Contributed by: Kali Hassinger, CFP®, CDFA®
After months of deliberation, Congress passed a bill providing a second round of Coronavirus relief, and it was signed by the president on December 27th. This will provide direct payments to citizens, extend unemployment benefits, and reopen the Paycheck Protection Program to provide loans to small businesses. This Act, totaling $2.3 trillion dollars, earmarks $900 Billion for stimulus relief with the remaining $1.4 trillion for the 2021 federal fiscal year.
The direct stimulus rules are largely similar to the CARES Act from March 2020, with a few changes, most notably, of course, the amounts provided.
Direct Payments
Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government.
Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:
Married Filing Jointly: $150,000
Head of Household: $112,500
All other Filers (Single): $75,000
If income is above the AGI limits shown above, the credit received will reduced by $5 for each $100 of additional income.
How much can I expect to receive?
Married Filing Jointly: $1,200
All other Filers: $600
Additional credit of up to $600 for each child under the age of 17
The rebates are dispersed based on your 2019 tax return, but, like the CARES Act, is a 2020 tax credit. This means that if your income in 2019 phased you out of eligibility, but your 2020 income is lower and puts you below the phase out, you won’t receive the rebate payment until filing your 2020 taxes. The good news is that those who do receive a rebate payment based 2019 income, and, when filing 2020 taxes, find that their income actually exceeds the AGI thresholds, taxpayers won’t be required to repay the benefit.
When will I receive my benefit? As soon as possible, though delays similar to the CARES Act payments should be expected.
Where will my money be sent? Payment to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have a payment sent to the last known address on file.
Charitable Giving Tax Benefits
The charitable deduction limit on cash gifted to charities will remain at 100% of Adjusted Gross Income for 2021. This was increased from 60% to 100% for 2020 with the CARES Act. If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years. This does not apply to Donor Advised Fund contributions.
This Act also extends the above-the-line tax deduction for charitable donations up to $300 that was authorized by the CARES Act, but it increases this deduction to $600 for married couples ($300 per person)
Support For Small Businesses
The Paycheck Protection Program (PPP) will allow businesses affected to COVID-19 to apply for loans. Those who did not receive a loan through the CARES Act once again have the chance, and those who successfully applied for a loan previously, may have the opportunity to obtain another loan. If applying for a second loan, however, the previous loan funds must already have been received and spent.
Some of the Paycheck Protection Program provisions are more stringent and other provide more clarity:
The business must have experienced a 25% or larger drop in revenue for any quarter in 2020
The loan is limited to a 2.5 times the average monthly payroll costs or 3.5 times for businesses categorized as “Accommodation and Food Services.” The total amount received is capped at $2 million.
Expenses paid of forgiven Paycheck Protection Program funds are deductible
The IRS tried to withdrawal the deductibility of items funded with PPP, but this Act states that expenses paid with both forgiven and new PPP loans shall remain deductible.
Loans are limited to businesses that have no more than 300 employees with the exception, again, for businesses categorized as “Accommodation and Food Services.”
Expanded Unemployment Benefits
Unemployment benefits were set to expire for many Americans, but the Consolidated Appropriations Act extends the benefit for an additional eleven weeks. Additional relief will also be provided at $300 per week until Mid-march when the extension expires.
Individual Healthcare & Tax Planning
Individuals are able to deduct medical expenses if they exceed 7.5% of their Adjusted Gross Income. This hurdle was previously 10% of AGI.
FSA funds that haven’t been used in 2020 can be rolled into 2021 if the employer permits this extension.
Higher Education Deduction With Increased Phase-out
The Lifetime Learning credit provides a credit of 20% of the first $10,000 spent on higher education expenses (so $2,000 if you spend $10,000). The income phase-out limit has been increased to match the American Opportunity tax credit at $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers. Although the American Opportunity tax credit is more lucrative for the amount spent (100% credit up to $2,000 in education expenses with an additional 25% credit on the next $2,000 of expenses. So a total credit of $2,500 on $4,000 spent), you can only claim this credit for 4 years. As the name Lifetime Learning credit implies, you can claim this credit throughout your lifetime!
Earned Income Tax Credit Changes
The Earned income Tax Credit and additional Child tax credit are determined by an individual’s earned employment income. Because so many Americans have faced periods of unemployment in 2020, this Act will allow individuals to use their 2019 earned income to calculate the amount they will receive for 2020.
Student Loan Repayments
The ability for an employer to pay up to $5,250 of an employee’s qualified student loan debt is extended through 2025. The employee receives this benefit tax free.
The period of time between the passing of the CARES Act and the passing of a 2nd round of relief throughout the Consolidated Appropriations Act of 2021 was much longer than many anticipated. Thankfully the majority of the legislation did not provide short term deadlines for the end of 2020!
Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. You should discuss any tax or legal matters with the appropriate professional.