Consolidated Appropriations Act, 2021: What’s in It for You?

The key feature of the new law signed by the President on December 27 ,2020, is a second stimulus payment to individuals. The payment is $600 per individual (compared with the initial payment of $1,200), plus $600 per child under age 17 at the end of the year (compared with the initial payment of $500). Payments are only made to individuals with adjusted gross income (AGI) in 2019 below a set amount. Full payments apply if AGI was no more than $75,000 for singles and $150,000 for joint filers. The payment is reduced for those with AGI above these levels; no payment is made if AGI reaches $87,000 for singles (compared with $99,000 for the initial payment) and $174,000 for joint filers (compared with $198,000 for the initial payment). For those whose income is below the filing threshold so that no return was filed for 2019, the IRS is working with the Social Security Administration, the Railroad Retirement Board, and the Veterans Administration to get payments to eligible individuals.

Unemployment benefits. In addition to any state unemployment benefits to which an out-of-work individual may be entitled, there is a $300 per week benefits payable through March 14, 2021 (11 weeks). This additional benefit may be paid to self-employed individuals who have exhausted state benefits. As in the case of regular unemployment benefits, these supplemental payments are includible in gross income.

Social Security tax deferral. If your employer opted to defer the Social Security portion of FICA on wages paid from September 1, 2020, through December 31, 2020, there is a longer period for paying the deferred tax. Instead of having to do so from January 1, 2021, through April 30, 2021, deferral is now spread over all of 2021. If employers do not withhold the deferred taxes, interest and penalties begin to accrue for these employers starting January 1, 2022.

Tax-free income. Usually, the cancellation of debt is taxable income. However, the cancellation of home mortgage debt is exempt from this rule, within limits. While the cap on debt through 2020 was $2 million, the exemption is extended through 2025, but only up to $750,000 ($375,000 if married filing separately). Students who receive education assistance due to COVID-19 are not taxed on this benefit.

Educator and education expenses. The above-the-line deduction for classroom expenses remains at $250. However, the new law includes as eligible expenses the cost of personal protective equipment (PPE) and other supplies to prevent the spread of the coronavirus. The above-the-line deduction for tuition and fees, which expired on December 31, 2020, has not been extended. Education credits remain a good way to reduce the out-of-pocket cost of higher education. The modified adjusted gross income limits (MAGI) for the lifetime learning credit have been aligned with those for the American opportunity credit starting after 2020. And repayment of student loans under an employer’s education assistance plan continues for five more years (it had been set to apply only for 2020), so that payments up to $5,250 for this purpose are tax free.

Itemized deductions. The 7.5% of adjusted gross income (AGI) floor used for determining deductible medical expenses, which had been set to expire at the end of 2020, has been made permanent. The ability to treat mortgage insurance premiums as deductible home mortgage interest for those with income below set levels, which had also been set to expire at the end of 2020, has been extended for one year. Also extended for one year (through 2021) is the election to deduct cash charitable contributions up to 100% of AGI.

Charitable deduction for non-itemizers. For those who claim the standard deduction, the up-to $300 above-the-line deduction for cash donations to charity has been extended through 2021. What’s more, for 2021, non-itemizing joint filers can deduct up to $600 of cash donations.

Tax credits. The amount of the earned income tax credit and the child tax credit has not been increased. However, the new law allows individuals to elect to use 2019 income in figuring these credits for 2020. This is beneficial if 2019 income is higher, as long as it is not so high as to result in a phaseout of the credits. The residential energy credit for solar and other renewal energy property has a two-year extension, while the credit for adding insulation, storm doors, and other similar energy-saving property to a home has a one-year extension. Also, the 10% credit for a plug-in electric drive motorcycle applies through 2021.

Disaster relief. Each year, various tax-relief measures are enacted for specific disasters. The new law provides relief to all federally-declared disasters occurring on or after January 1, 2020, and ending 60 days after the date of this new law’s enactment. This relief includes net disaster loss deductions, higher limits on loans from qualified retirement plans, exemption from the 10% early distribution penalty for withdrawals from qualified retirement plans and IRAs, and the spread of retirement plan distributions over three years with the ability to recontribute withdrawals within this period.