Congress passed, and the President signed, the nearly 5,600-page Consolidated Appropriations Act (CAA), which includes COVID-19 and economic relief. The CAA includes over $900 billion in wide-ranging COVID-19 and economic relief. We’ve compiled some of the key provisions that affect individuals and their tax situations:
Direct Payments of $600 to Americans
Individuals making up to $75,000 per year qualify for a non-taxable $600 direct payment, and married couples making up to $150,000 per year qualify for $1,200. Individuals also receive a non-taxable $600 payment for each child dependent. The CAA refers to these direct payments to Americans as “recovery rebates.” Individuals who earn more than $75,000 and married couples who earn more than $150,000 will receive a reduced payment. The payments begin phasing out at $75,000 of modified adjusted gross income for single filers, $112,500 for heads of household, and $150,000 for married couples filing jointly. Payments are reduced by $5 for every $100 of income above these thresholds, and phase-outs reduce the total payment amount, including the amounts for qualifying children.
The federal government has already begun sending out the direct payments starting late December 2020. The federal government will send the money out via direct deposit for eligible Americans and will mail physical checks to those whom the federal government doesn’t have direct deposit information or who simply do not have a bank account. 2019 tax return information will determine recovery rebate amounts. If an individual’s actual income was lower in 2020 or their family size grew, they may be able to claim an additional credit for the difference on your 2020 tax return. However, if an individual receives a payment and their actual 2020 income is high enough that their payment should have been phased-out, they won’t have to repay the difference.
Federal Unemployment Supplement
The CAA provides an extra $300 per week for 11 weeks in federal unemployment supplement over any state unemployment benefits offered to individuals. It also extends the Pandemic Unemployment Assistance program for 11 weeks. This program makes unemployment benefits available to workers who typically don’t qualify, including the self-employed, gig economy workers, and others in nontraditional employment. Under the CAA, these benefits will expire on March 14, 2021.
Federal Eviction Moratorium and other Housing Assistance
The CAA contains multiple types of relief for those struggling with their housing costs, including the extension of the federal eviction moratorium through January 31, 2021. The CAA also offers rental assistance for families affected by COVID-19. Eligible households can apply the funds to their rent, utilities, and energy costs. Mortgage insurance premiums remain deductible through 2021 (subject to phase-out limits).
Paid Sick Leave
The CAA provides a tax credit to support employers offering paid sick leave, based on the framework of the Families First Coronavirus Response Act (Families First) enacted in March 2020. Families First required many employers to provide individual workers with two weeks of sick leave related to COVID-19 at full pay and up to 12 weeks of family and medical leave to care for family members at two-thirds of their salary.
In the spring of 2020, the CARES Act permitted penalty-free withdrawals from specific retirement plans for expenses related to COVID-19 and removed the limit on retirement plan loans. The CAA clarified that money purchase pension plans are an included type of retirement plan subject to the temporary relief measures under the CARES Act.
The CAA did not extend the CARES Act’s temporary waiver of required minimum distributions, so affected taxpayers should plan on resuming those distributions for 2021.
Luckily, the CAA includes certain tax relief for taxpayers in federally declared disaster areas for major disasters not related to COVID-19 declared from January 1, 2020, through February 25, 2021. The relief under the CAA provides that residents of qualified disaster areas can take distributions of up to $100,000 from retirement plans without the standard 10% early withdrawal penalty. To qualify for this relief, individuals must make their disaster distributions no later than June 25, 2021.
Earned Income and Child Tax Credits
Under the CAA, lower-income individuals may use their earned income from the 2019 tax year to determine their earned income tax credit and the refundable portion of their child tax credit for the 2020 tax year.
Medical Expense Deductions
For tax years beginning after December 31, 2020, the itemized deduction for unreimbursed medical expenses was scheduled to change from 7.5% to 10% of adjusted gross income (AGI). The CAA permanently sets the threshold at 7.5% of AGI for tax years beginning after December 31, 2020.
In the Spring of 2020, the CARES Act allowed taxpayers who don’t itemize their deductions on their tax returns to claim a $300 deduction for cash contributions to qualified charitable organizations in 2020. This deduction is extended through 2021 and is doubled to $600 for married filers under the CAA.
The CARES Act also boosted the limitations on charitable deductions for cash contributions made in 2020 from 50% to 100% of AGI. The CAA extends that provision to also apply in 2021. Cash contributions remain limited to the excess of AGI over the amount of all other charitable contributions. Any excess cash contributions are carried forward to later years.
In the Spring of 2020, the CARES Act allowed employers to provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The CAA extends this provision through 2025.
The CARES Act temporarily halted collections on defaulted loans, suspended loan payments, and reduced the interest rate to zero through September 30, 2020. Subsequent executive branch actions extended this relief through January 31, 2021. The CAA did not change this expiration date.
Education Tax Credits
Qualified taxpayers can claim an education tax credit under the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Historically, these two credits were subject to different phase-out rules. The CAA adopts a single phase-out for both the AOTC and the LLC effective for tax years beginning after December 31, 2020. The credits will phase-out, starting at $80,000 for single filers and ending at $90,000. For joint filers, they will begin to phase-out at $160,000 and fully phase-out at $180,000. The CAA also repeals the higher education expense deduction while allowing taxpayers to apply for the LLC credit.
Energy Tax Credit and Other Energy-efficient Provisions
A credit of up to $500 is available for purchases of qualifying energy improvements made to a taxpayer’s main home. Any prior claimed credits reduce the $500 maximum allowance. This credit initially expired in 2020 until the CAA extended it through 2021.
Under the CAA, the tax credit for qualifying solar energy equipment expenditures for your home was extended at the 26% credit rate to cover equipment placed in service in 2021 and 2022, and 22% rate to cover equipment placed in service in 2023. The credit is scheduled to expire for 2024 and beyond.
Discharged Mortgage Debt
The tax provision that allows taxpayers to exclude the discharge of qualified debt on their principal residence up to $2 million for joint filers from their gross income originally expired at the end of 2020. The CAA extends this provision through 2025. However, the CAA reduces the maximum acquisition debt limits to $750,000 for joint filers and $375,000 for married individuals filing separately for debt discharged after 2020.
Flexible Spending Accounts
The CAA allows unused amounts from 2020 Flexible Spending Accounts (FSAs) to roll over to 2021 and unused amounts from 2021 FSAs to roll over to 2022. For 2021, employees can make mid-year prospective changes in their FSA contribution amounts without a change in status. These changes are voluntary for employers and may not apply if the employer hasn’t adopted them.
Repayment of Deferred Payroll Taxes
In August 2020, President Trump issued an executive order allowing employees to defer their share of Social Security taxes. Initially, the IRS issued guidance requiring employees to pay any deferred employment taxes on a prorated basis from January 1, 2021, through April 30, 2021. The CAA now gives employees the entire year in 2021 to make up those deferred payments
With so many changes and new additions with the signing of the CAA, it’s crucial to understand what parts of the bill affect your personal tax situation. To stay on top of the latest information, be sure to reach out to a CRI tax advisor for further guidance and advice on how you may be impacted.