This week, President Trump signed the second major coronavirus stimulus bill. The stimulus bill is part of the 5,000+ page Consolidated Appropriations Act of 2021 which funds the federal government through next September. In addition to coronavirus stimulus, it also makes some important changes to the tax law. As you would imagine, there is a lot in the bill, way too much to discuss in one blog post. This article will highlight what we believe is the most relevant information for our readers as individuals.
New Stimulus Checks
The Additional Recovery Rebate provided for in the new bill is similar to the CARES Act checks sent out this spring, but with a few changes. The base amount is $600 per eligible person with an income limit. An eligible person is a taxpayer or child for whom a Child Tax Credit may be claimed (younger than age 17). The phaseout for eligibility based on income starts at $75,000 for single taxpayers, $150,000 for married couples, and $112,500 for heads of household. Above that amount, $5 of stimulus is phased out for every $100 of adjusted gross income (AGI). As with the initial benefit, checks are sent out based on 2019 income even though it is a 2020 refundable credit. Those who are eligible based on 2019 income, but not based on 2020 income, will not have to repay the money.
Note: Yesterday the House voted to increase these stimulus checks from $600 to $2,000 per eligible person. At this point, it's not clear whether the Senate will vote on this House-passed bill.
You may have heard in the news that unemployment benefits would end for many if the bill wasn’t signed before this week. The bill extends three key CARES Act provisions for unemployment for another 11 weeks. Regular unemployment has been extended 11 weeks, through the middle of March, which makes eligibility for benefits last longer than under normal circumstances. Pandemic Unemployment Assistance, which provides benefits for those usually ineligible for unemployment because they are self-employed or contract workers, has been extended for 11 weeks, through the end of March. Next, the bill allows for an extra $300 in weekly unemployment benefits for the next 11 weeks on top of the regular benefits. Finally, under normal circumstances, you must wait a week before receiving unemployment benefits. The CARES Act eliminated the wait and this bill extends that elimination another 11 weeks.
Repayment of Deferred Social Security Taxes
On August 8, 2020, President Trump signed an order allowing people to defer paying their September 1, 2020, to December 31, 2020, Social Security taxes until January 2, 2021, to April 30, 2021. Under the new bill, people who deferred Social Security taxes will have the entirety of 2021 to repay them instead of only 4 months. With a longer repayment period, taxes can be repaid in smaller increments for less of an effect on cash flow.
Income Floor for Medical Deductions
To deduct medical expenses on your tax return, they must exceed a certain percentage of your income. Recently, that floor has gone back and forth between 7.5% and 10% of AGI. The bill that just passed sets it permanently at 7.5% of AGI, which means more expenses are deductible.
The Tuition and Related Expenses above-the-line deduction will end with the 2020 tax year. To make up for eliminating the deduction, the Lifetime Learning Credit is being expanded. Starting in 2021, the phaseout range for the Lifetime Learning Credit will be the same as the American Opportunity Tax Credit, which is $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers.
Charitable Contribution Benefits
The CARES Act included some new benefits for charitable giving and the new bill modifies and extends them. The CARES Act created a $300 above-the-line deduction for charitable giving for those who claim the standard deduction for the 2020 tax year. The limit is $300 per tax return, regardless of whether it is filed by a single person or a married couple. This benefit has been extended into 2021, but for the coming year married couples can deduct up to $600 on their return (and singles are still limited to $300).
Usually, itemized charitable deductions are limited to a certain percentage of income. The CARES Act removed the limit for 2020 and this new bill extends that to 2021 so that up to 100% of income can be deducted. However, the donations must be given to a charity, funding a donor advised fund (DAF) does not qualify. You can still deduct cash contributions to a DAF up to 60% of AGI and contributions of appreciated assets up to 30% of AGI.
Flexible Spending Accounts
Dependent Care Flexible Spending Accounts (FSAs) and Healthcare FSAs are great benefits for those with predictable dependent care or health expenses because they allow the expenses to be paid pre-tax. However, they are use-it-or-lose-it accounts that cannot be rolled over from year-to-year. After a year when many summer camps were shut down, parents ended up at home caring for children themselves, and non-urgent medical care was postponed, this became a problem.
This month’s bill seeks to rectify that by permitting employers to allow funds from 2020 to be rolled into 2021 and funds from 2021 to be rolled into 2022. It also permits employers to adopt up to a 12-month grace period for using the funds for 2020 and 2021. Yet, these changes are optional, not mandatory. If you have unused funds in an FSA, you should reach out to your HR department to see if they are going to adopt these changes and encourage them to do so.
Required Minimum Distributions
While the CARES Act waived required minimum distributions (RMDs) from retirement accounts for 2020, that has not been extended under the new legislation. Thus, RMDs will resume as normal in 2021 and should be planned for accordingly.
Student Loan Relief
Since March, federal student loan payments were suspended, interest rates were set to 0%, and collection efforts on defaulted loans were suspended. This was not addressed in the new bill, so all such relief ends on January 31, 2021 (extended from December 31, 2020).
As you can see, the recently passed legislation contains a number of provisions that may affect you. If you want help adjusting your financial plan in light of these changes, or if you need help creating a financial plan, we are here to help. Schedule a free introductory call today.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.