- Top 8 Year-End Tax Tips
- Act before December 31 to increase your tax breaks
- 1. Defer your income
- COVID-19: Tax Issues Addressing Pandemic Relief and Extenders Feature Prominently in Year-end Legislation
- COVID-19 RELIEF
- RECOVERY AND OTHER STIMULUS PROVISIONS
- DISASTER TAX RELIEF
- LOOKING AHEAD
- Ill-Considered Tax Cuts Will Not Help the Economy Recover From the Coronavirus Crisis
- Large corporations do not need more tax cuts
- Trump’s special tax breaks won’t work and could make the virus outbreak worse
- A payroll tax holiday is poorly targeted at the country’s current needs
- Conclusion: Ineffective tax breaks could take dollars away from Americans who are hurting
Top 8 Year-End Tax Tips
Learn these top 8 year-end tax tips in order to maximize your tax refund or minimize the taxes you owe.
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
Act before December 31 to increase your tax breaks
Whether you are having a good year, rebounding from recent losses, or still struggling to get off the ground, you may be able to save a bundle on your taxes if you make the right moves before the end of the year.
1. Defer your income
Income is taxed in the year it is received—but why pay tax today if you can pay it tomorrow instead?
It's tough for employees to postpone wage and salary income, but you may be able to defer a year-end bonus into next year—as long as it is standard practice in your company to pay year-end bonuses the following year.
If you are self-employed or do freelance or consulting work, you have more leeway. Delaying billings until late December, for example, can ensure that you won't receive payment until the next year.
Whether you are employed or self-employed, you can also defer income by taking capital gains in 2021 instead of in 2020.
Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year.
You don't want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket.
If that's ly, you may want to accelerate income into 2020 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.
Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductions this year.
For example, contributing to charity is a great way to get a deduction. And you control the timing.
In 2020 you can deduct up to $300 per tax return of qualified cash contributions if you take the standard deduction. For 2021, this amount is up to $600 per tax return for those filing married filing jointly and $300 for other filing statuses.
- You can supercharge the tax benefits of your generosity by donating appreciated stock or property rather than cash.
- Better yet, as long as you've owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.
You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.) Other expenses you can accelerate include:
- an estimated state income tax bill due January 15
- a property tax bill due early next year
- or a doctor or hospital bill.
But speeding up deductions could be a blunder if you're subject to the alternative minimum tax, as discussed below.
Don’t miss out on valuable tax deductions if you can itemize rather than claiming the standard deduction. According to the IRS, about 75% of taxpayers take the standard deduction, but could be missing out on valuable tax deductions if they can itemize.
- If your qualifying expenses exceed the standard deduction, which in 2020 is $12,400 if you are single, or $24,800 if you’re married filing jointly, then you ly should maximize your deductions and itemize.
- Don’t worry about figuring out if you can itemize or should take the standard deduction. TurboTax will figure it out for you your answers to simple questions about your deductible expenses.
If you're on the itemize-or-not borderline, your year-end strategy should focus on bunching. This is the practice of timing expenses to produce lean and fat years. In one year, you cram in as many deductible expenses as possible, using the tactics outlined above. The goal is to surpass the standard-deduction amount and claim a larger write-off.
In alternating years, you skimp on deductible expenses to hold them below the standard deduction amount because you get credit for the full standard deduction regardless of how much you actually spend. In the lean years, year-end planning stresses pushing as many deductible expenses as possible into the following year when they'll have more value.
Sometimes accelerating tax deductions can cost you money… if you're already in the alternative minimum tax (AMT) or if you inadvertently trigger it.
Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class.
The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher.
This is a year-end issue because certain expenses that are deductible under the regular rules—and therefore candidates for accelerated payments—are not deductible under the AMT.
- State and local income taxes and property taxes, for example, are not deductible under the AMT. So, if you expect to be subject to the AMT in 2020, don’t pay the installments that are due in January 2021 in December 2020.
A key year-end strategy is called “loss harvesting”—selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2020 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes.
Company-sponsored 401(k) plans may be the best deal because employers often match contributions.
Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($19,500 for 2020, $26,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
Also consider contributing to an IRA.
- You usually have until the May 17, 2021 filing deadline to make IRA contributions, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred.
- Making deductible contributions also reduces your taxable income for the year.
- You can contribute a maximum of $6,000 to an IRA for 2020, plus an extra $1,000 if you are 50 or older. Use our IRA Calculator to see how much you can contribute.
If you are self-employed, a good the retirement plan might be a Keogh plan. These plans must be established by December 31 but contributions may still be made until the tax filing deadline (including extensions) for your 2020 return. The amount you can contribute depends on the type of Keogh plan you choose.
Congress created the “kiddie tax” rules to prevent families from shifting the tax bill on investment income from Mom and Dad's high tax bracket to junior's low bracket.
- For 2020, the kiddie tax taxes a child's investment income above $2,200 at the same rates as trusts and estates which are typically higher than rates for individuals.
- If the child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns age 24.
So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is too large and the child’s unearned income exceeds $2,200, you could end up paying taxes at the same rates as trusts and estates.
You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 72 (70 1/2 if you reached 70 1/2 prior to January 1, 2020). However, minimum distribution requirements have been suspended for 2020. Failing to take out enough triggers one of the most draconian of all IRS penalties:
- A 50% excise tax on the amount you should have withdrawn your age, your life expectancy, and the amount in the account at the beginning of the year.
- After that, annual withdrawals must be made by December 31 to avoid the penalty.
When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.
Important note: One of the advantages of Roth IRAs is that the original owner is never required to withdraw money from the accounts. The required minimum distributions apply to traditional IRAs.
Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees steer part of their pay into a special account which can then be tapped to pay child care or medical bills.
The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious “use it or lose it” rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don't use it all by the end of the year, you forfeit the excess.
With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2020 set-aside money as late as March 15, 2021. If not, you can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. The CAA allows employers to extend healthcare FSA and dependent care FSA grace periods for up to 12 months into the following plan year for plan years ending in 2020 and 2021.
COVID-19: Tax Issues Addressing Pandemic Relief and Extenders Feature Prominently in Year-end Legislation
Wednesday, December 23, 2020
After several months of halting negotiations, Congress passed the Consolidated Appropriations Act, 2021 (the Act) late in the evening on December 21, 2020.
The Act includes omnibus appropriations language to fund the government through September 30, 2021, COVID-19 relief, and a variety of other legislative priorities.
This alert provides a high-level summary of the Act’s many tax provisions affecting corporations, organizations, and individuals.
Although the White House indicated that President Trump would sign the bill at the time of Congressional approval, he since has indicated concerns with several of the provisions in the legislation and has asked Congress to make changes.
It is unly that Congress will be willing or able to revise the package and unclear whether the President will decide to veto the bill as a result.
Although the legislation was passed by wide, bipartisan margins in both chambers and Congress potentially could override a Trump veto, it is unclear given the political climate, including the pending Georgia special elections, whether they would do so.
The Act includes several policies aimed at providing relief to businesses, organizations, and individuals to help them weather the COVID-19 pandemic and keep employees on payroll.
- Individual recovery rebates of $600 per individual, including children
- Extension of time to one year for individuals to repay deferred employment taxes
- Personal Protective Equipment (PPE) costs made eligible for educator expense deduction
- Expenses paid with forgiven Paycheck Protection Program (PPP) loan proceeds are deductible
- Clarification that forgiveness of certain financial aid under the CARES Act is not taxable income and information reporting requirements for forgiveness of indebtedness are waived
- Penalty-free withdrawals from certain retirement plans for COVID-19 related expenses and special rules for repayment
- Special rules for farmers and carryback of net operating losses
- SSI and SSDI payments are excluded from the IRS private debt collection program
- Election allowed to terminate transfer period for qualified transfers from a pension plan to cover future retiree costs
- Extension through March 31, 2021 of tax credits for paid sick and family leave originally enacted in the Families First Coronavirus Response Act and modifications to the computation of the credits
RECOVERY AND OTHER STIMULUS PROVISIONS
The Act includes a series of miscellaneous provisions intended to provide additional relief and stimulus to recover from the economic impact of the COVID pandemic.
- Establish a permanent four percent minimum low-income housing tax credit rate
- Depreciable recovery period of 30 years for certain residential rental property placed in service before January 1, 2018
- Waste energy recovery property made eligible for the energy investment tax credit (ITC)
- Extension of ITC for offshore wind facilities that begin construction through 2025
- Update to minimum rate of interest for certain determinations related to life insurance contracts
- Revisions to the CARES Act employee retention credit increasing the amount of the credit and making it easier for employers to qualify
- Update minimum age to 55 for distributions from certain tax-exempt multiemployer pension plans during working retirement for individuals in the building and construction industry
- Modify the temporary rule preventing partial pension plan terminations
- 100 percent deduction for business meals paid or incurred in 2021 and 2022
- Allow use of 2019 income to determine Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) for 2020
- Extend and increase the non-itemizer charitable contributions deduction for 2021 to $300 for single filers and $600 for married filing jointly
- Extend the CARES Act increased limit for charitable contributions for one year for corporations and taxpayers that itemize
- Greater flexibility for flexible spending arrangements
DISASTER TAX RELIEF
The Act includes several policies to provide relief for individuals and businesses in presidentially declared disaster areas for major disasters declared on or after January 1, 2020 through 60 days after enactment. These policies do not apply to disaster areas declared solely because of COVID-19.
- Special disaster-related rules providing exceptions related to the use of retirement funds
- An employee retention credit for employers affected by qualified disasters
- Temporary suspension of charitable contribution limitations
- Special rules for qualified disaster-related personal casualty losses
- Increase in the low-income housing tax credit state ceilings for 2021 and 2022
- Allow the Secretary of the Treasury to provide payments to U.S. territories for losses incurred due to disasters
The Act addressed dozens of temporary tax provisions.
Rather than the usual practice of extending all of them for the same period of time, Congress took a different approach by making a number of them permanent, extending others through 2025 – which will align their expiration with the expiration of key provisions from the Tax Cuts and Jobs Act, and extending other provisions for various lesser periods of time.
- Tax Extenders Provisions Made Permanent:
- Reduction in medical expense deduction floor
- Energy efficient commercial buildings deduction (IRC Section 179D)
- Benefits provided to volunteer firefighters and emergency medical responders
- Repeal the qualified tuition deduction and expand the lifetime learning credit
- Railroad track maintenance credit
- Reduction in certain excise taxes on beer, wine and distilled spirits (craft brewers)
- Beginning in 2023, refunds provided in lieu of reduced rates for certain imported craft beverages
- Clarify that reduced rates are not allowed for smuggled or illegally produced beer, wine, and spirits
- Modify the minimum processing requirements for reduced distilled spirits rates
- Modify single taxpayer rules regarding beer, wine and distilled spirits
Tax Extenders Provisions Extended Through 2025
- Look-thru rule for payments of dividends, interest, rents, and royalties between related controlled foreign corporations
- New markets tax credit
- Work opportunity tax credit
- Exclusion from gross income of discharge of qualified principal residence indebtedness; maximum exclusion reduced from $2 million to $750,000
- Seven-year recovery period for motorsports entertainment complexes
- Expensing rules for certain film, television, and theatrical productions
- Oil spill liability trust fund excise tax rate of $0.09 per barrel
- Empowerment zone tax incentives, with modifications to terminate deferral of certain capital gains taxes and increased expensing of certain types of equipment
- Employer credit for paid family and medical leave
- Exclusion for certain employer payments of student loans up to $5,250
- Extension of carbon oxide sequestration credit for facilities that begin construction by the end of 2025 (IRC Section 45Q)
Extension of Certain Other Provisions (various extension periods, as noted)
- Production Tax Credit (PTC) extended for renewable power facilities beginning construction by the end of 2021. Note that for wind facilities where construction begins by the end of 2021, the credit remains reduced by 40 percent.
- Investment Tax Credit (ITC) extended at 26 percent for solar energy property, fiber-optic solar equipment, fuel cell property, and small wind energy property beginning construction by the end of 2022; 22 percent rate for property beginning construction by the end of 2023; 10 or zero percent thereafter. Ten percent investment credit for microturbine property, geothermal heat pumps, and combined heat and power property that begin construction through 2023.
- Mortgage insurance premiums treated as qualified residence interest extended through 2021
- Health coverage tax credit extended through 2021
- Indian employment credit extended through 2021
- Mine rescue team training credit extended through 2021
- Classification of certain race horses as three-year property extended through 2021
- Accelerated depreciation for business property on Indian reservations extended through 2021
- American Samoa economic development credit extended through 2021
- Second generation biofuel producer credit extended through 2021
- Nonbusiness energy property credit extended through 2021
- New qualified fuel cell motor vehicle credit extended through 2021
- Alternative fuel refueling property credit extended through 2021
- Two-wheeled plug-in electric vehicle credit extended through 2021
- Production credit for Indian coal facilities extended through 2021
- New energy efficient homes credit extended through 2021
- Excise tax for alternative fuels extended through 2021
- Residential energy efficient property credit extended through 2021; eligible property expanded to include qualified energy efficient biomass fuel property with a thermal efficiency rating of at least 75 percent beginning in 2021 (no longer eligible under IRC Section 25C)
- Black lung disability trust fund excise tax extended through 2021
While the Act covers a smorgasbord of issues, several important policies that were under consideration were not included in the final bill for various reasons, including political differences and concerns about cost.
- COVID-19 relief funding for state, local and tribal governments
- COVID-19 liability protection
- Mobile workforce clarifications for workers temporarily working in a tax jurisdiction other than their normal place of business
- Conservation easement legislation
- Forgiveness of deferred employee payroll taxes pursuant to President Trump’s executive memorandum from August 8, 2020 (instead, repayment period extended to one year)
- Multiemployer pension plan relief or
- A stand-alone credit for PPE expenditures
With the incoming Biden Administration and 117th Congress, many tax issues may be in play. President-elect Joe Biden and Congress have suggested they would to begin work on the next iteration of COVID-19 relief as soon as January.
While funding for state, local, and tribal governments and liability protection are expected to be key issues in the next relief package, tax policies almost certainly will be part of the mix. Infrastructure and green energy are other agenda items that will ly have a tax component.
Regardless of the outcome of the Georgia special Senate elections on January 5, 2021, with close margins in both chambers, bipartisan cooperation generally will be necessary in order to garner enough support to pass legislation in the 117th Congress.
Copyright 2020 K & L GatesNational Law Review, Volume X, Number 358
Ill-Considered Tax Cuts Will Not Help the Economy Recover From the Coronavirus Crisis
As the coronavirus pandemic continues to surge, workers are suffering and the U.S. economy could be teetering on the edge of a much deeper downturn. Officially, 11.9 percent of workers are unemployed.
At least 1 million Americans have filed for unemployment insurance every week since March 14, with nine of those weeks seeing claims above 2 million. More than 30 million unemployed workers are at imminent risk of losing a vital lifeline, with enhanced unemployment benefits expiring this week.
State and local governments face severe budget shortfalls that could force them to cut services and lay off employees. More than 100,000 small businesses have shuttered permanently.
This is an unprecedented public health and economic crisis, yet some conservative policymakers are reflexively reaching for the only tool they know how to use: tax cuts for corporations.
The Trump administration also continues to push for a payroll tax holiday—an idea that has been rejected by lawmakers in both parties because it is so ill-suited for the country’s economic needs—as well as some wrongheaded tax breaks for specific industries.
Instead of these ill-considered tax cuts, Congress should focus relief where it is most needed: toward workers who are work, self-employed workers who have lost income, states and communities facing budget shortfalls, families needing child care, and struggling small businesses—many of which, especially those that are minority-owned, have been shut relief efforts to date.
Large corporations do not need more tax cuts
Since President Donald Trump took office, Congress has gone on a corporate tax-cutting spree.
Even before the pandemic began, corporate tax payments had dropped by about one-third thanks to the massive tax cuts in the Tax Cuts and Jobs Act (TCJA), which was signed into law by President Trump in 2017. These tax cuts were a bust.
Instead of investing or paying their workers more, corporations, which had been awash in cash even before TCJA passed, bought back record amounts of their own stock, increasing stock prices further and enriching wealthy shareholders.
Then, when the pandemic hit, Congress enacted even more tax cuts for corporations as part of its broader response. Many of these tax cuts reversed provisions of the 2017 law that restrained the official cost of the legislation by limiting some corporate and business deductions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress and signed by President Trump on March 27, included a major corporate tax cut that allows corporations to carry back tax losses from 2020 as well as from 2019 and 2018, before the pandemic began.
Corporations can deduct these losses against income as far back as 2015, when the tax rate was much higher, thereby allowing for much larger benefits. Congress also gave wealthy owners of other types of businesses an enormous tax cut that allowed them virtually unlimited use of business losses to reduce taxes on their ordinary personal income.
These tax cuts are estimated to cost $26 billion and $135 billion, respectively, over the next decade.
In addition, the CARES Act gave corporations a tax credit to encourage them to retain employees, at a cost of $55 billion; a suspension of a TCJA provision limiting the amount of interest on business debt that can be deducted, at a cost of $13 billion; and a delay in employment tax payments until the end of 2021 and 2022, which effectively constitutes an extraordinary interest-free loan from the federal government.
These recent tax cuts come on top of other extraordinary relief for large corporations aimed at ensuring that even those firms that have experienced only a temporary decrease in profits have many options to maintain liquidity and survive until the economy picks up again.
Large corporations can generally borrow funds at very low interest, reinforced by new Federal Reserve programs. The Fed facilities are backed by $500 billion from the U.S. Treasury Department under the CARES Act.
Equity financing—selling company stock to investors in return for cash—is still available and relatively cheap, with the stock market returning to pre-pandemic levels.
Incredibly, on top of all of this largesse, business lobbyists and some lawmakers want Congress’ next coronavirus relief package to allow corporations and businesses to accelerate tax credits into 2020 that otherwise would have to be carried forward to future years. Businesses generally are not allowed to use tax credits to reduce their taxes below zero.
Instead, they must carry them forward to future years when they have more tax liability. But under this proposal, the U.S. Treasury would write them a check for any amount that exceeds their 2020 tax liability, potentially accelerating into 2020 tens of billions of dollars of tax credits without any assurance that these businesses would not still lay off workers.
The largest of the credits is the research and development tax credit, which is already refundable for very small businesses, so the proposal would mainly benefit corporations and larger businesses. And depending on how the proposal is drafted, large, profitable companies that currently pay little or no U.S.
income tax—such as Amazon and Netflix—could stand to benefit.
Trump’s special tax breaks won’t work and could make the virus outbreak worse
The Trump administration has also embraced targeted tax cuts to subsidize activities that could actually worsen the pandemic. This includes tax breaks for having business meals at restaurants, attending large-scale sports events, and traveling around the country. These special tax breaks, targeted at specific industries, are a bad idea in normal times. They are an even worse idea now.
President Trump has said that he wants to allow corporations and businesses to deduct more of the cost of business meals and entertainment.
Over the years—and most recently in the bill signed by President Trump himself in 2017—Congress has trimmed back tax deductions for business meals and entertainment so that regular taxpayers would not have to subsidize the cost of business executives’ personal consumption at lavish restaurants, golf courses, luxury suites, and other venues.
Restoring the tax-subsidized “three martini lunch” is an exceptionally out-of-touch response to the economic crisis faced by American workers and families. Moreover, it encourages an optional activity—in-person dining—that is linked to the faster spread of COVID-19. Subsidizing sports attendance may make even less sense.
As one epidemiologist explained: “The reason we don’t have sports back in the U.S. right now is that the virus is control in the U.S. … We should not have large gatherings of people for optional events when the virus is control, and we definitely shouldn’t be incentivizing that behavior.”
In June, the president touted an “Explore America” tax credit, first proposed by Sen.
Martha McSally (R-AZ), that would provide a nonrefundable tax credit of 50 percent of the costs of taking a vacation, including transportation and hotels. The tourism industry is certainly hurting.
But encouraging people to go on vacation while infections are still increasing in many states could contribute to further spread.
These types of tax deductions and nonrefundable tax credits for leisure activities are highly regressive: Their benefits would flow overwhelmingly to high-income people, and most Americans would not stand to benefit at all.
Moreover, it is doubtful that they would have any significant effect since it is the pandemic, not the lack of tax subsidies, that is keeping people at home.
To the extent that these tax deductions do encourage more of these activities, they would worsen a virus outbreak that will inflict severe economic damage as long as it persists.
A payroll tax holiday is poorly targeted at the country’s current needs
President Trump is insisting on a payroll tax holiday. This is a misguided response to the crisis at hand. It would do nothing at all for workers who have lost their jobs or livelihoods; its benefits would go mainly to employers and higher-income households who have not lost income, such as affluent professionals who are able to work from home.
The payroll tax is a 7.65 percent tax on wages paid by both employers and employees, the proceeds of which go into the Social Security and Medicare trust funds. The administration has not specified whether it wants both sides of the tax to be suspended, but that is what some close to the White House have recommended.
Suspending the employer side of the payroll tax would be a costly giveaway, largely benefiting wealthy corporations. With a temporary suspension of the tax, employers would have no reason to pass on their tax savings to workers by raising wages; they could simply pocket the benefit.
Since the tax cut applies to all payroll, it is neither targeted toward those businesses most affected by pandemic-related closures nor those deciding whether to maintain their payrolls.
It would not even help businesses with their immediate cash flow needs, since in prior COVID-19 relief legislation, Congress took the extraordinary step of allowing employers to delay their payroll tax payments until the end of 2021 and 2022.
Suspending the employee side of the payroll tax benefits highly paid workers the most while doing nothing for those who have lost their jobs or sources of income. Consider the following examples:
- An employee who has been laid off would get $0.
- A freelancer, contractor, or self-employed business owner who is unable to earn income because of the pandemic would get $0.
- An essential worker whose wages are at the federal minimum would get roughly $480 over the rest of the year, or $22 per week, assuming full-time work is available.
- A lawyer earning a $135,000 salary would get about $4,300 over the rest of the year, or $199 per week.
- Unless the benefit is somehow capped, a CEO making $1 million in compensation would get about $6,000—and potentially as much as $9,600.*
Coming the last recession, President Barack Obama and Congress agreed on a partial payroll tax holiday for 2011 and 2012.
But even at the time, policymakers recognized that it would be a suboptimal policy, as it was the lowest common denominator of what Democrats and Republicans could agree on at the time.
Subsequent research has confirmed that small tax cuts in paychecks are less effective in stimulating the economy than larger one-time payments.
Lawmakers in both parties have expressed opposition to a payroll tax holiday—and rightly so, since it is an exceptionally poor response to the crisis at hand.
Conclusion: Ineffective tax breaks could take dollars away from Americans who are hurting
Senate Majority Leader Mitch McConnell (R-KY) has said that the cost of the next coronavirus bill should not exceed $1 trillion. There is no reason for Congress to arbitrarily restrain the response to COVID-19 given the unprecedented scale of the crisis.
Interest rates on Treasury debt remain historically low, signaling that markets are unconcerned with additional deficit spending.
But to the extent that members of Congress are aiming to hold down the official price tag of the next round of COVID-19 relief legislation, every dollar that goes to corporate tax breaks or ineffective payroll tax cuts is a dollar that is not going to unemployed workers or preventing layoffs of teachers and other state and local workers.
Before the pandemic, about two-thirds of families lacked even six weeks of take-home pay set aside for a rainy day. If Congress fails to enact further support for the unemployed and low-income families, a large number of families will not be able to cover their expenses.
Furthermore, as state and local governments stare down deadlines for meeting strict budget requirements, families and their children will suffer even more. State and local spending on education, for example, is already on the chopping block, along with public sanitation and other vital functions.
And more families are ly to lose their incomes due to state and local government job layoffs.
In its next COVID-19 response, Congress should reject tax cuts that are ill-suited to America’s current challenges. Instead, it should focus on directly helping the families, small businesses, and state and local communities that are in need of immediate relief.
Seth Hanlon is a senior fellow at the Center for American Progress. Alexandra Thornton is the senior director of Tax Policy for Economic Policy at the Center.
*Authors’ note: These examples assume that the 7.65 percent payroll tax—including both the 6.2 percent Social Security component and the 1.45 percent Medicare component—is suspended for the final five months of 2020.
They also assume that very high earners, such as CEOs, who have already exceeded the $137,750 wage maximum for the Social Security tax only receive the benefit of the Medicare tax suspension; if they also receive a Social Security payroll tax cut pro rata for five months, they would receive an additional $3,559.
To find the latest CAP resources on the coronavirus, visit our coronavirus resource page.