By Matthew Gaude & Shawn McGuire
After much political intrigue and back and forth, lawmakers finally passed the 5,593-page $900 Billion Coronavirus Response and Relief Act in the eleventh hour of December 2020. The bill is designed to assist Americans who may be suffering in the wake of COVID-19.
Besides the highly publicized cash payments and unemployment supplement payments, the stimulus legislation also had several tax implications that will affect a wide swath of individual earners and business owners.
We at Live Oak Wealth Management have had some questions about what this means for our clients. Here we outline 5 major tax implications that have stemmed from the new stimulus package.
1. Medical Expenses
For individuals who itemize their tax returns, lawmakers extended a provision that allowed individuals to deduct qualifying medical expenses that exceeded 7.5% of their adjusted gross income. This number was set to increase to 10% of an individual’s adjusted gross income by the end of 2018, but lawmakers extended the lower percentage through the end of 2020. With the latest stimulus bill, lawmakers have made the lower percentage permanent. (1)
2. Deductions On Mortgage Insurance Premiums
This benefit is also reserved for those who itemize their tax returns. If you paid less than 20% on your down payment for your home, you are required to pay mortgage insurance. This program allows you to deduct the mortgage insurance premiums if you are itemizing your deductions. It is not permanent but will be available through 2021. (2)
3. For Small Business Owners-Employee Retention And Paycheck Protection
There are a number of provisions applying to small businesses, and although this is not designed to be an exhaustive review, we include 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. The 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 the Paycheck Protection Program, through which businesses can borrow up to $10 million at a fixed interest rate of 1% for two years to pay for business expenses, including employee salaries. The PPP is available to small businesses that had a decline of revenue of 25% in any quarter of 2020 as compared to the same quarter of 2019. (3)
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.
Finally, business meals at restaurants are 100% tax deductible through the end of 2022.
4. Tax-free Employer Payments Of Student Loans
For the millennial generation, debt stemming from college tuition is a huge issue. College tuition has skyrocketed in the last few decades, leaving many professional 20- and 30-somethings swimming in debt. Under the new legislation, if you own a business, you can make tax-free contributions to your employees’ student debt of up to $5,250 per year.
The CARES Act, passed in March, created the first program that allowed companies to make tax-free contributions to their employees’ student debt, and the new relief bill extends this provision for five years. (4) This provision allows an employer to contribute up to $5,250 annually toward an employee’s student loans. The payment is excluded from the employee’s income, but it’s still a tax deduction for employers.
Initially this was a temporary fringe benefit. Now, however, the expanded CARES Act extends this provision until Dec. 31, 2025. The $5,250 cap applies to other educational assistance, such as tuition, fees and books, and employer repayments of student loans. Employers can make payments either directly to an employee or to a lender.
If you are employed, review your employee benefit booklet, typically available online. Since employees are often unaware of these benefits, it is important you take the steps to request the benefits information to identify these opportunities. You could save yourself over $5,000!
5. Charitable Donations For Non-Itemizers
The new stimulus package also included other provisions to encourage taxpayers to donate to charitable causes. 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). Single taxpayers can write off donations up to $300. This is available to taxpayers who take the standard deduction of $12,400 for single people and $24,800 for married couples. (5) This extension is for 2021 only.
There will more than likely be another stimulus package passed by the Democrats in March and possibly an Infrastructure bill sometime this year. This will be another busy year of new laws and regulations that will more than likely affect us in one way or another. We will continue to keep you updated on all of the important news, both financially and economically that you should know about!
We’re Here To Help
There are thousands of pages of the new stimulus bill that can affect you or your business. Feeling overwhelmed? We can help. Call our office at 770-552-5968 or email firstname.lastname@example.org. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional.