On December 8, 2020, the IRS published guidance to encourage taxpayers to prepare for the upcoming filing season. Each individual should consider his or her potential credits, deductions and tax refunds.
- Economic Impact Payment — If you have received an Economic Impact Payment (EIP), you should retain Notice 1444, Your Economic Impact Payment. If you did not receive an EIP, you may be eligible for a Recovery Rebate Credit. When an individual files his or her 2020 tax return, it is still possible to receive a payment of $1,200 for a single person, $2,400 for a married couple or $500 each qualified child. Anyone who did not receive the Economic Impact Payment, can complete the information on the Recovery Rebate Credit on IRS Form 1040.
- Interest on Tax Refunds — If you received a federal tax refund in 2020, you may have also received additional interest. The IRS will send Form 1099-INT to anyone who received interest with a refund. This interest is taxable income and must be reported on the 2020 tax return.
- Charitable Deductions — With the increased standard deduction, the number of taxpayers who itemize declined from approximately 30% to about 10%. However, in 2020, taxpayers who do not itemize may qualify for a $300 cash charitable contribution deduction. This "above-the-line" deduction will reduce your taxable income even if you do not itemize deductions. There is more information on the $300 cash charitable deduction in Publication 526, Charitable Contributions.
- Tax refunds in 2021 — Some taxpayers plan to file in January of 2021 hoping to receive a prompt refund. This may be especially important because of the economic challenges resulting from the COVID-19 pandemic. The IRS cautions that some refunds may require a longer period for processing. Delays may be related to IRS efforts to update its security procedures to protect against identity theft and refund fraud. The IRS is also required to delay refunds for tax returns that claim an Earned Income Tax Credit or Additional Child Tax Credit. These refunds will be issued on or after the middle of February.
- Best Refund Option — The IRS reminds taxpayers that the safest and most convenient way to receive a refund is to use electronic filing. Many taxpayers use the IRS FreeFile program. After filing, a taxpayer may track a refund with the Where's My Refund? Tool on IRS.gov.
Many individuals with substantial state and local tax deductions, mortgage interest and charitable gifts will itemize deductions. The charitable gifts must be made prior to December 31 of this year. Under the CARES Act, the normal cash contribution limit of 60% of adjusted gross income (AGI) is increased to 100% of AGI for 2020. While under the CARES Act there is a holiday on the IRA required minimum distribution (RMD), it may still be convenient for individuals to make a gift from their IRA. If you are over age 70½ and have a traditional IRA, you may choose to make a qualified charitable distribution (QCD) up to $100,000 this year. Plan to contact your IRA custodian as soon as possible to ensure the gift is made before the end of December.
Pursuing Agreement on COVID-19 Relief Bill
On December 10, 2020, House Speaker Nancy Pelosi (D-CA) and Treasury Secretary Steven Mnuchin both sounded positive about passing a COVID-19 relief bill. Pelosi and Mnuchin have been negotiating on a proposed $908 billion relief package.
Pelosi indicated that the negotiators are pursuing agreement on the bill. She stated, "I think they have made great progress." House Minority Leader Kevin McCarthy (R-CA) also was optimistic. He stated, "I think next week will be the week we get it done."
Senate Majority Leader Mitch McConnell (R-KY) has expressed concern about the bipartisan negotiations. McConnell desires a COVID-19 liability protection provision for business interests. He has suggested that this provision should be included together with Pelosi's goal of $160 billion for state and local governments.
There were two factors this week that increase the probability of a compromise. First, COVID-19 numbers continue to increase. There have been over 3,000 COVID-19 deaths per day and over 200,000 new infections each day. Second, unemployment claims increased to 853,000 the week ending December 5. This was the highest unemployment number in three months.
Representative Don Beyer (D-VA) is expected to be Chair of the Congressional Joint Economic Committee next year. He stated, "These numbers are deeply disappointing and, in the context of unemployment benefits expiring for millions on Christmas Eve, they are also deeply disturbing."
There is a reasonably good prospect for a compromise next week. The uptick on COVID-19 cases and unemployment will cause lawmakers to want to pass a bill prior to the December recess. The key issue is crafting a compromise on state and local assistance and business liability protection.
Updated Syndicated Conservation Easement Bill
The Charitable Conservation Easement Program Integrity Act of 2020 (H.R. 8842) was introduced by House Ways and Means Committee Members Mike Thompson (D-CA) and Mike Kelly (R-PA). A similar bill was introduced in the Senate by Sen. Steve Daines (R-MT).
Both bills attempt to limit valuation abuse by syndicated conservation easement partnerships. If a syndicated conservation easement partnership grants a charitable easement, the contribution deduction is limited to two and one-half times the partner's outside basis.
An updated bill was introduced this week. The new provisions are designed to limit the ability of partners to increase outside basis through use of debt or by contribution of unrelated assets to the partnership.
The new bill also changes the holding period rule. The holding period must be the later of three years after the partnership acquires the property or three years after partners acquire their interest in the partnership.
The Land Trust Alliance has been a strong supporter of the bill. Andrew Bowman is President and CEO of the Land Trust Alliance.
Bowman supported the bill and stated, "On behalf of the Land Trust Alliance and its 1,000 member land trusts, I applaud U.S. Rep. Mike Thompson, a Democrat, and Rep. Mike Kelly, a Republican, for introducing an updated version of the Charitable Conservation Easement Program Integrity Act. This new legislation closes potential loopholes identified by the Joint Committee on Taxation while remaining true to the original bill's objective of ending abuse while allowing conservation easement donations motivated by charity to continue unimpeded. And, like its predecessor bill in the U.S. House of Representatives, this legislation makes clear that conservation easement donations are not intended to be profit opportunities."
Bowman and other leaders of conservation organizations have sought passage of the bipartisan legislation. Bowman concluded, "The stars are now aligned to pass this legislation this year and halt the abuse once and for all."
Applicable Federal Rate of 0.6% for December -- Rev. Rul. 2020-26; 2020-50 IRB 1 (16 November 2020)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2020. The AFR under Section 7520 for the month of December is 0.6%. The rates for November of 0.4% or October of 0.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.