With a new year comes many new things: resolutions, car models, and of course, tax rules. In late December, Congress passed a stimulus package that also included a number of tax provisions that apply to many people in 2021. As financial planners, “Tax Alpha” is one of the most powerful tools at our disposal, and when providing financial planning, it can make a big difference for just about anyone. Today in Longmont, we’re providing a quick overview of tax changes that could keep more money in your pocket and out of Uncle Sam’s hands.
Educator’s Expense Deduction
Simply put, if you are an educator (K-12, college, etc.), you can now include classroom cleaning supplies as part of the classroom supplies deduction you can normally take. The limit on this deduction is still $250 worth of expenses, but if your school district or university are cheapskates and don’t provide you with cleaning materials for your classroom, it’s something.
PPP Loan Expenses Are Deductible
While this probably is how you already thought they worked, Paycheck Protection Program loans were never deductible in the first place, because the loan itself wasn’t treated as income. Thus, had the expenses been treated as deductible, not only would you have paid with tax-free money, but you’d pay even fewer taxes. Yet, the new tax law clarifies that PPP expenses are now deductible, meaning that business owners who carefully split their PPP expenses close to the 75% of payroll 25% on other expenses, can deduct the expenses paid by the PPP and still qualify for loan forgiveness.
Medical Expense Deduction Permanently 7.5%
This is of great relevance for taxpayers with chronic health conditions. The tax law for the past several decades has constantly waffled back and forth between whether a consumer’s medical expenses needed to exceed 7.5% or 10% of their adjusted gross income before it started becoming deductible. In its (infinite?) wisdom, congress has decided to permanently settle that figure at 7.5% of AGI going forward; at least so long as the next Congress doesn’t change its mind.
College Expense Tax Deductions
Unfortunately, this is more of a takeaway than a giveaway, but it has been determined that the tax deductions received for college tuition and paying student loan interest will begin phasing out after income exceeds $80,000 for an individual or $160,000 a year for a couple. This means that some of the tax relief found by parents sending students to school may be lost for higher-earning couples, which gives only more emphasis to the importance of 529 plans and other college savings vehicles!
Student Loan Payments by Employers
This is a big one for everyone with student debt and everyone with employees. The tax law permits employers to pay W2 employees up to $5,250 tax-free for student loan repayments. What does this mean? This means that the employee can receive up to $5,250 without paying federal income, state income, or payroll taxes on the amount, and the employer can save on the payroll taxes. This is a big win for everyone involved, so if you have student loans, talk to your employer about converting some of your compensation into student loan repayments, and if you have employees who you think have student loans, do the same. This is a rare “everybody wins” tax giveaway.
Three Martini Lunch Credit
Okay, this isn’t what it’s really called, but it feels like an appropriate name. For the tax years of 2021 and 2022, meals are 100% deductible business expenses if (and only if) the meals are served by a restaurant. There’s no definition of a restaurant given, but I’d suggest that your receipts say “Johney’s Steakhouse” and not “JB’s Gas Station” if you’re going to claim 100% deductions for the expense.
Above the Line Charity
In 2020, we were given a $300 “above the line” deduction for charitable donations (meaning the write-off applies before you decide whether to use your standard deduction or itemized deduction). In 2021, this program is being continued and expanded, with those couples who file jointly now able to deduct up to $600 (note, this does not go retroactively back to 2020.) You can also donate up to 100% of your adjusted gross income and receive a write-off for it (whereas traditionally it’s capped at 50%). Notably, you should probably draw the line on doing this at your standard or itemized deduction, since you’d be claiming a writeoff on untaxed dollars as it is, and can instead carry those deductions forward into the next tax year.
Flex Spending Accounts usually come with a “use it or lose it” provision that kicks in by the end of the 1st quarter of the year following the contributions. The new stimulus permits people to carry their unused 2020 funds up to 12 months, and those funds saved in 2021 for up to 12 months, thus effectively extending the “use it or lose it” period up to 24 months instead of 12. However, the employer has to adopt this, so if you have a big FSA you haven’t spent down already, start lobbying your employer ASAP!
Any info on tax shelters for home based businesses or local small businesses?
All of the tax shelters in this piece are applicable to small businesses. Otherwise, the best tax shelters for a small business are low-cost self-employed retirement plans, such as Solo 401(k), SEP IRA, and SIMPLE IRA Plans. They’re minimally expensive (just the expense ratios for the investment products you choose +/- the cost of a financial planner to help you manage them), incredibly flexible, and easy to manage.
Last year 2020 I got killed in federal taxes after cashing in some vacation time. What are best ways to reduce taxes for employees. Thank you