On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (the Act).  The Act contains both the COVID-Related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The Act also extends  various expiring provisions, and expands previous COVID-19 tax relief.  Read more about provisions affecting individual taxpayers below. Click here to learn about provisions affecting businesses.

Pandemic Relief Payments

The Act provides for a refundable recovery rebate credit for 2020 that will be paid in advance to eligible individuals.  The $600 direct payments($1,200 for married filing jointly), along with an additional $600 for each qualifying child will be paid in early 2021.  Payments are phased out at a rate of $5 per $100 of additional income starting at $75,000 of modified adjusted gross income for single taxpayers $112,500 for heads of household, and $150,000 for marrieds filing jointly and surviving spouses. Since this is an advance payment of a 2020 tax credit, taxpayers who receive a payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the credit determined on the taxpayer’s 2020 return exceeds the amount of the advance payment, taxpayers may claim the difference as a refundable tax credit.

Deductions

• 7.5%-of-AGI “floor” on medical expense deductions is made permanent – The Act permanently decreases the limitation for deducting medical expenses to 7.5% of adjusted gross income, which was to have increased to 10% of adjusted gross income after 2020.  The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later years.

• Mortgage insurance premium deduction is extended by one year – Set the expire at the end of 2020, The Act extends through 2021 the deduction for qualifying mortgage insurance premiums.

• Above-the-line charitable contribution deduction is extended through 2021; increased penalty for abuse – The CARES Act, passed earlier in 2020, provided for a new above-the-line deduction for cash contributions to “qualified charitable organizations.” The Act extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains at $300 for other taxpayers).  In addition, the Act increased the anti-abuse rule whereby taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%).

• Extension through 2021 of allowance of charitable contributions up to 100% of an individual’s adjusted gross income – As part of the CARES Act, the limit on cash charitable contributions by an individual in 2020 was increased to 100% (from 60%) of the individual’s adjusted gross income. The Act extends this rule through 2021.

• Mortgage insurance premium deduction is extended by one year – Set the expire at the end of 2020, The Act extends through 2021 the deduction for qualifying mortgage insurance premiums.

Exclusions from Income

• Exclusion for discharge of qualified mortgage debt is extended, but limits on amount of excludable discharge are lowered – Forgiveness of debt is generally included in taxable income, but under an exclusion that was due to expire at the end of 2020, a taxpayer can exclude from gross income up to $2 million ($1 million for married individuals filing separately) of forgiveness of debt that was used to acquire a personal residence.  In addition, the Act extends this exclusion through the end of 2025, but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately).

• Exclusion for benefits provided to volunteer firefighters and emergency medical responders made permanent – The Act made permanent the exclusion from gross income certain state or local government payments received and state or local tax relief provided, on account of their volunteer services, for emergency workers who are members of a “qualified volunteer emergency response organization”.

• Extension of exclusion for certain employer payments of student loans – Qualifying educational assistance provided under an employer’s qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee’s income. The CARES Act added to the types of payments that are eligible for this exclusion, “eligible student loan repayments” made after Mar. 27, 2020, and before Jan. 1, 2021. The Act extends the exclusion for eligible student loan repayments, subject to the overall $5,250 per employee limit, through the end of 2025.

Tax Credits

• Individuals may elect to base 2020 refundable child tax credit (CTC) and earned income credit (EIC) on 2019 earned income – If an individual’s CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer’s taxable “earned income” for the tax year as exceeds $2,500. And the EIC equals a percentage of the taxpayer’s “earned income.” For both credits, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. But for determining the refundable CTC and the EIC for 2020, the Act allows individuals to use their earned income from 2019, if greater, to calculate their CTC & EIC for 2020.

• New Markets tax credit extended – This credit was due to expire at the end of 2020, but the Act extended it through the end of 2025. Carryovers of the credit were extended as well. The New Markets credit provides a substantial tax credit to either individual or corporate taxpayers that invest in low-income communities.

• Nonbusiness energy property credit extended by one year – The Act extends this credit, which was due to expire at the end of 2020, through 2021. A credit is available for purchases of “nonbusiness energy property” (i.e., qualifying energy improvements) to a taxpayer’s main home.

• 2-wheeled plug-in electric vehicle credit extended by one year – The 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500) was extended until the end of 2021 by the Act.

• Qualified fuel cell motor vehicle credit extended by one year – The credit for purchases of new qualified fuel cell motor vehicles, which was due to expire at the end of 2020, was extended by the Act through the end of 2021.

• Residential energy-efficient property (REEP) credit extended by two years, bio-mass fuel property expenditures included – Individual taxpayers are allowed a personal tax credit, known as the REEP credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. The REEP credit was due to expire at the end of 2021, with a phase-down of the credit operating during 2020 and 2021. The Act extends the phase-down period of the credit by two years—through the end of 2023; the REEP credit won’t apply after 2023.

DISASTER-RELATED CHANGES IN RETIREMENT PLAN RULES

• 10% early withdrawal penalty does not apply to qualified disaster distributions from retirement plans – A 10% early withdrawal penalty generally applies to, among other things, a distribution from employer retirement plan to an employee who is under the age of 59 1/2. The Act provides that the 10% early withdrawal penalty doesn’t apply to any “qualified disaster distribution” from an eligible retirement plan. The aggregate amount of distributions received by an individual that may be treated as qualified disaster distributions for any tax year may not exceed the excess (if any) of $100,000, over the aggregate amounts treated as qualified disaster distributions received by that individual for all prior tax years. It is important to note that this disaster relief applies to areas in which a qualified disaster was declared, but does not include disaster areas solely due to the COVID-19 pandemic.

• Increased limit for plan loans made because of a qualified disaster – Generally, a loan from a retirement plan to a retirement plan participant cannot exceed $50,000. Plan loans over this amount are considered taxable distributions to the participant. The Act increases the allowable amount of a loan from a retirement plan to $100,000 if the loan is made because of a qualified disaster and meets various other requirements. As with the penalty relief discussed above, this relief does not apply to areas declared a disaster only on account of the COVID-19 pandemic.

If you have any questions about these provisions, contact the professional at Gilliam Bell Moser LLP.

Brett Davidson, CPA/PFS