On Sunday December 27, 2020 President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021). The act contains many individual, business, payroll, disaster, and energy-related provisions, as well as tax extenders. The Consolidated Appropriations Act, 2021 includes the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).
Individual Provisions of CAA, 2021
Additional 2020 Recovery Rebates
Provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
The term “eligible individual” does not include any nonresident alien, anyone who qualifies as another person’s dependent, and estates or trusts.
In general, taxpayers without an eligible Social Security number are not eligible for the payment. However, married taxpayers filing jointly where one spouse has a Social Security Number and one spouse does not are eligible for a payment of $600, in addition to $600 per child with a Social Security Number.
Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment. If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.
Certain Charitable Contributions Deductible by Non-Itemizers
For 2020, individuals who normally do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations. This $300 limit also applies to married filers. A 20% penalty applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.
New law. The TCDTR extends the above deduction rule through 2021, allowing individuals an above-the-line deduction of for up to $300 ($600 for married filers) for cash contributions to qualified charitable organizations.
An increased penalty of 50% applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.
Modification of Limitations on Charitable Contributions
Under pre-TCDTR and pre-CARES Act law, individuals could not take an itemized deduction of more than 60% of their contribution base on charitable contributions, of cash, made to 50% charities. The CARES Act provided that taxpayers could elect to substitute 100% for 60% with respect to contributions made in 2020.
New law. TCDTR extends the CARES Act rule through 2021.
Individuals May Base 2020 Refundable CTC & EIC on Preceding Year’s Earned Income –
Under the TCDTR, in determining the refundable CTC and the EIC for 2020, taxpayers may elect to substitute the earned income for the preceding tax year if that is greater than the taxpayer’s earned income for 2020.
For joint returns, the taxpayer’s earned income for the preceding tax year is the sum of each spouse’s earned income for that preceding tax year.
Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements
A cafeteria plan may permit the carryover of unused amounts remaining in a health FSA as of the end of a plan year to pay or reimburse a participant for medical care expenses incurred during the following plan year, subject to the carryover limit (currently $550). This is sometimes referred to as the carryover rule.
New law. The TCDTR expands the carryover period for 2020, and 2021. The provision also allows employers to extend the grace period for plan years ending in 2020 and 2021 to 12 months after the end of such plan year for unused benefits and contributions to health flexible spending and dependent care flexible spending arrangements.
In addition, an employer may allow an employee who ceases to participate in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which the employee’s participation ceased, including any extended grace period.
The TCDTR also provides a special carry forward rule for dependent care flexible spending arrangements where the dependent aged out during the pandemic.
Reduction in Medical Expense Deduction Floor
Under pre-Act law, for tax years beginning before January 1, 2021, individuals could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of AGI.
New law. The Act makes the 7.5% threshold permanent, applicable for tax years beginning after December 31, 2020. (Code Sec. 213(a), as amended by Act Sec. 101)
There were over 5,500 pages in the CAA. We have briefly outlined items that may benefit you.
Please feel free to Contact Us to discuss how this law may apply to your personal tax situation.