The Consolidated Appropriations Act, 2021 – A Summary of Individual Tax Provisions
Melissa Abbott, CPA, J.D., Shikha Patel, J.D., Merrick Shukan, CPA, MST, Mona Loong, MBA, and Veronique Horne, J.D.
1.26.21 | Client Alert
The Consolidated Appropriations Act, 2021 (CAA), which was signed into law on December 27, 2020, includes several individual tax provisions that enhance and extend many of the provisions that were enacted by the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CAA further responds to the financial hardship that many individuals and families face due to the ongoing COVID-19 pandemic. Below are a few highlights.
Financial Hardship Relief Provisions
Under the CAA, another round of recovery rebates has been made available to individuals. These rebates are considered income tax credits that offset an individual’s income tax liability for 2020, even though most taxpayers will receive these checks prior to filing their 2020 income tax returns. In order to expedite the payments of these checks, the federal government is calculating payments based on the taxpayer’s 2019 adjusted gross income (AGI).
The maximum CAA recovery rebate is $600 per individual (reduced from $1,200 provided under the CARES Act). An additional credit of $600 is available for each dependent child that has not reached the age of 17. The recovery rebate begins to phase out when the taxpayer’s AGI reaches $75,000 for individual filers, $112,500 for head of household filers, and $150,000 for joint filers. For taxpayers with no dependent children under 17 years of age, a complete phase out of the credit occurs at $87,000 for individual filers, $124,500 for head of household filers, and $174,000 for joint filers.
If a taxpayer’s 2019 AGI results in the receipt of a recovery rebate check, but the 2020 AGI would partially or completely phase the taxpayer out of recovery rebate eligibility, the taxpayer will not be obligated to repay the amount received. Alternatively, if a taxpayer was not eligible to receive a recovery rebate (or a portion thereof) based on the taxpayer’s 2019 AGI, but is eligible based on the 2020 AGI, a credit against income tax on the 2020 tax return is available.
Pandemic Relief Extension for Unemployed Workers
With the signing of the CAA, workers received an extension of all federal unemployment insurance programs, including Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC), which expired on December 26, 2020. PUA covers gig and self-employed workers who do not normally qualify for unemployment insurance (UI), and PEUC provides additional weeks of aid to those who have run out of their state unemployment benefits by extending the program by 11 weeks. Those receiving unemployment benefits will receive an additional $300 per week as a supplemental amount to unemployment benefits for weeks of unemployment starting December 27, 2020 and ending March 14, 2021. The CAA supplement is half of that which was provided by the CARES Act and includes a new “return to work” requirement, which mandates that all States have a method in place for addressing situations when an individual receiving unemployment compensation refuses to return to work or refuses to accept an offer of suitable work without good cause.
Tax Deduction and Credit Provisions
Extension of Charitable Contribution Provisions
Under the CARES Act, individuals can deduct cash contributions of up to 100% of AGI if direct cash charitable contributions are made to qualified public charities in the 2020 calendar year. The CAA extends this provision by one year to cover the 2021 calendar year. Prior to the CARES Act, the AGI limit for deducting cash contributions to qualified charities was 60%. As a result of the CAA provision, it is possible for an individual taxpayer to shelter their entire AGI from tax in 2021 with direct cash contributions to qualified public charities.
Caution: Contributions to donor advised funds and private foundations do not qualify under the increased CARES Act or CAA AGI limits.
For individual taxpayers that do not itemize deductions, the CAA extends the CARES Act above-the-line charitable deduction. Under the CAA, the maximum above-the-line charitable deduction is $300 or $600 depending on the single or married filing joint filing status in 2021. Under the CARES Act, a maximum $300 deduction was permitted for both single and married filing joint filers (a $150 limit applied for married separate filers). Above-the-line contributions must be made in: (1) cash or cash equivalent and (2) directly to a qualified charity.
Caution: Contributions to donor-advised funds or private foundations do not qualify for this deduction.
In the case of any overstatement of the charitable deduction taken under this new provision, the accuracy-related penalty of 50% applies for the understatement of income taxes. Accordingly, all charitable receipts and acknowledgement letters should be maintained by the taxpayer as part of the taxpayer’s annual tax records.
For additional information on charitable planning, click this link – “2020 Year-End Charity Planning Opportunities to Consider.”
Medical Expense Deduction Rate Restored to 7.5%
In 2010, the Affordable Care Act increased the AGI threshold for deducting medical expenses from 7.5% to 10%, but the Tax Cuts and Jobs Act, enacted in December 2017, returned the threshold back to 7.5% for 2017 and 2018. In late 2019, the Further Consolidated Appropriations Act extended the lower threshold through December 31, 2020. The CAA permanently sets the threshold to 7.5% beginning January 1, 2021. Individuals that itemize deductions and have significant out-of-pocket medical bills will likely benefit from the permanently reduced AGI threshold.
Expansion of the Educator Expense Deduction
Currently, educators are permitted to take a $250 above-the-line deduction for any unreimbursed expenses for classroom materials, e.g., books, supplies, etc. Under the CAA, the Treasury will expand the definition of classroom materials to include protective equipment, e.g., disinfectants and other COVID-19 related preventative supplies, purchased after March 12, 2020. The Treasury will issue guidance on eligible expenses that qualify for this deduction by no later than February 28, 2021.
Deduction for Qualified Tuition and Related Expenses Repealed in Favor of Relaxed AGI Limitation for Lifetime Learning Credit
Starting in 2021, the CAA removes the tuition and fees deduction which allowed eligible taxpayers to deduct up to $4,000 in qualified higher education expenses as an above-the-line deduction from income and increases the AGI phase out limitation for the Lifetime Learning Credit (LLC). The LLC phase-out limitations are increased from $58,000 to $80,000 for single filers and from $116,000 to $160,000 for joint filers. The LLC provides an annual income tax credit against income taxes for up to $2,000 of paid expenses related to undergraduate, graduate, and professional degree courses, including courses to acquire or improve job skills. There is no limit on the number of years the credit can be claimed. If the credit brings the amount of tax owed to zero, any excess credit is not refundable. The increased AGI limits now run parallel to the AGI restrictions imposed by the American Opportunity Tax Credit (AOTC), which remains unchanged and is only available for the first four years of undergraduate education. The AOTC provides a maximum annual income tax credit of $2,500 per student, of which up to $1,000 is a refundable credit subject to certain AGI limits ($80,000 for single filers and $160,000 for joint filers). The amount of the credit is 100% of the first $2,000 of qualified education expenses paid and 25% of the next $2,000 of qualified education expenses paid for an eligible student.
Taxpayers receive a reduced LLC or AOTC credit if their AGI is over $80,000, but less than $90,000 (over $160,000 but less than $180,000 for joint filers) with a complete phase-out if their AGI exceeds $90,000 for single filers or $180,000 for joint filers. A taxpayer may only claim one education credit for each eligible student (and their corresponding expenses) per year. If a student qualifies under both the LLC and AOTC, taxpayers can choose the one education credit that will result in the higher tax benefit.
For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
Berdon LLP New York Accountants
This alert is for general information purposes only and is not intended, and should not be construed, as legal or tax advice.