The Consolidated Appropriations Act of 2021 — which includes the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR) — provides various provisions that effect individual taxpayers.
The tax and non-tax impacts to individuals are highlighted below:
New recovery rebate
Economic Impact Payments (EIPs) were direct payments/rebates to certain individual taxpayers provided by the CARES Act, which was enacted March 27, 2020. The COVIDTRA contains a new program, referred to as “additional 2020 recovery rebates.”
A refundable tax credit of $600 per eligible family member is provided for eligible taxpayers. The credit is available on the taxpayer’s 2020 return and is $600 per taxpayer ($1,200 for married filing jointly), plus $600 per qualifying child. The credit phases out at a rate of $5 per $100 of additional income starting at $75,000 of modified adjusted income ($112,500 for heads of households and $150,000 for married filing jointly).
The credit is available on the taxpayer’s 2020 return. Treasury is to advance payments based on the information on 2019 tax returns. An “eligible individual” does not include any nonresident alien, anyone who qualifies as another person’s dependent, and estates or trusts. Taxpayers without an eligible Social Security number are not generally eligible for the payment. However, in instances where the one spouse has a Social Security number and one 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 calculated on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable credit.
Rebate amounts and phaseout ranges
|Married filing jointly
|Head of household
Enhancements to the normal charitable gifts deduction rules in 2020 have been extended through 2021.
For 2020 and 2021, when itemizing deductions, the limit on the charitable gifts deduction has increased to 100% of AGI for direct cash gifts to public charities.
Nonitemizers have a $300 charitable deduction (increased to $600 in 2021 for joint returns) for direct cash gifts to public charities available in addition to the standard deductions. For 2020 a penalty of 20% applies to tax underpayments attributable to any overstated cash contribution by non-itemizers. This penalty increases to 50% for 2021.
$250 educator expense deduction
In 2020 eligible educators (kindergarten through grade 12 teachers, instructors, etc) are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses paid by them.
COVIDTRA provides an expansion of qualified educator expenses to include personal protective equipment (PPE), disinfectant and other supplies purchased after March 12, 2020, and used for the prevention of the spread of COVID-19.
Child Tax Credit and Earned Income Tax Credit
The new law permits use of 2019 income to determine eligibility for the Child Tax Credit and Earned Income Tax Credit for tax tear 2020. These credits would normally be based on the 2020 tax year for the 2020 tax returns. However, since earnings may be lower in 2020 than 2019 due to the pandemic, the 2019 income may be used.
Health and dependent care flexible spending arrangements
The TCDTR expands the carryover period for 2020 and 2021 for unused amounts remaining in a health flexible spending account (FSA). The provision allows employers to extend the grace period for plan years ending in 2020 and 2021 to 12 months after the end of such plan year for unused benefits and contributions to health flexible spending and dependent care flexible spending arrangements.
Other tax provisions
The floor for deducting medical expenses has been permanently lowered to 7.5% of AGI (it was scheduled to increase to 10% in 2021).
Starting in 2021, the deduction for qualified tuition and related expenses has been repealed. To make up for it, the modified adjusted gross income (MAGI) phaseout range for the lifetime learning credit has been increased to be the same as the phaseout range for the American opportunity tax credit.
A number of provisions that are periodically extended (often a year at a time) have been extended through 2025, including:
- The exclusion from gross income of discharge of qualified principal residence indebtedness. The maximum amount that can be excluded has decreased from $2 million to $750,000 beginning with 2021.
- The employer credit for paid family and medical leave.
- The exclusion from income for certain employer payments of student loans.
Other provisions have been extended (generally through 2021), including:
- The treatment of mortgage insurance premiums as qualified residence interest for purposes of the interest deduction.
- The energy efficient home credit.
- Student loan payment relief extended through 2025.
If you have any questions about the above provisions on how they impact you personally, reach out to Wipfli. You can also find more helpful articles on our COVID-19 resource center.