by Jeff Deiss, CFP
CFP, AEP, Wealth Advisor
Last night, under pressure from both parties, President Trump signed the aid bill Congress passed after days of uncertainty and confusion in Washington. The bill carried overwhelming bipartisan support and is arguably a lifeline to many Americans at a time when it is most needed.
The “Coronavirus Stimulus 2.0” bill passed as an attachment to a much larger “Consolidated Appropriations Act of 2021”, which included a host of provisions unrelated to individual taxpayers and that President Trump considered wasteful.
The bill avoids a potential government shutdown (it funds the government through Sept. 2021), provides direct payments to many Americans, extends a federal eviction prohibition, and restarts two pandemic relief programs (one provided unemployment benefits for contract/gig workers and the other provided up to 13 weeks of additional payments to individuals who exhausted other programs) that lapsed over the weekend and were recently providing roughly 14 million people with benefits.
In short, the bill extends and amends various expiring tax provisions and addresses several financial planning issues. Fortunately, none of the provisions appear to create any last minute, end-of-year planning.
Here are the highlights for individuals:
- Additional Recovery Rebate (i.e., Stimulus checks). Individuals will receive a one-time payment of $600 if they file taxes individually and where their 2019 Adjusted Gross Income was $75,000 or less. A payment phase-out ($5 for every $100 of AGI) begins for those earning $75,000 annually and ending with no payment to those reporting $99,000 of AGI or more. Joint filers will receive $1,200 if their AGI was $150,000 or less in 2019, with the payment then phasing out and not paid to joint filers with AGI of $198,000 or more. In addition, a $600 payment for each dependent child under the age of 17 will be paid to taxpayers who satisfy the above income requirements.
If a taxpayer’s 2019 was low enough to receive a payment, but whose 2020 income was high enough that they should have been phased out, then there will be no “clawback” and they will not have to repay anything. In contrast, if a taxpayer’s 2019 income was high enough to phase them out, but their actual 2020 AGI is lower and would have produced a higher rebate, then the difference between the two amounts will be added as a credit when they file their 2020 tax returns.
The House is still set to vote on increasing the Additional Recovery Rebate from $600 to $2,000 today.
- Unemployment Benefits – Prior to this bill passing, Federally subsidized unemployment benefits were set to expire this week. Instead, they will be extended by an additional 11 weeks, through the middle of March 2021. Pandemic Unemployment Assistance (for self-employed individuals, i.e. gig/contract workers) is also extended for 11 weeks.
Unemployment compensation is also increased by $300 per week for 11 weeks on top of regular state-determined unemployment compensation. The contentious $600 per week benefit that was provided by the CARES Act was available for four months and ended earlier this year. The $300 benefit revives a reduced version of this provision and will still nearly double the nationwide average state unemployment benefit of $400.
Individuals are generally ineligible to receive unemployment benefits for the first week that they are unemployed, when it may be particularly valuable. The CARES Act provided funds to states to waive this requirement and the Appropriations Act does the same for an additional 11 weeks.
- Charitable Contributions – The one-time $300 above-the-line deduction for cash contributions created by the CARES Act for 2020 has been extended to 2021 and increased to $600 for joint filers. In addition, the ability to make cash contributions up to 100% of AGI created by the CARES Act has been extended through the end of 2021. This includes public and private charities, but not donor-advised funds.
- Medical Expenses – The Act permanently restores the 7.5% of AGI hurdle for the medical expense deduction for all taxpayers (it had been increased for 10% previously).
A ban on surprise medical bills, which sometimes occur when a patient unexpectedly/unknowingly gets care outside of a network and particularly when visiting an emergency room. Going forward, insurance companies will have to work these out with providers, with the exception of ambulance rides, which were curiously not included.
- Breaks for renters and homeowners: $25 billion in rental relief and an extension of the eviction moratorium through Jan. 31, 2021. The Act also extends the period for which forgiven debt attributable to a primary residence (ie. a short sale is resolved with the sale/foreclosure for less than the mortgage balance) can be excluded from income through 2025. Beginning in 2021, the amount that can be discharged is lowered to $750,000 for joint filers and $375,000 for single filers.
- Meal Expense Deduction – In order to encourage business spending at restaurants, the Act allows for a full 100% deduction in 2021 and 2022 for the expenses incurred “for food or beverages provided by a restaurant”, which appears to include both in-restaurant dining and takeout meals. This provision is not retroactive for 2020.
- Paycheck Protection Program (PPP) – $284 billion for businesses and revival of the Paycheck Protection Program, which ended some months ago.
Businesses that received PPP loans and had them forgiven faced tax confusion. The new bill will make it clear such businesses will be allowed to deduct the costs covered by those loans.
PPP2 loans will be available to first-time qualified borrowers and to businesses that previously received a PPP loan for up to $2 million, provided they have 1) 300 or fewer employees, 2) have used or will use the full amount of their first PPP loan and 3) can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.
- Health and Dependent Care Flexible Spending Accounts – In an effort to avoid substantial employee forfeitures, the bill permits employers to let employees roll forward (carryover) any unused balances from 2020 to 2021. At the end of 2021, balances can similarly be carried over to 2022. In prior years, any remaining balances were subject to forfeiture (with the exception where certain employers allowed a small amount to be used within in the first few months of the following year).
The Act also allows FSA participants to modify their 2021 contributions (contributions are typically irrevocable) for 2021 only.
- Employer Payments of Student Loans– The CARES Act authorized the ability for an employer to provide up to $5,250 of annual tax-free education assistance used to pay principal or interest on an employee’s qualified student loan for 2020 only. The Appropriations Act extends this through 2025. The employer may pay the lender directly or the employee, who can then pay the lender. The beauty of this provision is that neither the employee or the employer is liable for employment taxes on the amount and the payment is received tax-free to the employee.
- Lifetime Learning Credit with Higher Income Phaseout to replace Tuition and Related Expenses Deduction – In sum, the elimination of the Tuition and Related Expenses deduction reduces the number of education-related tax benefits people have to contend with and provides a better outcome. The Lifetime Learning Credit is superior in size to the Tuition and Relate Expenses deduction and, beginning in 2021, the phaseout range is increased to $80,000-$90,000 for single filers and $160,000 – $180,000 for joint filers to be aligned with the American Opportunity Tax Credit phaseout range.
Other items of note:
- Educator Expenses include Covid-10 supplies.
- Energy Efficient Homes Credit and Qualified Fuel Cell Motor Vehicle Credits are Extended through 2021.
- 2019 income can be used to determine 2020 Earned Income Tax credit and Additional Child Tax Credit.
- Qualified Disaster Distributions and Enhanced Plan Loans – work similar to the 401k distribution and loan provisions provided by the CARES Act for Covid purposes, but with the caveat that these are subject to the declaration of a Federal disaster area for something other than Covid-19.
- Deadline to repay deferred Payroll Taxes is extended to December 31, 2021.
What’s not include in the bill?
- No aid for state and local governments, which Democrats had pushed for.
- No liability protections for businesses, which Republicans had wanted.
- No checks for adult dependents.
- No hazard pay for essential workers.
- No waiver of future Required Minimum Distributions (RMDs) or relief for unwanted 2020 RMDs.
- No further student loan relief beyond Jan 31 2021 – the suspension of collections on defaulted loans, the suspension of loan payments and the 0% interest established by the CARES Act and extended by President Trump (through Dec. 2020) and again by Secretary Devos through Jan 31, 2021 was not extended by the Appropriations Act of 2021.
Given that the House is expected to vote on potentially increasing the Stimulus Check amount to $2,000 today and the fact that many of the important provisions above are only extended temporarily, we all should expect more changes to these provisions, and particularly with a new administration taking office, in 2021.
We will provide updates as provisions are changed in the future. In the meantime, and as always, please reach out to your ACM Wealth Advisor with any questions on these issues or if there have been any changes to your financial situation.
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