The Consolidated Appropriations Act,
2021 was signed into law on December 27, 2020. The bill is a combination of several
Acts that aim to provide economic relief through stimulus payments and extensions
of beneficial tax provisions (extenders) that were set to expire on December
31, 2020. Below is a summary of several provisions and extenders that will be particularly
important to the 2020 and 2021 federal tax returns of individuals.
Additional Recovery
Rebate Credit
Under the COVID and Taxpayer Certainty
Acts, eligible individuals and qualifying children will each receive up to $600
in additional recovery rebate credits for their first tax years beginning in
2020. The IRS began advanced distributions of these stimulus payments based on
2019 returns filed or recipients of governmental benefits. If eligible
individuals do not receive their second credit by January 15, 2021, they will
need to claim the refundable credit on their 2020 tax returns. There are
several reasons why eligible taxpayers may need to claim the credit on their
2020 returns, such as they received only a partial amount of the credit they
were entitled to, their income for 2020 is lower and makes them eligible for a
different amount of the credit, or they had a child in 2020. The refundable
credit allows you to reduce the taxes you owe or increase your refund. These
economic impact payments should not be reported as income and are not taxable.
While the additional rebate credit models the first rebate from the CARES Act,
there are a few differences worth noting besides the dollar amount. One spouse
on a joint return may be eligible for the credit even if the other spouse lacks
a social security number. Unlike the original credit that sent many payments to
deceased taxpayers, the second credit does not apply to those who died before
January 1, 2020. Lastly, these credits cannot be garnished like it could in the
original rebates for debts regarding delinquent child support or private debts.
The credit phase-out is still 5% for each $100 of the taxpayer's AGI. However,
since the credit amount is substantially less, the complete phase out amount is
lower as well.
- $150,000 for taxpayers who file jointly
or as a surviving spouse—$1,200 credit phases out completely at $174,000.
- $112,500 if filing as head of
household—the $600 credit phases out completely at $124,500.
- $75,000 if filing as single or married
filing separately—the $600 credit phases out completely at
$87,000.
Unemployment Benefits
The U.S Department of Labor has issued
new guidance regarding unemployment insurance provisions found in the Continued
Assistance for Unemployed Workers Act of 2020 that passed with the Consolidated
Appropriations Act, 2021. These provisions include an extension of the Pandemic
Unemployment Assistance program that was first established under the CARES Act.
For eligible states, federal funding of compensation is extended through the weeks
of unemployment that begin on or before March 14, 2021 (March 13, 2021 if the
week of unemployment ends on Saturday). The number of weeks for the benefit is
increased from 39 to 50 weeks, and those individuals that have not consumed
their entire eligibility may receive additional weeks of collection. However,
there are new requirements for states to properly verify the applicants and for
the individuals to submit specific reasons as to why the Pandemic Unemployment Assistance
is being claimed on a weekly basis. Additionally, the Federal Pandemic
Unemployment Compensation Program, that expired on July 31, 2020 and provided
an additional $300 a week in unemployment benefits, is reinstated for weeks of
unemployment beginning December 26, 2020 and ending March 14, 2021. There is
also a new provision for Mixed Earners Unemployment Compensation (MEUC) that is
optional for states to provide. The program will allow eligible individuals to
receive an additional $100 each week, along with the $300 compensation
mentioned above, through the week of unemployment ending on or before March 14,
2021. Requirements for the (MEUC) eligibility are as follows:
- Have received at least $5,000 of
self-employment income in the most recent taxable year prior to the
individual's application for regular Unemployment Compensation.
- Be receiving a UI benefit (other than
Pandemic Unemployment Assistance) for which Federal Pandemic Unemployment
Compensation is payable.
- Submit documentation substantiating their
self-employment income.
Charitable Contribution Deduction for Non-Itemizing Individuals in 2021 -
Extensions after 2020
Charitable donations have steadily
declined due to taxpayers taking advantage of the increased standard deduction
from the Tax Cuts Jobs Act. As a way to promote charitable giving and alleviate
the current financial burden facing taxpayers, the Taxpayer Certainty and Tax
Relief Act of 2020 will extend the deduction for non-itemizing individuals for
the 2021 tax year. This law was previously passed with the CARES Act, which
allows a 2020 charitable contribution deduction in the amount of $300 for
non-itemizers. This additional deduction will continue through 2021 but will
double to $600 for joint filers. For both tax years, these contributions must
be made in cash to nonprofit schools, churches, nonprofit medical institutions,
public charities, and other organizations. The contribution cannot be made to
an organization described in section 509(a)(3) or for a new or existing donor advised
fund. The term cash means that household items and securities do not qualify,
and the donation must be made with cash, check or credit card. Written
acknowledgements of charitable contributions for more than $250 still apply. The
2021 deduction will also be considered a "below-the-line" deduction and not
lower your adjusted gross income like it will on 2020 tax return. Penalties
have also increased for those overstating the contribution deduction from 20%
to 50% of the tax that is understated.
Charitable
Contribution Deduction Limitation for Individuals - Extensions after 2020
For the 2019 tax year, charitable cash
contributions found on Schedule A were limited to 60% of the adjusted gross
income of the taxpayer. Any amount over the limit would be carried forward up
to five years. With the passing of the CARES Act, that 60% limit is suspended
for 2020, and taxpayers are able to deduct up to 100% of their adjusted gross
income. The newest legislation, Taxpayer Certainty and Tax Relief Act of 2020, extends
this suspension for itemizers through the 2021 tax year. Taxpayers can benefit
from this deduction by making a charitable contribution to nonprofit schools,
churches, nonprofit medical institutions, public charities, and other organizations.
The contribution cannot be made to an organization described in section
509(a)(3) or for a new or existing donor advised fund.
Medical and Dental Expense Deduction - Extensions after 2020
Taxpayers that elect to itemize
deductions on their 2020 return may deduct unreimbursed medical expenses that exceed
7.5% of adjusted gross income. This 7.5% floor was set to return to 10% for the
2021 tax year. The newest legislation, passed by Congress and President Trump
last month, will also extend this 7.5% floor for all taxpayers through the 2021
tax year. For example, if a taxpayer's adjusted gross income is $40,000 and
their medical and dental expenses for the year amount to $5,000, the deductible
amount would be $2,000 on their Schedule A. See the comparison chart below on
potential deduction amounts with varying adjusted gross income floors.
AGI |
Expenses |
AGI Floor |
Deduction
Amount |
|||
$40,000 |
$5,000 |
40,000*7.5%= $3,000 |
$5,000 -$3,000 = $2,000 |
|||
$40,000 |
$5,000 |
40,000*10%= $4,000 |
$5,000 -$4,000 = $1,000 |
Because the standard deduction for
single filers will be $12,550 in 2021, the taxpayer from the example above would
still need a substantial amount of other itemizable deductions to make the
lower AGI floor beneficial on their return. Medical and dental expenses that
qualify under this category, include, but are not limited to payments for or to
doctors, dentists, chiropractors, psychiatrists, drug prescriptions, eyeglasses,
contact lenses, false teeth, hearing aids, wheelchairs and many more.
Education Credits and Tuition deduction - Extensions after 2020
The Consolidated Appropriations Act of
2021 moves to transition from a deduction for qualified tuition and education
expenses to an increased income limitation for the Lifetime Learning Credit. Previously,
the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit
(LLC) had different phaseout rules. With this new legislation, a single
phaseout for both will begin at $80,000 for single filers and $160,000 for
joint filers and fully phased out at $90,000 and $180,000, respectively. These
increased income limits will allow more taxpayers to benefit from the credit. The
deduction for qualified education expenses is repealed and no longer applicable
for the 2021 tax year. The three benefits previously available for taxpayers
were a choice between deductions and credits. Taxpayers will now only have the
choice between a credit from either the AOTC or the LLC. Generally, the AOTC
offers the largest credit, worth up to $2,500 per student, with a partial
refund if the tax liability is reduced to zero. If taxpayers no longer meet the
requirements to receive the AOTC, the LLC will allow a non-refundable credit
worth up to $2,000.
Temporary Special
Rules for Health and Dependent Care Flexible Spending Accounts
Health
Flexible Spending Accounts (FSAs) are commonly used to reimburse employees for
eligible medical expenses not covered by insurance. Dependent Care FSAs can be
used to reimburse the qualifying costs to care for a dependent child under the
age of 13, a disabled spouse, or a disabled relative who lives with the
taxpayer for more than half the year. Generally, these plans incorporate a "use-it-or-lose-it"
rule where unused benefits and contributions at the end of the year are
forfeited (with exceptions). Under the Consolidated Appropriations Act, 2021,
employers may adopt the following temporary rules to help employees enrolled in
health or dependent care flexible spending accounts without jeopardizing their
status as a cafeteria plan:
- Health FSAs and Dependent Care FSAs may allow any remaining balances at the end of the 2020 plan year to roll over into the 2021 plan year.
- Health FSAs and Dependent Care FSAs may allow any remaining balances at the end of the 2021 plan year to roll over into the 2022 plan year.
- Health FSAs and Dependent Care FSAs may extend grace periods for plan years ending in 2020 and 2021 to up to 12 months.
- Health FSAs may allow employees who terminate participation during the 2020 or 2021 plan year to use up their unspent balances through the end of the plan year.
- Dependent Care FSAs may increase the age limit for certain eligible employees' qualifying children from 13 to 14 for purposes of determining whether expenses may be paid or reimbursed.
Employers
who choose to implement any or all of these changes may implement them
immediately and retroactively. They may amend their plans in the year after
the year that the change is effective.
Disaster
Relief-Related Distributions from Retirement Plans
The
Consolidated Appropriations Act, 2021 included retirement plan modifications
for disaster related distributions. It waives the 10% early distribution
penalty for qualified coronavirus related distributions made from an eligible retirement
plan. To be considered a coronavirus related distribution, the distribution
must be made to someone who was diagnosed with COVID-19, whose spouse or dependent
was diagnosed with COVID-19, or someone who experienced adverse financial
consequences from COVID-19. The total amount of coronavirus related distributions
received by an individual for a year cannot exceed $100,000. Additionally, the
new law allows for the qualified
distribution to be included in income ratably over three years, beginning with
the year that the distribution is received. An individual who receives a
coronavirus related distribution may recontribute the amount of those
distributions to an eligible retirement plan within three years of receiving
them. The recontributed amounts are treated as though they are eligible
rollover distributions that are transferred in a direct trustee-to-trustee
transfer within 60 days, with the result that the original distribution is no
longer included in income or subject to tax.
As always, please feel free to reach out to your HLB Gross Collins, P.C. adviser with any questions regarding this new legislation or other tax planning opportunities.