A number of laws passed in the last two years, such as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (Disaster Act), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have made changes to U.S. federal tax law. Some of these changes are retroactive, some apply to tax year 2020, and some apply to businesses while others apply to individuals. Keeping informed of the many changes is crucial for tax preparers, particularly as we get to the end of 2020. Here are some details on a few of the business and individual year-end tax issues that apply to 2020 tax filings.
Sections 101 through 105 of the Disaster Act retroactively extended five expired individual tax provisions through December 31, 2020. They are:
- Discharge of indebtedness on principal residence exclusion (had expired December 31, 2017),
- Mortgage insurance premiums deduction (had expired December 31, 2017),
- The threshold for medical costs lowered to 7.5% (had expired December 31, 2018),
- Tuition and fees deduction up to $4,000 per year (had expired December 31, 2017), and
- Black lung disability trust fund reduction in the amount of the excise tax that’s imposed on coal from mines in the United States (had expired December 31, 2018).
As a result of the retroactive reinstatement of these tax provisions, tax preparers may need to revisit their clients’ prior-year tax returns to see if an amended tax return is warranted.
To that end, the Internal Revenue Service recently issued some good news concerning the filing of amended tax returns: Information Release 2020-182 (August 17, 2020) announced that taxpayers can file Form 1040-X electronically in this initial phase for Forms 1040 and 1040-SR beginning with tax year 2019. Prior-year amended returns, unfortunately, still must be filed in paper form.
The CARES Act provides some tax relief and encouragement for taxpayers to make charitable contributions in 2020. CARES Act §2204 permits an individual taxpayer to claim an above-the-line deduction for qualified charitable contributions that are only made in 2020. The deduction is limited to $300 and may be claimed by an eligible individual. In this instance, eligibility is defined as any individual who doesn’t elect to itemize deductions.
There are some additional restrictions associated with this deduction. First, it must be a cash contribution made in 2020 to a qualified organization as described in Internal Revenue Code (IRC) §170(b)(1)(A). A carryover from a prior contribution year doesn’t qualify. Second, married taxpayers who file a joint return and don’t elect to itemize deductions can only deduct up to $300 in qualified charitable contributions on their return. This is because the $300 limit applies to the tax-filing unit. Third, contributions of noncash property, such as securities, aren’t qualified.
The staff of the Joint Committee on Taxation notes that contributions to a charitable remainder trust generally aren’t qualified contributions unless the charitable remainder interest is paid in cash to an eligible charity during the applicable time period.
Although the deduction is limited to a cash contribution, taxpayers need to realize that documentation for any cash contribution is required, such as a canceled check, a bank statement, or a credit card statement. In addition, if the contribution is $250 or more for any qualified organization, then a written acknowledgment (i.e., a receipt) issued by the organization at the time of the contribution is needed.
CARES Act §2205 further modifies the 2020 charitable contribution deduction opportunities for taxpayers. Charitable contributions of cash are generally limited to a percentage of the taxpayer’s contribution base, which is currently 60% of adjusted gross income (AGI) without regard to any net operating loss carryback. For 2020 contributions only, however, the CARES Act removes the 60% limitation, and, thus, taxpayers can deduct up to 100% of their contribution base (AGI without regard to any net operating loss carryback). But there’s a catch—they must elect the 100% limit. If a taxpayer’s contributions exceed the contribution base, the excess is treated as a charitable contribution amount in each of the next five years in the order of time, such as first-in, first-out (IRC §170(b)(1)(G)(ii)).
In addition, contributions of appreciated capital gain property to qualified charitable organizations are deductible up to 30% of the taxpayer’s contribution base. A taxpayer can elect to elevate the contribution to the 50% category by excluding the property’s appreciation from the deduction.
Congress also has allowed more deductible generosity to the taxpayer with the charitable contribution limits for businesses. In the case of a corporation, the deduction for charitable contributions is limited to 10% of the corporation’s taxable income after consideration for certain modifications. The CARES Act increases the deduction to 25%. Excess contributions are deductible for each of the next five taxable years in order of time as stipulated under IRC §170(d)(2).
Taxpayers can take deductions for charitable contributions of “apparently wholesome food” (food intended for human consumption even though it may not be readily marketable) from any trade or business of up to the lesser of either (1) the tax basis plus one-half of the item’s increase in fair market value or (2) two times the tax basis. For taxpayers other than C corporations, the total deduction for donations of food inventory in a taxable year generally may not exceed 15% of the taxpayer’s net income for such taxable year from all sole proprietorships, S corporations, or partnerships (or other non-C corporation trades or businesses) from which contributions of “apparently wholesome food” are made.
For C corporations, these contributions are made subject to a limitation of 15% of taxable income (as modified). The general 10% limitation for a C corporation doesn’t apply to these contributions, but the 10% limitation applicable to other contributions is reduced by the amount of these contributions. Qualifying food inventory contributions in excess of these 15% limitations may be carried forward and treated as qualifying food inventory contributions in each of the five succeeding taxable years in order of time. CARES Act §2205 provides that the 15% limitation is increased to 25% for 2020.
The 2020 tax year has been a difficult one for all taxpayers. The opportunity exists for tax preparers to illustrate the various tax laws that have been modified to allow taxpayers to reduce their tax liabilities. Individual and business taxpayers can take advantage of the extension of expiring provisions and charitable contributions for tax year 2020.
© 2020 A.P. Curatola