 37% 
  • Imposing the Social Security Payroll tax of 12.4% on earned income over $400k.  This would create a “donut hole” where earned income between the current wage cap of $142,800 and $400,000 would not be taxed. 
  • Taxing long term capital gains at ordinary income tax rates for individuals with income in excess of $1 million.  Long term gains are currently taxed at 0%, 15% or 20% depending on the taxpayer’s marginal bracket.  The Net Investment Income Tax of 3.8% on investment income for taxpayers (Married Filing Jointly) will continue to apply if modified adjusted gross income exceeds $250,000.T
  • The exemption from estate tax is likely to drop from its current level of $11.7 million per individual back to $5.5 million. 
  • The step up in cost basis of assets at death is proposed to be eliminated, with a  possible exemption of $100k per individual. 
  • Itemized deductions are likely to be limited for taxpayers who are in the 28% marginal income tax bracket. 
  • The marginal corporate income tax rate is proposed to be increased from 21% to 28%.  
  • The Qualified Business Income (QBI) deduction would be phased out for filers with taxable income over $400k. 
  • The proposal calls for the elimination of real estate tax preferences such as 1031 like-kind exchanges, accelerated depreciation for rental property and the $25,000 annual rental loss allowance. 
  • Making the Child Tax Credit fully refundable and increasing the amount from $2,000 to $3,000 for children ages 6-17. 
  • Increasing the Child and Dependent Care tax credit from $3,000 to $8,000 with a $16,000 cap per taxpayer. 
  • Creating refundable tax credits to limit health insurance premiums to no more than 8.5% of income and adding tax benefits to assist with the purchase of long-term care insurance. 
  • Creating a first-time, refundable homebuyer tax credit of $15,000 that could be taken in advance to assist with a down payment. 
  • Student loan forgiveness after 20 years without having to recognize the amount forgiven as income. 

With Democrats holding razor thin majorities in both the House and Senate, we believe that any tax legislation will be moderate in nature, particularly if the Coronavirus Pandemic is still negatively influencing the economy when the tax legislation is introduced.  Once a bill is approved by Congress and signed by the President, we will offer more specific planning ideas to be discussed with our clients’ tax and legal advisors. 

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