Parodi & de Laveaga, CPAs

Proposition 19 (Prop 19) recently passed in California and contains two relevant changes in California property tax assessments that may impact your estate planning. To ensure that you are not unaware of or adversely impacted by these changes, here is a summary of relevant planning information for your review.

Proposition 19 (Prop 19) recently passed in California and contains two relevant changes in California property tax assessments that may impact your estate planning. To ensure that you are not unaware of or adversely impacted by these changes, below is a summary of relevant planning information for your review.

Changes to the Transfer of Taxable Value for Certain Property Owners

Prop 19 expands the class of people who qualify for a transfer of their taxable value (i.e., property tax assessed value) from their current home to a new property.

Under existing law, only homeowners over 55 years of age or certain disabled persons could make use of this benefit one time during their lifetime. And they could do so only if (1) their new home is in the same county as their old home or in a few other select counties, (2) the value of their new home is less than or equal to the value of their old home, and (3) the sale and new purchase were done within a two year period.

The new law, which takes effect on April 1, 2021:

Expands the class of homeowners who are able to transfer their taxable value to include victims of wildfire or other natural disasters, regardless of age or disability status;
Permits homeowners to take advantage of this provision three times during their lifetime.
Removes the restriction that the replacement home must be in the same county as the old home. Now such replacements must simply be in the state of California.
Allows homeowners to buy a replacement home that is worth more than their old home, provided, however, that the increase in value is added to the transferred taxable value of the old home. For example, assume a homeowner is over 55. Her house has a taxable value of $500,000. She sells it for $3,000,000. If she buys a new home anywhere in California for $3,000,000 or less, she can transfer her $500,000 taxable value to the new home, and it will become its taxable value. However, if she wants to upgrade to a $5,000,000 home, her new home's taxable value will be $2,500,000 – the taxable value of her old home transferred ($500,000) plus the upgrade value ($5,000,000 - $3,000,000.)

While the new law keeps the two-year window requirement, it remains to be clarified by the California Board of Equalization if both the sale and new purchase have to occur after the April 1, 2021, effective date of the new law.

Changes to the Parent-Child Exclusion

Prop 19 limits the availability of the parent-child exclusion for purposes of real estate tax assessments. This aspect of Prop 19 takes effect on February 16, 2021.

Under current law, when a parent (or grandparent) transfers ownership of his or her principal residence to a child, the property's value for tax assessment purposes is not reassessed, regardless of how the child uses the residence. In California, transferring a parent's home to one or more children is permissible under current law without triggering reassessment, and the child or children could use it as a vacation home or a rental property.

Prop 19 changes this by requiring that the child or children use the residence as their own principal residence, or it will be reassessed. Furthermore, even if the child uses the residence as his or her own, there is a cap of $1,000,000 on the exclusion, as explained below. Technically, the new and old rules apply where a child transfers the residence to a parent, but this is much less common.

If your home has increased in value significantly from its taxable value, Prop 19 adds certain limitations that could result in an increased assessment. This new rule will apply to outright transfers and to transfers in trusts, such as the QPRT transfer illustrated below. If the increase in value is less than or equal to $1,000,000, no adjustment is made. If the increase in value is more than $1,000,000, the increase in value after the first $1,000,000 is added to the tax assessed value. For example, assume a parent's home has a taxable value of $500,000. Because the parent purchased the home many years ago, its value is now $5,000,000. In other words, it has increased by $4,500,000. The new reassessed value if the parent gifts the home to her child will be $3,500,000. There are inflation adjustments that apply to the $1,000,000 increase limitation for subsequent years.

This change to the parent-child exclusion may also affect many common estate planning trusts that were established several years (or even decades) ago. For example, a qualified personal residence trust (QPRT) allows the transfer of a residence to a trust while that residence can still be occupied for a fixed number of years. The parent(s) continue to live in the residence as their primary residence, and at the end of the fixed number of years, the residence transfers to someone else (typically their children or a trust for their benefit). Most parents who establish QPRTs want to continue living in the house after the fixed term ends. They may do so, but they need to pay rent to the trust or to their children, depending on who owns the residence at the end of the fixed term.

Under existing law, when the children become the owners they would qualify for the parent-child exclusion. But once Prop 19 takes effect, the children would need to use the residence as their primary residence or trigger reassessment. They could not rent it back to the parent, and if siblings are entitled to the residence at the end of the fixed term, they would need to move in together and share a household to qualify for the exemption – which perhaps is not ideal for most adult children. If parents have QPRTs whose fixed term ends on or after February 16, 2021, the value of their home may be reassessed to its current value. This could lead to a massive property tax increase, though it may be possible to mitigate this. A review of your estate planning documents is recommended.

Full text of Proposition is available at https://vig.cdn.sos.ca.gov/2020/general/pdf/topl-prop19.pdf

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The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2021 Income Tax Brackets
For 2021, the highest income tax bracket of 37 percent applies when taxable income hits:

$628,300 for married individuals filing jointly and surviving spouses,
$523,600 for single individuals and heads of households,
$314,150 for married individuals filing separately, and
$13,050 for estates and trusts.

2021 Standard Deduction
The standard deduction for 2021 is:

$25,100 for married individuals filing jointly and surviving spouses,
$18,800 for heads of households, and
$12,550 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

$1,100 or
the sum of $350 plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

$1,350 for married taxpayers and surviving spouses, or
$1,700 for other taxpayers.

AMT Exemption for 2021
The alternative minimum tax (AMT) exemption for 2021 is:

$114,600 for married individuals filing jointly and surviving spouses,
$73,600 for single individuals and heads of households,
$57,300 for married individuals filing separately, and
$25,700 for estates and trusts.

The exemption amounts begin to phase out when alternative minimum taxable income (AMTI) exceeds:

$1,047,200 for married individuals filing jointly and surviving spouses,
$523,600 for single individuals, heads of households, and married individuals filing separately, and
$85,650 for estates and trusts.

Expensing Section 179 Property in 2021
For tax years beginning in 2021, taxpayers can expense up to $1,050,000 in Code Sec. 179 property. However, this dollar limit is reduced when the Section 179 property placed in service during the year exceeds $2,620,000.

Estate and Gift Tax Adjustments for 2021
The following inflation adjustments apply to federal estate and gift taxes in 2021:

the gift tax exclusion is $15,000 per donee, or $159,000 for gifts to spouses who are not U.S. citizens;
the federal estate tax exclusion is $11,700,000; and
the maximum reduction for real property under the special valuation method is $1,190,000.

2021 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2021 is $108,700.

The IRS also provided inflation-adjusted amounts for the:

adoption credit,
lifetime learning credit,
earned income credit,
excludable interest on U.S. savings bonds used for education,
various penalties, and
many other provisions.

Effective Date
These inflation adjustments generally apply to tax years beginning in 2021, so they affect most returns that will be filed in 2022. However, some specified figures apply to transactions or events in calendar year 2021.

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The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.

Key Unchanged Amounts
The 2021 contribution limit remains unchanged at $19,500 for employees who take part in:

401(k) plans,
403(b) plans,
most 457 plans, and
the federal government’s Thrift Savings Plan

The catch-up contribution limit for employees aged 50 and over who participate in these plans also remains unchanged at $6,500.

The limitation for SIMPLE retirement accounts is unchanged at $13,500.

For individual retirement arrangements (IRAs), the limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment, and so remains $1,000.

IRAs and Roth IRAs
The income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have increased for 2021.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or his or her spouse takes part in a retirement plan at work. The deduction phase out depends on the taxpayer's filing status and income.

For single taxpayers covered by a workplace retirement plan, the 2021 phase-out range is $66,000 to $76,000, up from $65,000 to $75,000 for 2020.
For married couples filing jointly, when the spouse making the contribution takes part in a workplace retirement plan, the 2021 phase-out range is $105,000 to $125,000, up from $104,000 to $124,000 for 2020.
For an IRA contributor who is not covered by a workplace retirement plan but who is married to someone who is covered, the 2021 phase out range is between $198,000 and $208,000, up from $196,000 and $206,000 for 2020.
For a married individual who is covered by a workplace plan and is filing a separate return, the phase-out range is not subject to an annual COLA and remains $0 to $10,000.

The 2021 income phase-out ranges for Roth IRA contributions are:

$125,000 to $140,000 for singles and heads of household (up from $124,000 to $139,000 in 2020),
$198,000 to $208,000 for married filing jointly (up from $196,000 to $206,000 in 2020), and
$0 to $10,000 for married filing separately.

Saver’s Credit
The income limit for low- and moderate-income workers to claim the Saver's Credit under Code Sec. 25B has also increased for 2021:

$66,000 for married couples filing jointly (up from $65,000 in 2020),
$49,500 for heads of household (up from $48,750 in 2020), and
$33,000 for singles and married filing separately (up from $32,500 in 2020).

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The U.S. Supreme Court heard oral arguments in California v. Texas, the latest challenge to the Affordable Care Act (ACA). The ACA expanded insurance coverage, and includes popular provisions such as required coverage of preexisting medical conditions.

Three major issues are at play in this case:

Do the plaintiff challengers of ACA—two individuals, the Trump Administration, and a number of states led by Texas—have standing to bring this case?
Did reducing the penalty amount under Code Sec. 5000A(c) to $0 render the individual mandate in the ACA unconstitutional?
If the mandate is unconstitutional, does that mean the act itself is unconstitutional, in whole or in part?

Background
The individual mandate in the ACA requires that taxpayers either maintain minimum essential coverage, have an exemption, or pay a penalty. The Tax Cuts and Jobs Act of 2017 zeroed out the penalty. The plaintiffs in this case argue that without the penalty, the mandate is unconstitutional. They further contend that the mandate is so essential to ACA that it cannot be severed from the rest of the law, and thus the entire act should be struck down. At the very least, they would like the Court to strike down portions of the ACA.

The challenger states are: Texas, Alabama, Arkansas, Arizona, Florida, Georgia, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Utah, and West Virginia. They have added two individuals, and the U.S. Department of Justice under the Trump Administration is also a party.

Other states, the District of Columbia, and the U.S. House of Representatives have intervened to defend the ACA. The intervenor states are: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Nevada, North Carolina, New Jersey, New York, Oregon, Rhode Island, Virginia, Vermont, and Washington.

Oral Arguments
The Supreme Court heard oral arguments from both sides of this case on November 10. The challengers argued that Republicans used the 2017 Tax Cuts and Jobs Act to eliminate the law’s penalty for Americans who do not get health coverage. This rendered the mandate unconstitutional, and since the mandate is so essential to the rest of the act, the whole act must also fall.

The attorneys on behalf of the House, however, argued that the plaintiffs are asking the Supreme Court to take on a legislative role contrary to the Court’s precedent, and that striking down the ACA would throw millions of people off their health insurance, end pre-existing condition protections, and create "chaos in the health care sector."

The Supreme Court appeared unlikely to completely wipe out ACA, with key conservative justices Chief Justice John Roberts and Justice Brett Kavanaugh indicating that such a ruling would be too broad of a role for the courts. "I think it's hard for you to argue that Congress intended the entire act to fall if the mandate were struck down," Chief Justice Roberts said.

If the three more liberal justices agree with the two conservative justices, it would provide the minimum five votes needed for the ACA to survive its latest appearance before the Supreme Court. A decision is expected before the end of term in June.

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The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19.

The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19, for:

certain depreciable property acquired and placed in service after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021;
certain plants planted or grafted after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021; and
components acquired or self-constructed after September 27, 2017, of certain larger self-constructed property and placed in service by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021.

Rev. Proc. 2020-25, 2020-19 I.R.B. 785, and Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, are modified.

Change in Accounting Method
The guidance applies to taxpayers who are changing their method of accounting for depreciable property that includes:

components described in Reg. §1.168(k)-2(c) or NPRM REG-106808-19 where the component election has already been made; and
specified plants for which the Code Sec. 168(k)(5) election has been made and that are planted, or grafted to a plant that was previously planted, after September 27, 2017, during the taxpayer’s 2017, 2018, 2019, or 2020 tax year.

This guidance does not apply to property or a plant:

that is impacted by a late election, or withdrawn election under Code Sec. 163(j)(7) after November 16, 2020, pursuant to Rev. Proc. 2020-22;
for which the taxpayer is changing from deducting the cost or other basis of such property as an expense to capitalizing and depreciating the cost or other basis, or vice versa; or
that the taxpayer does not own at the beginning of the year of change, with some exceptions.

In addition, this guidance cannot be used to make a late election, or revoke an election, under Code Sec. 168, Code Sec. 179, or Reg. §1.1502-68.

Taxpayers have a choice of applying the 2020 final regulations under T.D. 9916, the previous final regulations under T.D. 9874, or both the final regulations under NPRM REG-106808-19. However, once a taxpayer applies Reg. §1.168(k)-2 and Reg. §1.1502-68, the taxpayer must apply Reg. §1.168(k)-2 and Reg. §1.1502-68 to all subsequent tax years.

Automatic Extensions of Time
Applicable taxpayers may make a late Code Sec. 168(k)(5) election, a late Code Sec. 168(k)(7) election, a late Code Sec. 168(k)(10) election, a late component election, a late designated transaction election, or a late proposed component election, by filing either:

an amended Form 1065 for the placed-in-service year of the property, or for the planting year of the specified plant, as applicable, on or before December 31, 2021; or
a Form 3115 with the taxpayer’s timely filed original Federal income tax return or Form 1065 for the taxpayer’s first or second tax year succeeding the tax year in which the taxpayer placed in service the property or the planting year of the specified plant, or, if later, the taxpayer’s timely filed original Federal income tax return or Form 1065 that is filed on or after November 6, 2020, and on or before December 31, 2021.

Effective Date
This guidance is effective on November 6, 2020.

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The IRS has issued final regulations to update the life expectancy and distribution period tables under the required minimum distribution (RMD) rules. The tables reflect the general increase in life expectancy. The tables would apply for distribution calendar years beginning on or after January 1, 2022, with transition relief.

RMDs apply to qualified plans, including 401(k) plans and profit sharing plans. They also apply to IRAs (including SEP and SIMPLE IRAs), inherited Roth IRAs, Tax Sheltered Annuity plans, and eligible deferred compensation plans. In general, RMDs must begin for the year the individual reaches age 72. An RMD for a calendar year is determined by dividing the participant’s account balance by the applicable distribution period.

Distribution periods are based on life expectancies and are found in one of three tables, depending on the circumstances:

During the employee’s lifetime (including year of death), the applicable distribution period is determined by the Uniform Lifetime Table. The figures in that table are the joint and last survivor life expectancy for the employee and a hypothetical beneficiary 10 years younger.
If an employee's sole beneficiary is the employee's surviving spouse and the spouse is more than 10 years younger than the employee, then the applicable distribution period is the joint and last survivor life expectancy of the employee and spouse under the Joint and Last Survivor Table.
After the employee’s death, the distribution period is generally based on the designated beneficiary’s age using the Single Life Expectancy Table.

Updated Tables
Distribution periods under the new rules would generally increase between one and two years. For example, a 72-year-old IRA owner who applied the prior Uniform Lifetime Table to calculate RMDs used a life expectancy of 25.6 years. Applying the new Uniform Lifetime Table, a 72-year-old IRA owner will use a life expectancy of 27.4 years to calculate RMDs. As another example, a 75-year-old surviving spouse who is the employee’s sole beneficiary and applied the prior Single Life Table to compute RMDs used a life expectancy of 13.4 years. Under these regulations, a 75-year-old surviving spouse will use a life expectancy of 14.8 years.

Retirees and beneficiaries would be able to withdraw slightly smaller amounts from their plans each year. They could leave amounts in tax-favored retirement accounts for a slightly longer period of time, to account for the possibility that they may live longer.

Applicability Date
The life expectancy tables and Uniform Lifetime Table under these regulations apply for distribution calendar years beginning on or after January 1, 2022. Thus, for an IRA owner who attained age 70.5 in February of 2020 (so that the individual attains age 72 in August of 2021 and the individual’s required beginning date is April 1, 2022), these regulations do not apply to the RMD for the individual’s 2021 distribution calendar year (which is due April 1, 2022) but will apply to the RMD for the individual’s 2022 distribution calendar year (which is due December 31, 2022).

These regulations include a transition rule that applies if an employee died before January 1, 2022, and, under the rules of Reg. §1.401(a)(9)-5, the distribution period that applies for calendar years following the calendar year of the employee’s death is equal to a single life expectancy calculated as of the calendar year of the employee’s death (or if applicable, the year after the employee’s death), reduced by one for each subsequent year.

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The IRS has released guidance on its website for employers and employees regarding deferral of employee Social Security tax under Notice 2020-65, I.R.B. 2020-38, 567.

In August, the IRS issued Notice 2020-65 in response to a Presidential Memorandum that allowed deferral of the withholding, deposit, and payment of certain employee payroll tax obligations. The Notice allows employers the option to defer the employee portion of Social Security tax from September 1, 2020, through December 31, 2020, for eligible employees who earn less than $4,000 per bi-weekly pay period (or the equivalent threshold amount with respect to other pay periods) on a pay period-by-pay period basis.

To pay the deferred amount, an employer that chooses deferral will ratably withhold the amount of deferred tax from the employees' paychecks from January 1, 2021, through April 30, 2021.

Employers
The guidance provides the following instructions to employers that deferred the employee portion of Social Security tax under Notice 2020-65:

When reporting total Social Security wages paid to an employee on Form W-2, Wage and Tax Statement, the employer should include any wages for which it deferred withholding and payment of employee Social Security tax in box 3 (Social security wages) and/or box 7 (Social security tips). The employer should not include in Box 4 (Social security tax withheld) any amount of deferred tax that has not been withheld.

Employee Social Security tax deferred in 2020 that is withheld in 2021 and not reported on the 2020 Form W-2 should be reported in box 4 (Social security tax withheld) on Form W-2c, Corrected Wage and Tax Statement. On Form W-2c, the employer should enter tax year 2020 in box c and adjust the amount previously reported in box 4 (Social security tax withheld) of the Form W-2 to include the deferred amounts that were withheld in 2021. The employer should file all Forms W-2c with the Social Security Administration (along with Form W-3c, Transmittal of Corrected Wage and Tax Statements) as soon as possible after the employer has finished withholding the deferred amounts. The employer should also furnish Forms W-2c to employees. (More information on completing and filing Forms W-2c and W-3c will be published in the 2021 General Instructions for Forms W-2 and W-3, in January 2021.)

There is similar guidance for employers that deferred withholding and payment of the employee Social Security tax equivalent of Tier 1 Railroad Retirement Tax Act (RRTA) tax.

Employees
There is also guidance for employees whose employers deferred the employee portion of Social Security tax (or the RRTA equivalent tax) under Notice 2020-65:

If an employee had only one employer during 2020 and his or her Form W-2c for 2020 only shows a correction to box 4 (or to box 14 for employees who pay RRTA tax) to account for the tax that was deferred in 2020 and withheld in 2021, no further steps are required.

If an employee had two or more employers in 2020 and the Form W-2c for 2020 shows a correction to box 4 (or to box 14 for employees who pay RRTA tax) to account for the tax that was deferred in 2020 and withheld in 2021, the employee should use the amount of Social Security (or Tier 1 RRTA) tax withheld reported on the Form W-2c to determine whether he or she had excess Social Security tax (or Tier 1 RRTA tax) on wages (or compensation) paid in 2020.

If the corrected amount in box 4 of the Form W-2c for 2020 causes the total amount of employee Social Security tax (or equivalent portion of the Tier 1 RRTA tax) withheld by all of the employee’s employers to exceed the maximum amount of tax owed ($8,537.40 for 2020), or increases an already existing excess amount of employee Social Security tax (or Tier 1 RRTA tax) withheld, the employee should file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim a credit for the excess tax withheld.

Additional Information
Additional information can be found here.

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The IRS intends to issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation are deductible by the partnership or S corporation in computing non-separately stated taxable income for the year of the payment. The proposed regulations are intended to provide certainty to individual partners and S corporation shareholders in calculating their state and local tax (SALT) deduction limitations.

The proposed regs described in the notice apply to specified income tax payments made on or after November 9, 2020. Taxpayers can also apply these rules to specified income tax payments made in tax years ending after December 31, 2017, and before the proposed regulations are published in the Federal Register.

SALT Deduction
For tax years beginning after 2017 and before 2026, an individual’s federal SALT deduction is generally limited to $10,000 ($5,000 for married individuals who file separate returns). The SALT deduction includes real property taxes, personal property taxes, income, war profits, and excess profits taxes, and general sales taxes.

However, legislative history indicates that this limit should not apply to taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 or similar form. Instead, these taxes should continue to reduce the partner’s or shareholder’s distributive or pro-rata share of income.

New Entity-Level Taxes
Some state and local jurisdictions have enacted or are considering entity-level income tax on partnerships and S corporations, sometimes with a corresponding credit, deduction or exclusion for the owners. There is uncertainty as to whether the entity’s payment of such taxes must be taken into account in applying an owner’s SALT deduction limit.

The proposed regs will clarify that specified income tax payments are deductible by partnerships and S corporations in computing their non-separately stated income or loss.

Specified Income Tax Payments
A "specified income tax payment" is any amount paid by a partnership or an S corporation to satisfy the entity’s liability for income taxes imposed by and paid to a state, a state’s political subdivision, or the District of Columbia. This definition applies regardless of whether the tax results from an election by the entity, or whether an owner receives any deduction, exclusion or credit for the payment. Specified income tax payments do not include income taxes imposed by U.S. territories or their political subdivisions.

The partnership or S corporation can deduct specified income tax payments in computing taxable income for the year the payment is made. The specified income tax payments will be reflected in a partner’s or a shareholder’s distributive or pro-rata share of non-separately stated income or loss. Thus:

a specified income tax payment is not an item of deduction that a partner or shareholder takes into account separately in determining its own federal income tax liability; and
a specified income tax payment is not taken into account in applying the SALT deduction limitation to any individual partner or shareholder.

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The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:

the due date for the withholding and payment of the employee’s portion of the 6.2-percent old-age, survivors and disability insurance (OASDI) tax (Social Security tax) under Code Sec. 3101(a), and the employee’s portion of the Railroad Retirement Tax Act (RRTA) Tier 1 tax that is attributable to the 6.2-percent Social Security tax under Code Sec. 3201, on applicable wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021; and
the deferred taxes must be withheld and paid from wages and compensation paid between January 1, 2021, and April 30, 2021.

The guidance states that it does not separately postpone the deposit obligation for employee Social Security tax. This is because the deposit obligation does not arise until the tax is withheld, so by postponing the time for withholding the employee Social Security tax, the deposit obligation is delayed by operation of the tax regulations.

7508A Relief
In light of the coronavirus (COVID-19) disaster, President Trump issued a memorandum on August 8, 2020, directing the Treasury Secretary to use his Code Sec. 7508A authority to defer the withholding, deposit, and payment of the employee’s portion of Social Security tax, and the employee’s portion of the RRTA equivalent tax, on wages and compensation paid from September 1, 2020, through December 31, 2020. The deferral is available only for employees whose biweekly, pre-tax pay is less than $4,000, or a similar amount where a different pay period applies.

The Treasury Secretary has determined that employers required to withhold and pay the employee share of the Social Security tax under Code Sec. 3102(a) or the RRTA tax equivalent under Code Sec. 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the presidential memorandum.

Applicable Wages
The deferral applies to wages under Code Sec. 3121(a) or compensation under Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020 (collectively "applicable wages"), but only if the amount of wages or compensation paid for a biweekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods.

Applicable wages are determined on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period. In that case, the relief provided in the guidance applies to the wages or compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.

Paying Deferred Taxes
An affected employer must withhold and pay the total applicable taxes that it has deferred ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any unpaid deferred taxes.

If necessary, the employer can make arrangements to otherwise collect the total deferred taxes from the employee.

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The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.

The guidance is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to any employee on or after October 1, 2020, for travel away from home on or after October 1, 2020. For computing the amount allowable as a deduction for travel away from home, the guidance is effective for M&IEs or for incidental expenses only paid or incurred on or after October 1, 2020.

Transportation Industry Rates
The special M&IE rates for taxpayers in the transportation industry are:

$66 for any locality of travel in the continental United States (CONUS), and
$71 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method
For purposes of the high-low substantiation method, the per diem rates in lieu of the rates described in Notice 2019-55 (the per diem substantiation method) are:

$292 for travel to any high-cost locality, and
$198 for travel to any other locality within CONUS.

The amount of these rates that is treated as paid for meals, and the per diem rates in lieu of the rates described in Notice 2019-55 (the M&IE only substantiation method), are:

$71 for travel to any high-cost locality, and
$60 for travel to any other locality within CONUS

The guidance provides a list of localities that have a federal per diem rate of $245 or more, and are high-cost localities for a specified portion of the calendar year. The list differs from the high-cost locality list in Notice 2019-55:

Added to the list: Los Angeles, California; San Diego, California; Gulf Breeze, Florida; Kennebunk/Kittery/Sanford, Maine; Virginia Beach, Virginia.
Localities that have changed the portion of the year in which they are high-cost localities: Sedona, Arizona; Monterey, California; Santa Barbara, California; District of Columbia; Naples, Florida; Jekyll Island/Brunswick, Georgia; Boston/Cambridge, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; Charleston, South Carolina.
Removed from the list: Midland/Odessa, Texas; Pecos, Texas.

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