The year 2021 has been a tumultuous one for tax professionals, with continuing pandemic-related developments as well as new legislation, regulations, court decisions and IRS pronouncements. While the major developments are familiar to most, there are some that might have been missed due to the busy nature of the profession during the past year.Below are some of the more important legislation, court decisions, IRS regulations and more for the year.
1. The Taxpayer Certainty Disaster Tax Relief Act of 2020
This was part
of PL 116-260, the Consolidated Appropriations Act, 2021, and included a host
of tax provisions, perhaps most notably a $600-per-person refundable tax credit
aimed at helping taxpayers get through the COVID-19 pandemic. Among the many
other tax provisions:
- Extending the 100% of adjusted gross income limitation on charitable contributions by itemizers through 2021, and doubling the $300 limit for married nonitemizers for 2021 and restructures that deduction so as not to reduce adjusted gross income.
- Extending through 2025 the exclusion on employer payment of student loans up to $5,250 per year as part of an educational benefit plan.
- Making financial aid grants under the CARES Act excludable from the income of university students, and providing that receipt does not affect eligibility for either the American Opportunity or Lifetime Learning tax credit.
- Extending through 2025 the exclusion from gross income on discharge of acquisition indebtedness on a principal residence irrespective of insolvency but reducing the maximum exclusion effective 2021 from $2 million to $750,000.
- Repealing the above-the-line deduction for qualified education expenses and replacing it after 2020 with higher phaseout limits on the Lifetime Learning Credit of $58,000-$80,000 (double for joint filers).
- Making personal protective equipment and other supplies for the prevention of COVID after March 11, 2020, eligible for the above-the-line deduction for educator expenses.
- Making permanent a restoration of the 7½% floor on medical expenses as an itemized deduction.
- Allowing plans to permit flexible spending arrangements to carry over unused 2020 and 2021 amounts to the succeeding year.
- Extends through 2021 the treatment of mortgage insurance premiums as home mortgage interest phasing out for those with AGI greater than $100,000.
- Extending through 2021 the lifetime credit of $500 for the purchase of non-business qualified energy improvements to a principal residence.
2. Public Law 117-2, the American Rescue Tax Plan of 2021
The headline
tax provisions of this stimulus legislation were the creation of a $1,400
credit for most individuals, making the first $10,200 of unemployment benefits
from 2020 tax-free for most taxpayers, and expanding and modifying the Child
Tax Credit. There were plenty of other tax provisions, though, including:
- Excluding the discharge of most government, school and private student loans from income for 2021-2025.
- Modifying the Earned Income Tax Credit for 2021 to allow higher 2019 income to be used in computations while lowering the minimum age eligible for those without children from 25 to 19 (to 24 for students) and eliminating the upper age limit of 65.
- Permanently raising the disqualifying investment income limitation for the EITC from $3,650 to $10,000 effective 2021 and adjusted for COLA.
- Modifying the Dependent Care Credit for 2021 to create refundability, among other things.
3. Wood v. Commissioner, TC Memo 2021-103
The Tax Court concluded that an individual who spent no more than 42 days in the United States while she worked for a defense contractor in Afghanistan was a bona fide resident of Afghanistan despite her inability to leave the military base, with the court accepting her testimony that she intended to stay in Afghanistan as long as similar jobs remained available. At issue was whether she was entitled to the foreign earned income exclusion.
4. State of New York v. Yellen, 128 AFTR2d 2021-6202
The Second Circuit Court of Appeals agreed with a New York federal district court that the $10,000 cap on deducting state and local taxes is not unconstitutional, rejecting the arguments of New York, Connecticut, New Jersey and Maryland.
5. Mann v. United States, 127 AFTR2d 2021-447
The Fourth Circuit Court of Appeals agreed with a Maryland federal district court that taxpayers could not take a charitable deduction of $675,000 representing the appraised value of a structure razed by a charity that previously disassembled some of the house and salvaged useful components, with the remainder left for demolition. The court reasoned that the taxpayer did not convey their entire interest in the house, failed to record that the house was transferred (though the land was not) and did not provide an accurate appraisal of what was actually donated.
6. Vasquez v. Commissioner, TC Summary Opinion 2021-32
The Tax Court, under pre-2018 law, denied travel expenses for an individual who worked 237 miles from his residence, despite his work being temporary and lasting less than one year in that he was regularly reengaged on new jobs; thus his tax home was where he worked and slept in a trailer, rather then where his family resided and where he returned on weekends.
7. Toulouse v. Commissioner 157 TC No. 4
The Tax Court ruled that the Foreign Tax Credit may not offset the Net Investment Tax, as it is not a “Chapter 1” tax.
8. Richlin v. Commissioner, 128 AFTR2d 2021-5969
The Ninth Circuit Court of Appeals agreed with the Tax Court that a divorcing husband was entitled to all overpayment credits from a joint return and all estimated tax payments, as the parties had a prenuptial agreement that made him responsible for all tax liability not related to separate property of his spouse.
9. Notice 2020-75
The IRS indicated that future regulations would allow flowthrough entities to deduct state and local income taxes paid at the entity level, in lieu of including all or a portion of that income at the individual level where a deduction would not be allowed.
10. Action on Decision 2021-1
The IRS announced its nonacquiescence in Schrieber v. Commissioner, TC Memo 2017-32, in which the Tax Court decided that a retirement plan interest that could not be cashed in or borrowed against does not count as an asset for purposes of the insolvency exclusion.
11. Estate of Jackson v. Commissioner, TC Memo 2021-48
In a 271-page opinion, the Tax Court decided generally in favor of Michael Jackson’s estate on valuation issues related to intangibles, citing Jackson’s tarnished reputation, and largely rejected the expert testimony on behalf of IRS, noting that the value in his image and likeness resulted from the post-death branding by his executors.
12. Chief Counsel Advice 202142010
The IRS stated that issuance of a closing letter to an estate does not preclude subsequent examination of the return.
13. California v. Texas, 127 AFTR2d 2021-2327.
The Supreme Court by a 7-2 margin reversed a Fifth Circuit
decision and determined that the Affordable Care Act and its tax provisions
continue in force and effect notwithstanding the repeal of the individual
mandate; the plaintiffs had challenged the act by taking the position that the
remaining portions could not stand alone but the argument was thrown out on
grounds of lack of standing.
The IRS has announced that it will not allow any of the protective claims held
in suspense, and will take no further action with respect to these claims.
14. Patrick’s Payroll Services v. Commissioner, 127 AFTR2d 2021-1068
The Sixth Circuit Court of Appeals agreed with the Tax Court that the specific language allowing substantive issues to be brought up at a collection due process hearing — “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability” — requires that both of the conditions be met and that the word “or” did not create disjunctive qualifications.
16. Chief Counsel Advice 202053013
The IRS cautioned that a claim for refund of individual taxes for 2019 must be filed by April 15, 2023, notwithstanding that an unextended 2019 return was actually due on July 15, 2020, as the result of COVID delays.
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