December 27, President Trump signed the $900 billion COVID-19 stimulus package into law, passed by Congress on December 21. The legislation, called the Consolidated Appropriations Act, 2021, provides over $300 billion in aid for small businesses, adds $300 to extended weekly unemployment benefits, and reopens the Paycheck Protection Program with some important changes, among other provisions. Here are some of the individual tax changes and extenders in the new stimulus package.
Tax Changes and Credits for Individuals
Additional 2020 Recovery Rebates
Individual filers will receive a refundable credit against income tax for the first taxable year beginning in 2020. The amount will be equal to the sum of:
- $600 ($1,200 in the case of eligible individuals filing a joint return)
- An amount equal to the product of $600 multiplied by the number of qualifying children
The amount of the credit allowed is reduced (but not below zero) by 5% of so much of the taxpayer’s adjusted gross income as exceeds:
- $150,000 in the case of a joint return or surviving spouse
- $112,500 in the case of a head of household
- $75,000 in the case of a taxpayer not described in the first two
An eligible individual is any individual other than:
- Any nonresident alien individual
- Any individual who qualifies as a dependent of another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins and,
- An estate or trust
The Treasury may issue advance payments based on the information on 2019 tax returns. Taxpayers without a Social Security number are not eligible for the payment. Married taxpayers filing jointly where one spouse has a Social Security number and one spouse does not are eligible for a payment of $600, in addition to $600 per child with a Social Security number.
Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of their advance payment, taxpayers will receive the difference as a refundable tax credit. Advance payments are generally not subject to administrative offset for past-due federal or state debts and the payments from bank garnishment or levy by private creditors or debt collectors.
Any individual who was deceased before 1/1/20 is to be treated as if the valid identification number of such person was not included on the return of tax for such taxable year, and no amount shall be determined with respect to any qualifying child of the taxpayer if:
- The taxpayer was deceased before 1/1/2020 or
- In the case of a joint return, both taxpayers were deceased before 1/1/2020
Educator Expense Tax Deduction
Not later than 2/28/2021, the Treasury shall, by regulation or other guidance, clarify that personal protection equipment, disinfectant, and other supplies used for the prevention of the spread of COVID-19 are treated as eligible educator expenses for purposes of the $250 educator above-the-line deduction.
Such regulations or other guidance shall apply to expenses paid or incurred after 3/12/2020.
Pandemic Unemployment Assistance Program
Under this program, a jobless individual would receive a $300 weekly federal enhancement benefit for 11 weeks, from the end of December through 3/14/2021. The $300 amount is half of the earlier $600 amount, which expired at the end of July 2020. The program expanded jobless benefits to gig workers, freelancers, independent contractors, the self-employed, and certain people affected by COVID-19.
The Pandemic Emergency Unemployment Compensation Program provides an additional 13 weeks of payments to those who exhaust their regular state benefits.
Both programs will close to new applicants on 3/14/2021.
Election to Base 2020 Refundable Earned Income Credit and Child Tax Credit on Preceding Year’s Earned Income
Section 24(d) provides that to the extent the child tax credit (CTC) exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% of so much of the taxpayer’s taxable earned income for the tax year as exceeds $2,500. Section 32(a) provides that the earned income credit (EIC) equals a percentage of the taxpayer’s earned income. For both purposes, earned income means wages, salaries, tips, and other employee compensation if includible in gross income for the tax year.
Section 32c(2) also includes self-employment income, computed without the deduction for one-half of self-employment tax.
The new law provides that in determining the refundable CTC and the EIC for 2020, taxpayers may elect to substitute the earned income for 2019 if that is greater than the taxpayer’s earned income for 2020. For joint returns, the taxpayer’s earned income for the preceding tax year is the sum of each spouse’s earned income for that preceding tax year.
Changes Relating to Charitable Contributions
For 2020, individuals who normally do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations. (Deduction limits of $300 also applied to married filers).
The new law extended the above rule through 2021, allowing individual cash contributions of up to $300 ($600 for married filers) to be deducted above-the-line for cash contributions to qualified charitable organizations.
Under Pre-Act law, individuals cannot take an itemized deduction of more than 60% of their contribution base on charitable contributions, of cash, made to 50% charities. The new law provides that for 2020 and 2021, the percentage limitation rules for individuals making qualified charitable contributions, in cash, to 50% charities do not apply.
Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements
• Allows plans to permit healthcare and dependent care flexible spending accounts (FSAs) to carry over unused benefits up to the full annual amount from 2020 to 2021 and 2021 to 2022
• Allows plans to permit a 12-month grace period for unused benefits or contributions in healthcare and dependent care FSAs for plan years ending in 2020 or 2021
• Allows plans to extend the maximum age of eligible dependents from 12 to 13 for dependent care FSAs for the 2020 plan year as well as for unused amounts from the 2020 plan year carried over into the 2021 plan year
• Allows plans to permit a prospective change in election amounts for healthcare and dependent care FSAs for plan years ending in 2021
Coronavirus-Related Distributions (CRDs)
The CARES Act temporarily allowed individuals to make penalty-free withdrawals from certain retirement plans for coronavirus-related expenses, permitted taxpayers to pay the associated tax over three years, allowed taxpayers to recontribute withdrawn funds, and increased the allowed limits on retirement plan loans.
This section clarifies that money purchase pension plans are included in the retirement plans qualifying for these temporary rules. A money purchase plan is a type of defined-contribution plan that is similar to a profit-sharing plan, except that the contribution amounts are fixed rather than variable.
New Stimulus Package: Tax Extenders for Individuals
Reduction in Medical Expense Deduction Floor
Under the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR), a subsection of the new stimulus package, for tax years beginning before 1/1/2021, individuals could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of adjusted gross income (AGI).
The TCDTR made the 7.5% threshold permanent. This change is applicable for tax years beginning after 12/31/2020.
The Section 25A education credit is the sum of the American Opportunity tax credit (AOTC) and the Lifetime Learning credit. Under pre-TCDTR law, different phaseout rules applied for the AOTC and the lifetime learning credit, and Section 222 allowed a “higher education expense deduction” for qualified tuition and related expenses paid during the year.
The TCDTR removed the different phaseouts rules for the AOTC and lifetime learning credit and replaced them with a single phaseout, effective for tax years beginning after 12/31/2020. After 2020, the provision repeals the qualified tuition deduction and replaces it by increasing the phaseout. TCDTR repealed Section 222 for tax years beginning after 12/31/2020 and increased limits on the lifetime learning credit from $58,000 ($116,000 for joint filers) to $80,000 ($160,000 for joint filers).
Discharge of Qualified Principal Residence Indebtedness
Prior to the TCDTR, discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately), was, in tax years beginning before 1/1/2021, excluded from gross income. The exclusion also applied to qualified principal residence indebtedness discharged pursuant to a binding written agreement entered into before 1/1/2021.
The TCDTR extended this exclusion to discharges of indebtedness before 1/1/2026 and also reduced the maximum acquisition indebtedness limits to $750,000 and $375,000, respectively.
Non-Business Energy Property Tax Credit
Section 25C provides a 10% tax credit for purchases of nonbusiness energy property. This equals 10% of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences.
The credits of fixed dollar amounts range from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans and is subject to a lifetime cap of $500. The TCDTR extended this credit through 2021 for property placed in service after 12/31/2020.
Contact Us for More Information on Tax Changes in the New Stimulus Package
These are just a few of the individual tax changes in the new stimulus package, and they’ll have a major impact on your personal tax planning strategy. If you need assistance or have questions or concerns, we’re here to help. Please email [email protected] or call 443-320-4101.
Author: Megan O’Donnell