It should come as no surprise that the pandemic that leads daily headlines is also mentioned first in this year's update. In response to the economic hardships suffered, Congress enacted numerous bills to postpone filings, offer temporary taxpayer relief, spur the markets, jump-start the economy, and amass the political capital of our legislators. While many provisions expired mid-year, others introduced meaningful changes.

Recovery Rebate Credit: Stimulus checks issued to taxpayers throughout the year were in fact advance tax credits intended to reduce the TY'20 tax liabilities of low- to moderate-income taxpayers. Eligibility and credit amounts were provisionally based on information from previously filed returns for 2018 and 2019 and must now be reconciled on 2020 returns. While excess credits received need not be repaid, taxpayers who did not receive Economic Impact Payments or received lesser amounts than those to which they are entitled, must claim the Recovery Rebate Credit when filing their TY'20 returns.

CARES ACT: As much as $100,000 COVID-related retirement plan distributions taken in 2020 may be withdrawn without the usual 10% early withdrawal penalty applicable to individuals under ae 59½. Additionally, such distributions will be included in taxable income in equal installments over a 3-year period unless the taxpayer affirmatively elects inclusion in the year received. If the distribution is repaid to the retirement plan or IRA within 3 years, all tax consequences of the distribution can be nullified. [Form 8915-E must be used to report plan distributions and repayments.] Eligible taxpayers include those who have been diagnosed with COVID or have suffered adverse financial consequences due to COVID-related quarantine, furlough, unemployment, childcare needs, or other business setback [IRS Notice 2020-50]. CAVEAT: Qualified disaster distributions do not (yet?) include those taken in 2021. STATE: California (CA) conforms to the penalty waiver, the inclusion of income over 3 years, as well as the recontribution provision.

More COVID Relief: Hard fought by seemingly intransient legislators, bipartisan compromises eventually created a second relief package that was reluctantly signed by President Trump on December 27th. The $2.3 trillion Consolidated Appropriations Act (CAA) combines $900 billion in stimulus relief for the COVID-19 pandemic with a $1.4 trillion omnibus spending bill that prevented a looming government shut-down and is one of the largest spending measures ever enacted. Tax-related provisions include:

• A second round of stimulus checks will be sent to income-qualified taxpayers who will receive up to $600 per individual as well as $600 for each dependent under age 17. Payments will be reduced by 5% of the taxpayer's adjusted gross income (AGI) in excess of $75K (Single) and $150K (Married-Filing-Jointly); and eliminated altogether when income reaches $99K (S) and $198K (MFJ). Eligible taxpayers include all but Non-resident Aliens (NRAs), trusts and estates. Eligibility was expanded to include all individuals with a valid Social Security Number (SSN) even if filing with a person who uses an Individual Taxpayer ID Number (ITIN). Taxpayers who were previously prevented from receiving stimulus checks under the CARES Act may now claim a Recovery Rebate Credit when filing their 2020 tax return.
• Enhanced unemployment benefits of $300/week were extended to March 14, 2021.
• The new legislation clarifies that business expenses paid with the proceeds of Payment Protection Program (PPP) loans are tax-deductible, even if loan proceeds are later forgiven. STATE: Not all states conform. CA taxpayers, for example, will have to reduce business expenses by the amount of PPP loan forgiveness on the state return.
• Employer education assistance provided after March 27, 2020 to repay student loans remains tax-free through 2025.
• Reversing the prohibition enacted under the Tax Cuts and Jobs Ac (TCJA) in 2017, business meals consumed in 2021 and 2022 are once again deductible – this time in full – if food or beverages are provided by a restaurant. CAVEAT: To be deductible (1) the meals cannot be lavish or extravagant, and (2) the business owner or an employee must be present when meals are served. If food or beverages are provided during an entertainment activity, they must be purchased or itemized separately from the cost of entertainment, which is nondeductible.
• Mortgage insurance premiums remain deductible through 2021; the maximum deduction is $1K if AGI is less than $100K.
• For taxpayers who itemize deductions, the 100% AGI threshold for deductible charitable contributions to a public charity has been extended through 2021. CAVEAT: While such deductions serve to reduce taxable income, they do not reduce AGI for purposes of computing other AGI-limited thresholds such as ROTH contributions and the Net Investment Income (NII) surtax.

Penalty Relief: In an effort to assist taxpayers affected by COVID, the IRS has stated that it wants to "do everything [it] can under existing rules for immediate, broad-based relief from unpaid liabilities [i]ncluding those affected by IRS mail processing and correspondence delays." The IRS seeks to remove bureaucratic barriers and expand flexibilities, as well as balance relief provided to individual taxpayers against the need to uphold the nation's tax laws. Specifically, the IRS offers the following initiatives:

• Reasonable cause assistance for failure to file, failure to pay and failure to deposit penalties. First-time abatement relief is also available for the first time a taxpayer is subject to one or more of these tax penalties.
• Extension of the short-term payment plan timeframe from 120 to 180 days.
• Streamlining the application process for installment agreements up to $250,000 without financial verification for cases not yet assigned to a revenue officer.
• Automatically including new tax year balances with existing installment agreements.

On the IRS website, Deputy Commissioner Guillot encourages taxpayers struggling with a tax bill to "reach out to us" and promises "our people can help you."

Delays: The IRS is open and processing mail, tax returns, payments, refunds and correspondence. However, service delays due to reduced staffing and COVID precautions continue to affect live phone support, processing tax returns filed on paper, answering mail from taxpayers and reviewing tax returns, even those filed electronically. The tax authority offers updates and anticipated wait times on its website.

Work from home: Taxpayers under stay-at-home orders and required to work remotely from a location that is different from the employer's location may have new state filing requirements. If subject to tax in both resident and non-resident states, most (but not all) states will allow the resident taxpayer to claim a credit for amounts paid on doubly taxed income.

Enactment in late 2019 brought sweeping changes to retirement plan contribution and distribution rules that became effective at the start of 2020.

Contributions:  Beginning January 1, 2020, working individuals may contribute to Traditional IRAs even after age 70½.

Required Minimum Distributions (RMDs):  The distribution age was raised from 70½ to 72 beginning in 2020.  CAVEAT: But because the CARES Act then eliminated the RMD for the COVID year, all required distributions – regardless of the taxpayer’s age – were deferred into 2021.

Designated Beneficiaries:  The entire retirement account balance must be distributed to non-spouse beneficiaries within 10 years following the plan owner’s death and can no longer be stretched over the lifetime of the beneficiary.  CAVEAT: Non-designated beneficiaries such as charities, estates and trust must generally withdraw retirement assets within 5 years, while spousal beneficiaries, disabled persons and minor children may still benefit from STRETCH IRA provisions.

“Baby” Withdrawals:Up to $5,000/spouse of retirement plan withdrawals used to cover expenses related to childbirth or adoption may be taken penalty-free.

Medical Expenses:  The AGI threshold for deductible costs has been permanently set at 7.5% of AGI.  NOTE:  It had been previously scheduled to increase to 10% in 2021.

IP-PIN:  The IRS Identity Protection PIN program previously available only to known identity theft victims will be expanded to all taxpayers who can verify their identity in early 2021.  The 6-digit number assigned annually to taxpayers is used to help prevent unauthorized use of SSNs on fraudulently filed returns.  To obtain an IP-PIN, a taxpayer may use the online Get an IP-PIN tool or submit Form 15227 to the IRS.  NOTE:  There is no longer a need to file Form 14039, Identity Theft Affidavit.

STATE:  CA offers a Young Child Tax Credit (up to $1,000) to taxpayers who qualify for the Earned Income Tax Credit (EITC) and have a child under age 6.  Taxpayers may use an online tool to estimate the amount of credit for which they are elgibile.

The IRS has not yet announced when it will begin processing paper and e-filed returns for tax year 2020. The late-year enactment of broad sweeping provisions has left the tax authority scrambling with requisite changes while charged with the simultaneous delivery of the second round of stimulus checks.

Here’s a list of due dates for 2020 tax returns:

Foreign Account Reporting: Taxpayers who had authority over foreign financial accounts with a combined value in excess of $10,000 at any time during 2020 must e-file FinCEN 114 by April 15, 2021; taxpayers who need additional time to file receive an automatic 6-month extension. CAVEAT: Individual taxpayers, as well as corporations and partnerships, may also be required to file Form 8938 and attach it to their income tax return if the aggregate value of foreign financial assets exceeds $50K. Certain taxpayers may have additional filing requirements, including Form 3520 (if transacting with a foreign trust or receiving an inheritance from abroad) and Form 8621 (if invested in passive foreign investment companies), amongst many others. STATE: CA conforms to FATCA reporting requirements. Failure to attach the federal Form 8938 to the state return will result in a $10,000 state penalty in addition to any applicable federal penalties.

Information Returns: Copies of W-2s issued to employees and 1099s issued to independent contractors must be submitted with the accompanying Forms W-3 and 1096 by February 1, 2021. Most other 1099s may be filed with the IRS on paper by March 1st or submitted electronically by March 31st. CAVEAT: Payers reporting non-employee compensation paid to independent contractors may no longer use Form 1099-MISC and must instead submit the new Form 1099-NEC. STATE: Some states – including CA – do not particpate in the combined federal and state filing progam and therefore require payers to submit a copy of Form 1099- NEC directly to the state tax authority.

STATE: CA now presumes that most workers are employees unless the hiring entity can satisfy each of the following three criteria under the A-B-C Test: A) The employer may not control or direct the worker's performance; B) The worker performs work outside the usual course of the employer's business; and C) The worker must be customarily engaged in an independently established trade or business that is of the same nature as the work performed for the employer. The new absolute standard eliminates the flexibility of the old Borello (1989) standard that weighted multiple factors with regards to how the work was performed. CAVEAT: A corporation or limited liability company (LLC) formed by the worker will be ignored if the worker does not meet the A-B-C Test; as a result, the worker who owns the business entity will still be deemed to be an employee of the payer.

Certain worker groups [e.g., insurance and securities brokers, doctors, lawyers, architects, engineers, accountants] have been granted legislative exemptions from the A-B-C Test (but not previously enacted guidelines); as have bona fide business entities that qualify under a narrow business-to-business exception if they can satisfy twelve criteria that include providing services directly to a contracting business (not its customers), the contractor maintains a separate business location and registers for a business license, amongst other factors. In general, however, most workers in a wide range of professions must now be classified as employees; thereby becoming eligible for wage protections and employee benefits but unable to claim deductions for unreimbursed business expenses on their federal returns.

After an intensive and expensive [$225 million] lobbying campaign, app-based driving companies successively carved out yet another exception with the passage of Proposition 22 on CA's November 5th ballot [58 to 42%]. As a result, delivery and rideshare drivers for such companies as DoorDash, Lyft, Uber, and Postmates may henceforth be classified as independent contractors. While it is not yet clear if the classification may be applied retroactively to the enactment of AB-5 in 2019, the voter-approved reclassification nevertheless signals a change that other states may adopt in the future as they seek to regulate the emerging gig economy.

Local Business Tax: Most cities require that businesses be registered; the attendant tax may sometimes be waived if registration forms are timely filed (March 1st, 2021 for Los Angeles). NOTE: Independent contractors (workers paid via 1099 rather than W-2) are deemed to be “in business” for licensing purposes.  Links to licensing departments in Los Angeles, Culver City, West Hollywood and Santa Monica, information for small business owners and much more can be found on a specialty page of my website dedicated to business matters. CAVEAT: Some localities may require AirBnB and other short-term rental hosts to submit BusinessProperty Statements for the purpose of assessing an annual tax on the value of personal property and fixtures used in the business.

Taxpayers should note that new lines and checkboxes have been added to Form 1040 to accommodate new legislation introduced during the past year and to facilitate IRS enforcement activity.

• The question asking if taxpayers have received, sold, exchanged, or otherwise acquired any financial interest in crypto currency has been moved from Schedule 1 and placed prominently near the top of Form 1040.  CAVEAT:  The IRS has taken the position that virtual currency is considered investment property.  Therefore, any transaction involving the sale or exchange of virtual currency must be accounted for on the tax return and will likely involve a reportable transaction on Form 8949.  
• Line 10b will be used to claim up to a $300 above-the-line charitable contribution for those taxpayers who do not itemize deductions on Schedule A [this provision was enacted under CARES and extended through 2021 under CAA].  REMINDER:  Seniors over the age of 70½ may elect to make a direct IRA-to-charity transfer, thereby avoiding the inclusion of their Required Minimum Distribution (RMD) in taxable income, minimizing the taxability of Social Security benefits, and potentially avoiding Medicare Surtaxes.  Although the SECURE Act of 2019 delayed the RMD starting age from 70½ to 72, the act did not change the Qualifying Charitable Distribution (QCD) starting age which remains at 70½.  IRA beneficiaries required under new accelerated distribution rules may also avail themselves of the QCD.  CAVEAT:  Taxpayers who make a deductible IRA contribution after age 70½ must recapture that deduction by subtracting the deducted contribution amount from any ensuing QCD.  Due to this penalty, taxpayers who wish to fund a retirement account after age 70½ should instead contribute to a ROTH.
• Line 25 has been subdivided so that taxpayers may report income tax withholdings from sources other than mere wage withholdings. 
• Line 30 has been added to Page 2 so that taxpayers can request a refundable credit for COVID stimulus payments they did not properly receive during 2020.
• Schedule 3 has been modified so that employers who previously elected to postpone the payment of the employer’s share of Social Security taxes can now add the deferred liability to the tax due as computed on Line 37 of Form 1040.  Schedule SE for self-employed taxpayers and Schedule H for household employers have been changed to allow employers to calculate the amounts of tax deferred under as CARES Act relief provisions.
• Form 7202 will be used to compute the refundable credit for qualified sick and family leave which must them be transferred to Schedule 3.
• Taxpayers seeking to amend a previously e-filed return for TY’19 (only) may now e-file Form 1040X.

STATE:  CA requires taxpayers wishing to claim the Head of Household (HoH) status to attach Form 3532 to the state return to allow the FTB to determine the taxpayer’s eligibility for the preferential tax filing status.  Failure to submit the form will result in the automatic issuance of a Notice of Tax Return Change denying the HoH status and assessing additional tax.

STATE: Effective with TY’20, CA requires that all taxpayers maintain qualifying healthcare coverage.  Failure to maintain minimum essential insurance will trigger the Individual Shared Responsibility Penalty equal to the greater of either $750/adult and $375/minor or 2.5% of excess gross income over the filing threshold for the applicable filing status; computed on the new Form 3853.  To reconcile advance premium assistance subsidy payments, Taxpayers must use Form 3849.  The FTB offers an online estimator to calculate the applicable penalty.  Information about coverages, exemptions and financial assistance are available through Covered California.  REMINDER:  The federal Shared Responsibility Penalty assessed on taxpayers who fail to maintain minimum essential healthcare coverage was repealed in 2019.