By: Olivia M. Seneca, MBA
President Trump signed the Consolidated Appropriations Act 2021 (CAA) into law on December 27, 2020. This bill is one of the largest ever enacted at $2.3 trillion, which combines $900 billion in COVID-19 stimulus relief and a $1.4 trillion 2021 federal fiscal-year spending bill. This is the first bill to address the pandemic since March 2020 and contains numerous tax provisions and extenders to the CARES Act. Today’s post is part one of a multi-blog series and will focus on the Individual Provisions of the CAA. We will write about other key provisions and extenders in detail in the coming weeks.
The new law provides a refundable tax credit, on the taxpayer’s 2020 return, to eligible individuals of $600 per family member. “Eligible Individual” does not include any nonresident alien, anyone who qualifies as another person’s dependent, and estates or trusts. Eligible individuals will receive an additional $600 per qualifying child.
- Single or married filing separately individuals start at under $75,000 of modified adjusted gross income (AGI) and phase out at $87,000.
- Head of household individuals start at under $112,500 of modified AGI and phase out at $124,500.
- Married filing joint individuals start at under $150,000 of modified AGI and phase out at $174,000.
The credit will reduce by $5 per $100 of additional income above stated modified AGI.
Advanced payments exceeding the eligible credit will not be required to be paid back. If the eligible credit exceeds the advanced payment, the taxpayer will receive a refundable tax credit.
Educator Expense Deduction Application to PPE
Educators are allowed a $250 above-the-line deduction for allowable business expenses. The new law states any expenses incurred after March 12, 2020, for personal protective equipment (e.g., disinfectant, and preventative supplies) can be treated as an allowable expense.
Higher Education Deductions and Exclusions
Emergency Financial Aid Grants
All emergency financial aid grants made after March 26, 2020, are excluded from the gross income of college and university students.
The portion of any amount paid for teaching, research, or other services, cannot be excluded.
IRC Section 222 – Qualified Tuition and Related Expenses
IRC Section 222 allows a deduction equal to the qualified tuition and related expenses paid by the taxpayer during the taxable year. For taxpayers whose AGI does not exceed $65,000, the applicable amount is $4,000. For taxpayers whose AGI does not exceed $80,000, the applicable amount is $2,000. IRC Section 222 will be repealed for tax years after December 31, 2020.
Lifetime Learning Tax Credit
Phase out amounts for the Lifetime Learning Credit will be increased in 2021 to account for Section 222 being repealed.
- Single filers phase out threshold increased from $59,000 to $80,000 and is completely phased out at $90,000 of AGI.
- Joint filers phase out threshold increased from $118,000 to $160,000 and is completely phased out at $180,000 of AGI.
Medical Expense – Itemized Deduction
In 2021, the gross income threshold was supposed to increase to 10%. With the new provisions, the 7.5% AGI threshold on medical expense deductions was made permanent.
Mortgage Insurance Premium Deduction
The deduction for qualifying mortgage insurance premiums was due to expire in 2020. The new provisions extended the deduction through 2021.
The above-the line charitable contribution deduction for $300 is extended through 2021 and is increased to $600 for joint filers ($300 for single filers) for 2021. Taxpayers who overstate contributions will be subject to a 50% penalty. The penalty was originally 20% in 2019.
In addition, the limit on cash contributions by an individual was increased in 2020 to 100% of AGI and is extended through 2021.
Qualified Disaster-Related Distributions
10% Early Withdrawal Penalty
A distribution from an employer retirement plan from an employee who is under the age of 59 1/2, is assessed a 10% early withdrawal penalty. However, when a distribution is made due to a qualified disaster, the penalty is not applied.
As a reminder, any distributions made are still subject to income taxes in the year distributed. We encourage you to notify your tax advisor when distributions are made.
Increased Limit for Plan Loans
Generally, a loan from a retirement plan cannot exceed $50,000. The CAA increases the allowable amount to $100,000 due to a qualified disaster.
Exclusions from Income
Emergency Workers – Volunteer Firefighters and Medical Responders
Members of a qualified emergency response organization can exclude from gross income certain state or local government payments received for their volunteer services. This exclusion was due to expire in 2020 but it was made a permanent exclusion in 2021.
Qualified Mortgage Debt
If a lender cancels a debt, the borrower must include the discharged amount in gross income. An exclusion from gross income of $2 million of discharged debt on a qualified principal residence was due to expire at the end of 2020. The CAA extended the exclusion until the end of 2025 and lowered the exclusion amount to $750,000 for joint filers ($375,000 for separate filers).
Employer Payments of Student Loans
According to the CARES Act, an annual maximum of $5,250 for employer qualified educational assistance programs are excludable from an employee’s income for repayments made after March 27, 2020 and before January 1, 2021. The CAA extends the exclusion through the end of 2025.
Refundable Child Tax Credit and Earned Income Credit on 2019 Earned Income
If an individual’s child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible to a refundable credit of 15% of earned income, that exceeds $2,500. The CAA allows taxpayers to elect to substitute earned income for the preceding tax year if greater than income in 2020.
Health Coverage Tax Credit
A refundable credit is allowed for 72.5% of health insurance premiums paid by certain individuals (individuals eligible for Trade Adjustment Assistance due to a qualifying job loss, and individuals between 55 and 64 years old whose benefit pension plans were taken over by the Pension Benefit Guaranty Corporation). This credit was due to expire in 2020 but the CAA extended it until the end of 2021.
New Markets Tax Credit
This credit is provided to either corporations or individual taxpayers that invest in certain low-income communities. This was due to expire in 2020 but the act extended it through the end of 2025.
Nonbusiness Energy Property Credit
A credit is available for purchases of nonbusiness energy property for a taxpayer’s primary residence. This credit was due to expire in 2020 but the CAA extended it until the end of 2021.
Qualified Fuel Cell Motor Vehicle Credit
A credit is available for purchases of new qualified fuel cell motor vehicles. This credit was due to expire in 2020 but the CAA extended it until the end of 2021.
Two-Wheeled Plug-In Electric Vehicle Credit
A 10% credit, capped at $2,500, for two wheeled plug-in electric vehicles is extended it until the end of 2021.
Residential Energy-efficient Property Credit
A personal tax credit equal to applicable percentages of expenditures for qualified energy-efficient property is available to taxpayers. This credit was due to expire in 2021 but the CAA extended it until the end of 2023.
Continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the pandemic may affect your tax filing, payments, and planning. Through these unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help. Call on us for assistance.