We hope that you are having a great start to the new year and keeping yourself, your loved ones, and your community safe from COVID-19 (commonly referred to as the Coronavirus). As we approach the upcoming tax season, you may be wondering about some of the recent changes in the tax law designed to give relief to individuals affected by COVID-19. In addition to the summary of the C.A.R.E.S. Act that we previously provided on our website, we now want to update you on the tax-related provisions in the Consolidated Appropriations Act, 2021 (CAA, 2021), which includes both the COVID-related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).
Direct-to-taxpayer recovery rebate. In addition to the direct payments/rebates that were provided for in the 2020 C.A.R.E.S. Act, the COVIDTRA provides for a refundable recovery rebate credit for 2020 that will be paid in advance to eligible individuals, often automatically, early in 2021. For these payments, the government will send up to $600 payments to eligible taxpayers and $1,200 for married couples filing joint returns. An additional $600 payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).
Rebates are gradually phased out at a rate of 5% of the individual’s adjusted gross income (“AGI”) over $75,000 (single or married filing separately), $112,500 (head of household), and $150,000 (joint). There is no income floor or “phase-in;” all recipients who are under the phase out threshold will receive the same amounts.
Treasury must make the advance payments based on the information on 2019 tax returns. Eligible taxpayers who claimed their Economic Impact Payments (EIPs) by providing information through the non-filer portal on IRS’s website will also receive these additional payments.
Nonresident aliens, persons who qualify as another person’s dependent, and estates or trusts do not qualify for the rebate. Likewise, taxpayers without a Social Security Number (SSN) are ineligible, but if only one spouse on a joint return has an SSN, that spouse is still eligible for a $600 payment. Children must also have an SSN to qualify for the $600-per-child payments.
Taxpayers who receive an advance payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay and of the payment. If the amount of the credit determined on the taxpayer’s 2020 return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit. The advance payments of the rebates are generally not subject to offset for past due federal or state debts, and they are protected from bank garnishment or levy by private creditors and debt collectors.
Pro-taxpayer changes to C.A.R.E.S. Act Economic Impact Payment rules. The COVIDTRA makes the following changes to the C.A.R.E.S. Act EIPs. It provides that the $150,000 limit on adjusted gross income before the credit amount starts to phase out also applies to surviving spouses. So, this change may allow taxpayers who qualify to use the surviving spouse filing status to claim a larger EIP. Additionally, it makes the requirements to provide the IRS with the taxpayer’s identification number identical to the same requirement under the new rebate, described above under “Direct-to-taxpayer recovery rebate.”
$250 educator expense deduction applies to PPE and other COVID-related supplies. The COVIDTRA provides that eligible educators (i.e., kindergarten-through-grade-12 teachers, instructors, etc.) may claim the existing $250 above-the-line educator expense deduction for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 that were bought after March 12, 2020.
7.5%-of-AGI “floor” on medical expense deductions is made permanent. The COVIDTRA makes permanent the 7.5%-of-AGI threshold on medical expense deductions, which was to have increased to 10% of AGI after 2020. The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later tax years.
Mortgage insurance premium deduction is extended by one year. The deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020, has been extended through 2021. The deduction is subject to a phase-out based on the taxpayer’s AGI.
Above-the-line charitable contribution deduction extended through 2021; increased penalty for abuse. For 2020, individuals who do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions to “qualified charitable organizations.” Married couples filing a joint return are allowed up to a $600 deduction (it remains at $300 for all other taxpayers). This above-the-line deduction has been extended through 2021. However, taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty, which is an increase from the previous 20% penalty.
Extension through 2021 of allowance of charitable contributions up to 100% of an individual’s AGI. In response to the COVID-19 pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s AGI. The usual limit is 60% of an individual’s AGI. This rule extends through 2021.
Exclusion for benefits provided to volunteer firefighters and emergency medical responders made permanent. Emergency workers who are members of a “qualified volunteer emergency response organization” can exclude from gross income certain state or local government payments received and state or local tax relief provided on account of their volunteer services. This exclusion was due to expire at the end of 2020 but has now been made permanent.
Exclusion for discharge of qualified mortgage debt is extended, but limits on excludable amount are lowered. Typically, if a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. But under this exclusion, a taxpayer can exclude from gross income up to $2 million of discharge-of-debt income if “qualified principal resident debt” is discharged. This amount is $1 million for married individuals filing separately. This exclusion is extended through the end of 2025 but lowers the amount of debt that can be discharged tax-free to $750,000 and $375,000 for married individuals filing separately.
Extension of exclusion for certain employer payments of student loans. Qualifying educational assistance under an employer’s qualified educational assistance program is excluded from the employee’s gross income up to an annual maximum of $5,250. The C.A.R.E.S. Act added to the types of payments that are eligible for this exclusion, “eligible student loan repayments” made after March 27, 2020, and before January 1, 2021. These payments, which are subject to the overall $5,250 per employee limit for all educational payments, are payments of principal or interest on a qualified student loan by the employer, whether paid to the employee or a lender. This exclusion has been extended through the end of 2025.
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% of so much of the taxpayer’s taxable “earned income” for the tax year as exceeds $2,500. Likewise, the EIC equals a percentage of the taxpayer’s “earned income.” For both of these credits, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. However, for determining the refundable CTC and EIC for 2020, the COVIDTRA allows taxpayers to elect to substitute the earned income for the preceding tax year, 2019, if that amount is greater than the taxpayer’s earned income for 2020.
Health coverage tax credit (HCTC) for health insurance costs of certain eligible individuals is extended by one year. A refundable credit, known as the HCTC, is allowed for 72.5% of the cost of health insurance premiums paid by certain individuals (i.e., individuals eligible for Trade Adjustment Assistance due to a qualifying job loss, and individuals between 55 and 64 years old whose defined-benefit pension plans were taken over by the Pensions Benefit Guaranty Corporation). The HCTC has been extended through 2021.
New Markets tax credit extended. The New Markets credit provides a substantial tax credit for to either individuals or corporate taxpayers that invest in low-income communities. This credit has been extended through 2021. Carryovers of the credit were also extended through 2021.
Nonbusiness energy property credit extended by one year. A credit is available for purchases of “nonbusiness energy property” (i.e., qualifying energy improvements to a taxpayer’s main home). This credit has been extended through 2021.
Qualified fuel cell motor vehicle credit extended by one year. The credit for purchases of new qualified fuel cell motor vehicles has been extended through the end of 2021.
2-wheeled plug-in electric vehicle credit extended by one year. The 10% credit for highway-capable 2-wheeled plug-in electric vehicles (capped at $2,500) was extended until 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 phase-down period of the credit was extended by two-years through the end of 2023. The REEP credit will not apply after 2023. Qualified biomass fuel property expenditures have also been added to the list of expenditures qualifying for the credit, effective beginning in 2021.
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 plans to an employee who is under the age of 59 1/2. COVIDTRA provides that the 10% early withdrawal penalty does not 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.
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 allowable amount of a loan from a retirement plan has been increased to $100,000 if the loan is made because of a qualified disaster and meets various other requirements.
We will be pleased to hear from you at any time with questions about the above information or any other matters, related to COVID-19 or not.
We wish all of you the very best in these difficult times.