Tax season is around the corner, but it’s hardly business as usual. The past few years have brought rafts of new legislation. From tax reform to emergency COVID relief, there are a lot of new provisions to remember as you assist your clients this tax season.
Think you nailed it last year? Well, you probably did! But while many of the new provisions have stuck, others are being dropped. It’s tricky keeping track of the new rules when they’re constantly in flux.
For those who advise small businesses and business owners, it’s especially important to understand how this tax season will differ from previous years.
In this post, we’re going to cover the biggest changes to the tax landscape—including the SECURE Act, the CARES Act, and Form 1099 updates—with special attention to what’s disappearing this year, what’s staying the same, and what’s getting slightly tweaked.
- Terms to know
- The SECURE Act
- The CARES Act
- Form 1099
- How to advise clients where it counts
Terms to know
Before we get into the nitty-gritty, a glossary. Most of these terms are probably known to you, but it always helps to establish a shared vocabulary.
Individual retirement arrangement (or “account”), as distinct from employer plans.
A retirement savings plan issued for employees of state or local government or agencies.
A savings account traditionally reserved for tuition, books, and other qualified education expenses.
An individual retirement arrangement that is non-deductible, exempt from required minimum distributions, and tax-free.
The “stretch” IRA
Historically, the “stretch” IRA has allowed non-spouse beneficiaries to inherit employer plan accounts and IRAs and withdraw distributions based on their own life expectancy, rather than the original account holder’s.
Required minimum distributions, or RMDs, are the minimum amount that an account holder must withdraw from their retirement account annually once they reach a certain age. Historically, that age has been 70 1/2.
The SECURE Act
What is the SECURE Act?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law by President Trump on December 20, 2019. It significantly overhauled many of the retirement plans that are most popular with Americans. Although some of these changes were already in effect last tax season, there are some updates to the SECURE Act you’ll want to know about.
What are the key components of the SECURE Act?
Small business incentives
The SECURE Act provides several tax incentives for small businesses implementing retirement plans for their employees. These include:
- A $500 tax credit for three years, simply for automatically enrolling all new hires
- Up to $5,000 for setting up a retirement plan (small businesses are eligible if they adopt a new plan before the filing date)
- Simplified rules and notice requirements for qualified non-elective contributions to safe harbor 401(k) plans
401(k)s for part-time employees
Previously, employers could exclude part-time employees working less than 1,000 hours from their 401(k) programs. The SECURE Act broadened the criteria to be more inclusive. Now, part-time employees are eligible for 401(k) contributions if:
- They are 21 or older
- They have worked at least three consecutive years at their employer
- They have worked at least 500 hours per year at their employer
IRAs for graduate students
Before the SECURE Act, the stipends and non-tuition payments that graduate and postdoctoral students received were not treated as compensation. The SECURE Act has reversed this. That allows students to make IRA contributions with this money.
IRA contribution age eliminated
As a result of the SECURE Act, employees older than 70 1/2 can continue contributing to a traditional IRA. But be advised: As long as an account holder takes advantage of this extension, they will not be able to make qualified charitable distributions with their IRA.
Penalty-free withdrawals for loan debt
Until now, beneficiaries have not been able to use these 529 plans to pay off student loan debt. With the implementation of the SECURE Act, 529 account holders can now withdraw up to $10,000, per beneficiary, for paying off student loan debt.
Penalty-free withdrawals for birth or adoption
As of 2021, account holders can make withdrawals from their retirement plan, without penalty, for costs related to the birth or adoption of a child. Each parent can withdraw up to $5,000 for each qualified birth or adoption. These withdrawals can later be repaid into an IRA without counting toward an account holder’s annual limit.
Annuities in 401(k) plans
The SECURE Act relaxes many of the regulations around annuities so that it’s easier to add them to employer retirement plans. This allows account holders to continue using 401(k)s and 403(b)s as lifetime income streams, without the risk or cost of having to transfer those funds.
RMDs delayed to age 72
Account holders can now wait until they are 72 before receiving their first RMD. This rule is only applicable to individuals who did not reach age 70 1/2 by the end of 2019.
Changes to the “stretch” IRA
With the passage of the SECURE Act, there are some major changes to the “stretch” IRA. Beneficiaries who have already inherited the “stretch” IRA will be grandfathered in under the old rules. “Eligible designated beneficiaries” will also continue to follow the old rules. These include:
- Individuals less than 10 years younger than the deceased account holder
- Children so long as they are minors
- Disabled beneficiaries
- Chronically ill beneficiaries
Any other designated beneficiaries will now have to withdraw the entire account over the course of a 10-year period, rather than a period based on their own life expectancy. This has the potential to significantly increase their income tax burden.
Non-designated beneficiaries, such as charities and trusts, will need to withdraw the entire account over the course of five years. Additionally, all beneficiaries have the option of withdrawing the inherited account as a lump sum.
For all its benefits, the SECURE Act does carry some new penalties you need to be aware of. Filers will pay more if they file late on these forms:
- Form 5500: $250 per day, up to a maximum of $150,000
- Form 8955-SSA: $10 for each participant, per day, up to a maximum of $50,000
- Tax withholding notice: $100 for each failure per year, up to a maximum of $50,000
The CARES Act
What is the CARES Act?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump on March 27, 2020. While some of its provisions will still be relevant this tax season, many have not been renewed.
What are the key components of the CARES Act?
Paycheck Protection Program (PPP) loans have helped small businesses keep their workers employed during the pandemic. There were two rounds during which businesses could earn loan forgiveness by meeting certain criteria. Round One ended on August 8, 2020. Round Two ended on May 31, 2021.
Economic Injury Disaster Loans, or EIDL loans, ended on June 15, 2020. But for some businesses and nonprofits that have been hit hard by COVID-19, there is still an opportunity to apply for EIDL targeted advances.
As part of the CARES Act, filers in 2020 could write off $300 in charitable cash gifts on their tax return, without itemizing. In 2021, that deduction remains $300 for single filers but has been increased to $600 for joint filers.
The limitation for cash deductions has also increased from 60% of adjusted gross income to 100%. Please note that gifts made to donor-advised funds and 509(a)(3) organizations are not eligible. The same is true for private foundations.
Which CARES Act provisions were not renewed for 2021?
The RMD waiver
Although RMDs were waived for 2020, they are not waived for 2021. Unlike in 2020, account holders will also not be allowed to roll over their RMDs to other IRA accounts.
The early withdrawal exception
In 2020, for those affected by COVID-19, early withdrawals of up to $100,000 were allowed from retirement accounts. In 2021, account holders will once again face a 10% penalty for withdrawing early.
Form 1099 updates
The IRS has made some changes to a few of the 1099 forms that you’ll want to be aware of this tax season.
This form reports non-employee compensation. In 2020 the IRS re-implemented this form for the first time in almost thirty years. It replaced Box 7 on 1099-MISC.
What’s changing for 1099-NEC in 2022?
- Box 1 will no longer be used for reporting
- You may choose between using Box 2 on the 1099-NEC or Box 7 on 1099-MISC
- Box 13 is now assigned to the Foreign Account Tax Compliance Act
- Taxpayers will be able to file Form 1099-NEC electronically
- The filing date is January 31, for both paper and electronic filing
This form reports miscellaneous income, excluding employment-related compensation. It reports payments of:
- At least $10 in royalties or broker payments, in lieu of dividends or tax-exempt interest
- At least $600 in rent; prizes and awards; other income payments; medical and health care payments; crop insurance proceeds; cash payments for fish and other aquatic life purchased from anyone engaged in the trade or business of catching fish; cash paid from a notional principal contract to an individual, partnership or estate; payments to an attorney; and any fishing boat proceeds
- At least $5,000 of consumer products sold anywhere other than a permanent retail establishment
What’s changing for 1099-MISC in 2022?
- Box 7 is assigned to direct sales of consumer products
- Box 9 is assigned to crop insurance proceeds
- Box 10 is assigned to an attorney’s gross proceeds
- Box 11 is assigned to cash payments for the purchase of fish for resale purposes
- Box 12 is assigned to deferral of compensation
- Box 14 is assigned to nonqualified deferred compensation
- Box 15 is for state taxes withheld
- Box 16 is for the state identification number
- Box 17 is the amount of income earned in the state
- The filing date is February 28 for paper, March 31 for electronic
This form reports certain payment transactions from a credit card company.
What’s changing for Form 1099-K?
Of all the 1099 forms, this one will experience the most dramatic change. Previously, this form was required when card payments exceeded 200 transactions, in excess of $20,000. Because of the spike in online sales this past year, 1099-K will now be required for card payment transactions exceeding $600.
Advise clients where it counts
Obviously, learning the quirks of new legislation and updated forms is just the beginning. Any old blog post can tell you about those. The real impact you make for your clients is by understanding their unique circumstances and leveraging the tax code to their advantage.
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