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Last Call for CARES Act Provisions

Seven key tax breaks set to expire

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a wide range of tax breaks to both individuals and small businesses. However, unless Congress takes prompt action, most of these tax benefits are scheduled to end after 2020. Following is a roundup of seven tax-related provisions that may go away in 2021.

1. Required minimum distributions: Currently, participants in qualified retirement plans and IRAs are generally required to begin taking required minimum distributions (RMDs) each year after turning age 72 (increased from age 70½, beginning in 2020). This also applies to certain taxpayers who have inherited accounts. Saving grace: The CARES Act suspends the RMD rules—but only for 2020.

2. Charitable donations: Prior to the CARES Act, you could deduct monetary donations up to a threshold of 60% of your adjusted gross income (AGI). But the CARES Act boosted this limit to 100% of AGI for 2020. Furthermore, the new law creates a $300 deduction in 2020 for charitable donations made by a taxpayer who does not itemize.

3. COVID-19-related distributions: The CARES Act carves out several tax breaks for distributions of up to $100,000 from qualified plans and IRAs made in 2020 due to the COVID-19 outbreak. Consider:

  • The distributions are exempt from the 10% tax penalty on pre-age 59½ payouts.
  • The usual 20% tax withholding on distributions from qualified plans is suspended.
  • The regular tax liability on distributions may be spread out evenly over three years.
  • No tax liability results if the entire amount is redeposited in a qualified plan or IRA within three years.

4. Business interest: Previously, business interest was fully deductible, but legislation in 2017 limited the deduction to 30% of adjusted taxable income (ATI) for 2018 through 2025. The CARES Act raised this threshold to 50% of ATI, but only for 2019 and 2020. Key exception: There is no limit for a business with average gross receipts of $25 million ($26 million in 2020) or less for the last three years.

5. Payroll tax deferral: Another CARES Act provision allows an employer to defer the 6.2% Social Security tax normally due for the period of March 27, 2020 through December 31, 2020. But this is a temporary reprieve: The employer must pay 50% of the required amount by the end of 2021 and the other 50% by the end of 2022.

6. Employee retention credits: Under the CARES Act, an employer can claim an “employee retention credit” (ERC) against the Social Security component of payroll tax for the first $10,000 of wages paid to an employee from March 13, 2020 through December 31, 2020. This credit is available if your business was forced to shut down or suspend operations because of the COVID-19 outbreak. Similarly, a business with reduced gross receipts below 50% of a comparable quarter in 2019 qualifies for the ERC.

7. Retirement plan loans: If you borrowed funds from a qualified plan in 2020, the CARES Act suspends the loan repayment requirements. Currently, loan repayments must resume in 2021. Borrowers have been granted an extra year to repay loans without violating the usual five-year maximum for repayments. Note: Certain other benefits are available for loans made from March 27, 2020 through September 22, 2020.

These are just seven tax breaks scheduled to go off the books after 2020. You may be affected by others. In any event, we will keep a close watch on proceedings in our nation’s capital.