On December 27, 2020, the President signed into law the Consolidated Appropriations Act of 2021. The bill, the longest ever passed by Congress, combines funding for the Federal government through fiscal year 2021 with stimulus relief for the Coronavirus pandemic in the United States.
The Act is extensive and includes the continuation of some measures enacted in the first Coronavirus stimulus package of March 2020 and new provisions. Below is a summary of the changes and notable items addressed in the act which impact individuals and families.
1. Recovery Rebates – The act includes a fresh round of direct payments to taxpayers which will be considered a 2020 refundable tax credit. The amount of the credit will be calculated based upon your adjusted gross income (AGI) on your 2019 tax return. The credit is $1,200 for couples who file married filing jointly (MFJ) and $600 for single filers or those filing other than MFJ, plus $600 for each child under the age of 17 that qualifies for the child tax credit.
The credit is subject to a phaseout if your income exceeds the following thresholds:
The credit phases out at $5 per $100 of income over your applicable threshold. So, for every $100 of income which exceeds the associated threshold, the credit is phased out at $5 per $100 of income in excess of the threshold.
Similar to the Recovery Rebate section of the CARES Act, there will be a true-up on the calculated credit amount when you file your 2020 tax return. If your actual 2020 AGI is higher than your AGI from 2019, there will be no claw back on the overpayment of the credit to you. If your actual AGI in 2020 is lower than in 2019, then you will receive the Recovery Rebate credit amount for your 2020 return when filed.
2. Coronavirus Related Distributions from IRA’s and Qualified Employer Retirement Plans – The act does not extend into 2021 the expanded/relaxed distribution rules surrounding IRA’s and retirement plans which were enacted by the CARES Act in 2020.
If you did take a distribution up to the maximum of $100,000 from IRA’s or Qualified Retirement Plans as stated in the CARES Act, keep in mind the following rules:
3. Enhancement to Loan Provisions within Employer Retirement Plans – The act does not extend the expanded ability of account owners to take a loan from a 401(k) plan or other employer retirement plan, if the plan allows loans in the first place.
4. Required Minimum IRA Distributions for 2021 – Unlike the CARES Act in 2020, this new act does not waive the IRS mandated required minimum distribution for 2021 from your pre-tax retirement accounts. Required minimum distributions which apply to IRA’s, inherited IRA’s, and also employer retirement plans will be enforced as normal in 2021.
5. Extension/Reinstatement of Federal Unemployment Compensation Benefits – The act extends the federally subsidized unemployment benefits (administered by states) for individuals and self-employed persons. Unemployment insurance is a joint state-federal funded program and federally subsidized benefits were set to expire at the end of December. Because of the passage of the act, federally subsidized benefits will continue for an additional 11 weeks.
Additionally, pandemic unemployment benefits for self-employed individuals who would not otherwise be eligible for state-federal unemployment benefits will continue to be eligible to receive such benefits through early April 2021.
In March 2020, the Federal Government began providing an additional unemployment benefit of $600 per week, above any state-determined unemployment benefit, for 16 weeks which expired earlier in 2020. Under the new act, the Federal Government will once again provide an additional unemployment benefit of $300 per week for 11 weeks.
And lastly, the act extends the waiver for individuals eligible for unemployment benefits to begin receiving benefits immediately rather than waiting one week for their first check under normal unemployment insurance rules.
6. Federal Student Loan Payments – The act does not extend the automatic forbearance and no interest accrual for Federal student loans through 1/31/21.
7. Expansion of Health Savings Account and Related Rules – The act does not extend the flexibility of rules given under the CARES Act for health savings accounts, flexible spending accounts, and medical savings account to help taxpayers meet additional medical expenses.
8. Charitable Contributions – The act extends and modifies the CARES Act’s $300 above-the-line deduction for cash contributions to qualified charities made by taxpayers who do not itemize deductions. This charitable deduction will also be available in 2021 but at an increased cap of $600 for joint filers only rather than capped at $300 for all taxpayers in 2020. The contribution must be in cash and go directly to a 501(c)(3) charity.
The new act also extends the CARES Act provision from 2020 through 2021 giving taxpayers the option to deduct up to 100% of AGI as a qualified contribution when making a charitable contribution of all cash. The contribution cannot be to a donor-advised fund or a 509(a)(3) supporting organization.
9. Permanent Reduction in the AGI Hurdle the Medical Expense Deductions – The act cements the 7.5% of AGI hurdle rate for medical expense deductions for all taxpayers that will itemize deductions in 2021 and forward. This change will remain in effect until Congress passes a law to, once again, change this tax provision.
10. Carryforward Relief for Flexible Spending Accounts (FSA) – The act also provides relief for individual’s with Dependent Care FSAs and Health FSAs. Employers may allow their employees to roll over any unused funds from 2020 into 2021, and once again, any unused funds from 2021 to 2022. It is important to note that the language in the legislation leaves the decision to the employers to allow unused funds to be rolled over to the next two years.