President Joe Biden, who took office on 20 January 2021, has proposed significant changes to United States (US) tax law as part of his budget submission to the US Congress. President Biden has proposed to increase corporate and individual tax rates that were put into effect by the 2017 tax reform act (Public Law [P.L.] No. 115-97). Key individual tax law changes proposed by President Biden include increasing the ordinary tax rate to 39.6% and taxing investment income at the same rate as ordinary income for individuals with income above 1 million US dollars (USD). At the time of this writing, it is uncertain whether the US Congress will approve any of these changes as proposed or in modified form.
The CARES Act and year-end government funding bill
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act, Public Law [P.L.] 116-136), signed into law on 27 March 2020, features significant tax provisions and other measures to assist individuals impacted by the economic effects of the COVID-19 pandemic. An additional tax extenders bill was signed into law on 27 December 2020. Provisions in the CARES Act and tax extender bill impacting individuals include the following:
Recovery rebates for individuals
To help individuals stay afloat during this time of economic uncertainty, the government is sending payments of up to USD 1,200 to eligible taxpayers and USD 2,400 for married couples filing joint returns. A USD 500 additional payment will be sent to taxpayers for each qualifying child dependant under age 17. Rebates are gradually phased out, at a rate of 5% of the individual's adjusted gross income over USD 75,000 (single taxpayers or married couples filing separately), USD 112,500 (head of household), and USD 150,000 (joint).
Included in the 27 December 2020 bill is a second round of direct payments to individuals: USD 600 for individuals, USD 1,200 for couples, and a USD 600 payment for each dependent child. Rebates follow the terms of the CARES Act and are gradually phased out at a rate of 5% of the individual's adjusted gross income over USD 75,000 (single taxpayers or married couples filing separately), USD 112,500 (head of household), and USD 150,000 (joint).
Waiver of 10% early distribution penalty
The additional 10% tax on early distributions from Individual Retirement Accounts (IRAs) and defined contribution plans (such as 401(k) plans) is waived for distributions made between 1 January 2020 and 31 December 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to USD 100,000, and may, subject to guidelines, be recontributed to the plan or IRA.
Waiver of required distribution rules
Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by 1 April 2020, due to the account owner having turned age 70 1/2 in 2019.
Charitable deduction liberalisations
The CARES Act makes the following significant liberalisations to the rules governing charitable deductions:
- Individuals generally will be able to claim a USD 300 above-the-line deduction for cash contributions made to public charities in 2020 and 2021. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
- The limitation on charitable deductions for individuals that generally is 60% of modified adjusted gross income generally does not apply to cash contributions made to public charities in 2020 and 2021. Instead, an individual's qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
Exclusion for employer payments of student loans
An employee currently may exclude USD 5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before 1 January 2021.
Break for remote care services provided by high-deductible health plans
For plan years beginning before 2021, the CARES Act allows high-deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.
Break for non-prescription medical products
For amounts paid after 31 December 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren't paid under a prescription.
Net operating loss liberalisations
The 2017 tax reform legislation (P.L. 115-97) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.
The CARES Act also temporarily liberalises the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the current 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (i) a 100% deduction of NOLs arising in tax years before 2018 and (ii) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
Deferral of non-corporate taxpayer loss limits
The CARES Act retroactively turns off the excess active business loss limitation rule of P.L. 115-97 in Section 461(l) by deferring its effective date to tax years beginning after 31 December 2020 (rather than 31 December 2017). Under the rule, active net business losses in excess of USD 250,000 (USD 500,000 for joint filers) are disallowed by P.L. 115-97 and were treated as NOL carryforwards in the following tax year.
Medical expense itemised deduction
The extenders bill makes permanent the reduction in medical expense deduction floor to 7.5% of adjusted gross income instead of 10% of adjusted gross income.
Exclusion for discharge of indebtedness on principal residence
The extenders bill extends through 2025 the gross income exclusion on the discharge of indebtedness on principal residences.