If you think you have had busy workdays, imagine the day the US Congress had on December 21, 2020, when the new stimulus and omnibus spending bill, the Consolidated Appropriations Act, 2021, was released. That same day, it was voted on and passed by both Houses of Congress. At more than 5,500 pages, it is the longest bill ever passed by Congress. Given that average person reads 2 pages a minute, it is unlikely any members of Congress read the entire bill before voting on it. But the bill was passed and signed into law 6 days later, and its provisions will impact you.
In this post I focus on the new law’s key impacts on individual taxpayers: direct stimulus payments, deductions for charitable contributions, medical expenses and dependent care, college financing, along with miscellaneous areas related to home ownership, rentals, disaster relief, and energy-efficient vehicles. I am not covering business-related items like the Paycheck Protection Program (PPP) loan or employer payroll tax deferrals. Your tax professional can help with these and other provisions specific to your circumstances.
Direct Payments
The most immediate impact on qualifying taxpayers is the stimulus payment to individuals and families. In the 2020 CARES Act, adults got $1,200 for themselves and $500 for each child as a “base amount.” The Consolidated Appropriations Act, 2021 lowered the amount to $600 for each person. For instance, a single filer without children starts with a base of $600. A family of four has a base amount of $600 x 4 = $2,400. There is a 5% phase-out once adjusted gross income (AGI) exceeds $150,000 (married filing jointly or qualifying widow/widower), $112,500 (head of household) or $75,000 all other filers. The filer’s 2019 tax year determines the payment amount. As with the 2020 payments, these are classified as refundable tax credits and will be trued up on your 2020 returns. If you were overpaid based on 2020 income, you get to keep the recovery payment. There have been proposals to increase the stimulus payments, but these are the amounts passed into law and being distributed now.
Regarding unemployment, the act provides for eleven (11) more weeks of federally funded unemployment benefits, and Pandemic Unemployment Insurance has been extended to March 14 (benefits can be paid through April 5).
For tax year 2020, the refundable portion of the Earned Income Tax Credit and the Enhanced Child Tax Credit is calculated using 2019 earnings . This is significant if you mostly received unemployment earnings in 2020 (possibly due to COVID layoffs) as unemployment compensation is normally not considered earned income, which is needed to qualify for the credit.
Charitable Contributions
The CARES act added a deduction of up to $300 for cash charitable contributions by nonitemizers. The new act extends the $300 charitable deduction for nonitemizers for 2021 and increases the maximum amount married couples filing jointly may deduct for tax year 2021 to $600.
If you itemize to 100% of your AGI through 2021, the act extends the limit of deductible Qualified Charitable Contributions. If you are in this situation, however, be careful. It will probably make more sense to spread your deduction over multiple years.
Medical Expenses & Dependent Care
Most filers use the standard deduction, but if you itemize deductions, Congress finally decided on a permanent (as “permanent” as tax law can be) health expense hurdle rate. Congress has settled on the 7.5% AGI hurdle going forward (it has been oscillating between 10% and 7.5% the past few years). If you have high medical bills, above 7.5% of your AGI, itemizing may provide some tax savings.
The bill also provides relief for employees by allowing them to roll over unused amounts in health and dependent care flexible spending accounts from 2020 to 2021 and from 2021 to 2022. However, note that this grace period extension is optional for the employer. The act also includes rules that allow post-termination reimbursements (also optional). Be sure to verify with your human resource department if you think you will be impacted.
There is an entire section on reducing surprise medical bills, but the impact will be muted by the numerous exceptions and loopholes. For example, ambulances are excluded. According to CNBC the average fee for an ambulance ride is $450 after insurance is paid out. And if you need a helicopter air-ambulance, the average patient pays $21,700 after insurance! This section does not take effect until 2022, so time will tell if it will have any significant impact on medical bills but even in the worst-case scenario the provider is required to give the patient notice of their network status and an estimate of charges, as well as obtain the patient’s written consent, prior to the delivery of care.
College Financing
College financing was impacted in several ways. First Congress inserted a section on a “transition” from the Student Tuition and Related Expense above-the-line deduction for the 2021 tax year. “Transition” here really means gone. To replace this deduction, the AGI limits for Lifetime Learning Credits have been increased to match the current limits for the American Opportunity Credits. Under the new AGI thresholds, the credit begins to phase out when income exceeds $80K for single filers or $160K for joint filers. A low earner with high student tuitions and fees may be hurt by this change as the previous deduction cap (these are both phased out with AGI) was $4,000 (dollar for dollar) whereas the lifetime learning credit is capped at $2,000 (20% of fees).
The Free Application for Federal Student Aid (FAFSA®) form used to apply for financial aid for college or graduate will be getting a massive makeover. The changes are being marketed as a simplification, as the plan is skinny the form down, from 108 questions to roughly 36. The goal is to make it easy for lower income families to complete the application by requiring them to answer the fewest questions. The “Expected Family Contribution” will be rebranded as the “Student Aid Index (SAI).” The act also updates the formulas for Available Assets and Available Income used in the SAI. These changes are too detailed to go into here. Some examples include: the new SAI formula removes the state and other tax income exclusion, and they have offset that with a higher Income Protection Allowance (IPA) amount (however that is also offset by an allowance reduction for number in college).
Pell Grant eligibility was also updated to ensure that all families who make less than 175% of the federal poverty level receive the maximum Pell Grant of $6,000. The poverty level is determined by family structure and number of dependents.
Lastly, if a student was granted an emergency financial aid grant by an institution of higher education, the grant is not included in the student’s gross income.
Home Ownership, Rentals, Disaster Relief, and Energy-Efficient Vehicles
Other aspects of the act may be relevant to your situation:
- Treatment of mortgage insurance premiums as qualified residence interest (now through 2021)
- Non-Business Energy Property, Energy Efficient Homes and assorted Electric Vehicle credits (through 2021)
- New requirements for defining as a disaster relief zone
- 2-wheeled plug-in electric vehicle credit (now through December 31, 2021)
- Energy credit extension (through 2024)
- Energy efficient homes credit (now through December 31, 2021)
- Residential energy-efficient property credit extension (now through December 31, 2021)
- Nationwide eviction moratorium extension (through January 31, 2021). This could be positive for tenants but very negative for landlords.
While initial media coverage of this bill highlighted the lower direct stimulus payments, the bill also lacked aid for failing state budgets, lacks a COVID-19 hold harmless for employers (which could impact smaller businesses’ ability to resume), does not extend deferment for student loans, and does not extend the Coronavirus-Related Distribution and COVID-related plan loan enhancements from retirement plants. That means that if you didn’t take your distribution by midnight on December 31, 2020, you are out of luck.
Speaking of luck, Congress did reclassify certain racehorses as 3-year property. If this happens to impact you, please get me some tickets to the Derby!
If you think you could use some assistance, please feel free to reach out to us.