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.
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.
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.
$5,000 -$3,000 = $2,000
$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.
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.