Individuals May Benefit from Additional Exclusions, Deductions and Credits
Tax & Economic Provisions of 2021 Stimulus | January 2021
Many of the provisions target additional relief related to the COVID pandemic, including the second stimulus payments. Although not specifically a tax provision, the filing of the 2020 tax return will be one mechanism certain taxpayers may utilize to receive any additional stimulus payment due. Some of the other more relevant forms of relief are discussed below.
Educators (kindergarten through the 12th grade) are allowed a deduction in arriving at adjusted gross income (AGI) for certain unreimbursed business expenses, not to exceed $250 a year. The Act provides that qualified expenses will now include personal protective equipment, disinfectant and other supplies used for the prevention of the spread of COVID-19, as long as these expenses are paid after March 12, 2020.
In the area of higher education, the Act repeals (by not extending) the deduction for AGI of qualified tuition and other qualified higher education expenses. This deduction was originally set to expire at the end of 2017 but had been extended for each of 2018, 2019 and 2020.
In addition, under pre-CARES and pre-ACT, qualified education assistance provided by an employer was exempt from an employee’s gross income, up to a certain threshold. CARES expanded the definition of qualified education assistance to include student loan payments made either to the lender or the employee after March 27, 2020 and before January 1, 2021. The Act extends the inclusion of these loan payments in the definition of qualified education assistance through December 31, 2025.
Although not specific to COVID but related to higher education, changes are in store for education credits, as well. Previously, the Lifetime Learning Credit (LLC) was subject to a lower phase-out range than the American Opportunity Tax Credit (AOTC). The Act provides that the LLC is now subject to the same, higher phase-out range as the AOTC.
Taxpayers within certain ranges of earned income are eligible for refundable child tax and earned income credits. Under the Act, taxpayers can elect to substitute earned income from 2019 for 2020, if the amount from 2019 is higher. This election may help taxpayers experiencing lower AGI in 2020 due to the pandemic.
The Act also enhances tax incentives for charitable giving.
- CARES allows taxpayers who do not itemize their deductions to take up to a $300 deduction for AGI attributable to cash donations made to qualified charitable organizations in 2020. The Act extends this opportunity for cash donations made through December 31, 2021. The $300 limit remains intact.
- In addition, CARES allowed taxpayers to substitute 100% for 60% when calculating the AGI limit for cash contributions made in 2020 to certain qualified charitable organizations. The Act extends this election for contributions made in 2021, as well.
Given the pandemic and disruption or loss of wages, medical costs currently represent a significant burden on many taxpayers. The Act contains four key provisions that provide some relief. The AGI threshold for deducting medical expenses from AGI was previously set to increase from 7.5% to 10% for tax years beginning after December 31, 2020. The Act makes the more beneficial 7.5% threshold permanent.
Also, the health coverage tax credit (HCTC) was due to expire December 31, 2020. The Act extends the HCTC, which provides a refundable credit to certain individuals for health insurance, through December 31, 2021. Individuals who participate in either health or dependent care flexible spending accounts (FSAs) through their employer now have a longer grace period to utilize unused benefits or contributions to these accounts. The Act allows employers to extend the grace period by 12 months for 2020 and 2021.
Accordingly, an employee now has until December 31, 2021 to utilize unused contributions to, and benefits from, an FSA in 2020. Likewise, an employee has until December 31, 2022 to utilize such unused contributions and benefits from an FSA in 2021. As noted, the employer must allow for these extended grace periods.
With regards to home ownership, prior tax law provided taxpayers an exclusion from gross income for forgiveness of qualified principal residence indebtedness up to $2 million ($1 million for married individuals filing separately). This exclusion would have expired for debt forgiveness arising after December 31, 2020. The Act extends this exclusion through December 31, 2025 but reduces the maximum amount to $750,000 ($375,000 for married individuals filing separately).
In addition, the Act extends for one year the itemized deduction for home mortgage insurance premiums. This deduction, which is subject to phase-out for higher-income taxpayers, would have expired at the end of 2020.
Finally, the Act extends the nonbusiness energy property credit by one year. This credit, which is available for purchases of qualifying energy property to be used in a taxpayer's principal residence, was also set to expire at the end of 2020.