In March, Congress moved quickly as COVID-19 spread across the country and shut down our economy. They passed a massive stimulus package called the CARES Act (Coronavirus Aid, Relief and Economic Security Act) that provided economic relief payments to millions of taxpayers, expanded unemployment benefits, and created a forgivable loan program for small businesses (Paycheck Protection Program).
It was widely predicted at the time this would be just the first of multiple stimulus bills that would be needed this year to get us through this pandemic. As early as May, House Democrats had already passed a bill proposing additional recovery rebates, and President Trump announced his support of a second stimulus bill in June. Then in July, Senate Republicans released their proposal for a stimulus bill.
For months lawmakers on both sides of the aisle negotiated over various pieces of the proposed legislation. The presidential election in November slowed down negotiations, but an agreement was finally reached just before Christmas. President Trump threatened to not sign the agreement, but after holding up the bill, dubbed the “Consolidated Appropriations Act of 2021”, for a few extra days, he finally signed it into law on Sunday, December 29th.
So now that we FINALLY have the second stimulus bill, it’s time to dissect what’s in it and what it might mean for you. The final bill clocked in at over 5,000 pages so I’ll just cover the highlights that might apply to many of our clients. I won’t spend time on the parts of the Appropriations Act that apply primarily to businesses, but if you are a small business owner or sole proprietor, there are many additional provisions in the bill for you to consider. If you have questions on specific parts of the bill that aren’t covered below, feel free to reach out to me.
Recovery Rebate Checks
There are a lot of similarities between the initial round of recovery rebate checks earlier this year, and the new version. If you received a check the last time, it’s likely you’ll receive another one now. Here are some specifics:
The payment will be $600 for everyone who is eligible. Since this bill was passed, the House has already passed a follow-up bill to increase this amount to $2,000. President Trump has also publicly backed an increase to $2,000, but it’s unclear at the time of this writing whether the bill will pass the Senate.
Kids will again only count if they are eligible to be claimed for a child tax credit
The payment is phased out again based on your 2019 Adjusted Gross Income starting at the following levels depending on your filing status:
Single - $75,000
Head of Household - $115,000
Married Filing Joint - $150,000
This will be treated as a 2020 refundable credit again, so if your 2020 income is below the phaseout but your 2019 income was above the phaseout, you will be allowed to claim the credit on your 2020 taxes. If your 2020 income is higher than in 2019 and you received a payment based on 2019, you will not have to repay that amount.
Flexible Spending Accounts are a great way to use pre-tax money to pay for dependent care expenses and/or healthcare expenses in a normal year when you can reasonably predict what those expenses might be. However, the money you put into an FSA must be used that year, and any remaining contributions at year-end are typically forfeited. 2020 was anything but a normal year, and with schools shut down and most elective medical procedures delayed, many people were unable to use the money in their FSAs this year.
Congress acknowledged this dilemma and included a section of the new bill that will allow employers to let employees roll forward any unused 2020 balances to 2021 AND any remaining balances at the end of 2021 to 2022. It also will allow participants to modify future contributions to the FSA in 2021, a change from the normal irrevocable nature of those elections. It’s important to note that the Act does not require employers to adopt these policies, so it will be up to your company’s HR department to decide if they will apply to your FSA. If you have a remaining balance in your FSA, be sure to reach out to your HR department about this change.
Unemployment Benefits Extended
Under the CARES Act, a number of “additional” unemployment benefits were created and many of those benefits have been extended under this bill. Regular unemployment compensation was extended for 11 weeks and the amount is increased by $300 per week. The original CARES Act included a similar provision but the additional amount was $600 per week. Pandemic unemployment assistance, which covers individuals not normally eligible to receive such benefits, is also extended 11 weeks.
Payroll Tax Deferral Repayment
In August, we told you about a payroll tax holiday created by President Trump via executive order. This deferral of payroll taxes covered the final 4 months of 2020 but was required to be repaid in the first 4 months of 2021. The Appropriations Act extends this repayment period from 4 months to the full 12 months of 2021. While most employers elected not to participate in the payroll tax deferral, the Federal government did adopt the relief, so if you are a Federal employee this might impact you.
In our November newsletter, we reminded you about the special above-the-line $300 deduction for charitable contributions that were included in the original CARES Act for 2020. This deduction is allowed regardless of whether you itemize deductions for 2020. The Appropriations Act extends this deduction to 2021 and allows joint filers to both take the deduction, so their combined allowable deduction will be $600 for 2021.
Another benefit created under the CARES Act for charitable contributions has also been extended to 2021. Under the CARES Act, in 2020 you are allowed to deduct up to 100% of your Adjusted Gross Income as a qualified charitable contribution if it is an all-cash contribution to a qualified charity (Donor Advised Funds not included). The AGI limitation for cash contributions is typically 60%, but this 100% allowance has been extended to 2021.
There were a number of smaller items that were included in the bill that might impact you. Among them are the following:
The adjusted gross income limitation for the deduction of medical expenses was permanently reduced to 7.5%. This limitation was originally set to be 10% for 2020 and 2021 and has gone back and forth in recent years.
For sole proprietors and business owners, business meals provided by a restaurant, which have always been limited to a 50% deduction, will be 100% deductible for 2021 and 2022.
A new lifetime learning credit with a higher income phaseout will replace the tuition and related expenses deduction.
The $250 deduction that educators can take for classroom expenses will include any costs related to COVID-19 supplies.
Mortgage insurance premiums will remain deductible through 2021, subject to phaseout limits.
The FAFSA form will be simplified and revamped effective July 1, 2023.
The Energy Efficient Homes Credit is extended through 2021.
As Jeff Levine points out in this much more detailed overview of the bill, there were three notable exclusions from the bill. First, there is no waiver of Required Minimum Distributions beyond 2020, so you should be prepared to resume normal RMDs next year. There was also no additional relief for unwanted 2020 RMD’s, beyond the rollover window the IRS allowed in Notice 2020-51 through August 31st of this year. Lastly, there was no further student loan relief provided in the bill.
If you have any questions about any of these provisions or how they might impact you, please feel free to reach out to me.
-Chris Benson, CPA, PFS
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