Insights from Keiter’s Tax Team
Tax and Non-Tax Provisions for Individuals in Response to COVID-19
The Consolidated Appropriations Act, 2021 (H.R. 133) (CAA, 2021), signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic. The CAA, 2021 includes the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), both of which provide numerous provisions to impact individual taxpayers. We have provided highlights of the tax and non-tax provisions below and encourage you to coordinate with your Keiter tax advisor to review further the provisions and related considerations that may apply to your situation and possible planning actions required to benefit from the provisions.
New Recovery Rebate
The Coronavirus Aid, Relief, and Economic Security Act (CARES), enacted March 27, 2020, provides for direct payments/rebates to certain individual taxpayers. These were referred to as Economic Impact Payments (EIP).
New law. COVIDTRA contains a new program, which it refers to as “additional 2020 recovery rebates.”
The provision provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member to be claimed on the taxpayer’s 2020 tax return. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit begins to phaseout for single taxpayers with modified adjusted gross income of $75,000 ($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, estates or trusts.
The legislation provides for Treasury to issue advance payments based on the information per the taxpayer’s 2019 tax return filing. Eligible taxpayers, treated as providing returns through the non-filer portal in with respect to their EIP, will also receive payments. 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 advance payments exceeding their eligible credit will not be required to repay any of the excess payment. However, if the credit determined on the taxpayers’ 2020 tax returns exceeds the amount of the advance payment received, taxpayers will receive the difference as a refundable tax credit on their 2020 tax returns. It is also important to note that the provision specifically provides that the recovery payment generally may not be used to offset existing federal or state debts or be remitted to satisfy bank or private creditor levies. (Code Sec. 6428A, as added by COVIDTRA Sec. 272)
Amendments to CARES Act Economic Impact Payment Rules
New law. The COVIDTRA makes the following changes to the CARES Act EIP:
- Clarification that the the $150,000 limit on adjusted gross income before the credit amount starts to decrease, which, under the CARES Act applied to joint returns, also applies to surviving spouses. (Code Sec, 6428(c)(1), as amended by COVIDTRA Sec. 273(a))
- Addition of requirement, in order to be eligible for CARES Act EIP, with respect to providing IRS with the taxpayer’s identification number, to conform to that requirement under the new rebate described above under “New Recovery Rebate.” (Code Sec. 6428(g), as amended by COVIDTRA Sec. 273(a))
$250 Educator Expense Deduction Applies to PPE
Eligible educators (i.e., kindergarten through grade 12 teachers, instructors, etc.) are allowed a $250 above-the-line deduction for certain otherwise allowable trade or business expenses paid by them. (Code Sec. 62(a)(2)(D)(ii))
New law. COVIDTRA provides an expansion of qualified educator expenses to include personal protective equipment (PPE), disinfectant, and other supplies purchased after March 12, 2020 used for the prevention of the spread of COVID-19. It provides that guidance and clarification will be issued no later than February 28, 2021 to apply this new provision. (added by COVIDTRA Sec. 275)
Emergency Financial Aid Grants Exclusion from Education Tax Credit Calculations
Individual taxpayers may claim the American Opportunity tax credit and/or the Lifetime Learning credit for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouses, and their dependents. (Code Sec. 25A) However, under Code Sec. 25A(g)(2) higher education expenses paid for by tax exempt income can’t be used to claim either of these credits.
New law. COVIDTRA excludes certain CARES Act emergency financial aid grants made after March 26, 2020 from the gross income of college and university students. In addition, it provides that these grants are not to be considered as a reduction in determining taxpayers’ American Opportunity and Lifetime Learning tax credits. (CARES Act sections 3502, 3504, and 18004 as clarified by COVIDTRA Sec. 277)
Reduction in Minimum Age for Qualified Plan Distributions to Working Retirement Age Employees in the Building and Construction Industries
Code Sec. 401(a)(36) provides that a trust forming part of a pension plan shall still be eligible to be considered a qualified trust in the event the plan allows from distributions to employees who have attained age 59 ½ and who have not separated from employment at the time of distribution.
New law. TCDTR amends the rules in Code Sec. 401(a)(36) to provide qualified trust classification for provision of distributions to employees in the building and construction industries that have attained age 55 and have not separated from employment at the time of distribution. The amendment made by this provision applies to distributions made before, on, or after the date of enactment. (Code Sec. 401(a)(36), amended by TCDTR Sec. 208)
Election for 2020 Refundable Child Tax Credit & Earned Income Credit to be Based on Preceding Year’s Earned Income
Under Code Sec. 24(d)(1)(B)(i), to the extent the child tax credit (CTC) exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer’s taxable earned income for the tax year as exceeds $2,500.00 and under Code Sec. 32(a), the earned income credit (EIC) equals a percentage of the taxpayer’s earned income.
For both purposes, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. Earned income also includes self-employment income, computed without the deduction for one-half of self-employment tax. (Code Sec. 32(c)(2))
New law. Under 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 greater than the earned income for 2020. For joint returns, the taxpayers’ earned income for the preceding tax year is the sum of each spouse’s earned income for that preceding tax year. (TCDTR Sec. 211)
Certain Charitable Contributions Deductible by Non-Itemizers
For 2020, individuals who normally do not itemize deductions may take up to a $300 deduction for cash contributions to qualified charitable organizations (deduction limits of $300 also applied to married filers) to calculated adjusted gross income. A 20% penalty applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.
New law. Similar to 2020 $300 charitable deduction allowed to non-itemizers, TCDTR allows that non-itemizing taxpayers may claim a deduction of $300 in addition to their standard deduction. It is important to note two differences for 2021: 1) the deduction for married filing jointly taxpayers is $600 and 2) the deduction is allowed after calculation of adjusted gross income for 2021. (Code Sec. 170(p), as added by TCDTR Sec. 212(a))
An increased penalty of 50% applies to tax underpayments attributable to any overstated cash contribution by non-itemizers under Code Sec. 170(p). (Code Sec. 6662(l), as added by TCDTR Sec. 212(b))
Modification of Limitations on Charitable Contributions
Under the CARES Act, individuals could claim a 2020 itemized deduction of 100% of adjusted gross income for charitable gifts of cash to qualified organizations.
New law. TCDTR extends the CARES Act provision to apply to 2021 as well. (Code Sec. 170(b)(1)(G)(i), as amended by TCDTR Sec. 213)
Temporary Special Rules for Health (HSA) and Dependent Care Flexible Spending Arrangements (DCFSA)
A cafeteria plan may permit the carryover of unused amounts remaining in an HSA or DCFSA 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 ($550 for both 2020 and 2021). (Notice 2013-71, 2013-47 IRB 532, and Notice 2020-33, 2020-22 IRB)
New law. TCDTR provides relief to taxpayers by allowing carryover to 2021 of any unused 2020 benefits remaining in either their HSA and/or DCFSA and the same for 2021 benefits to carryover to 2022. The provision also allows employers to extend the grace period from 2 1/2 months to 12 months for usage of the carryover. 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. TCDTR also provides a special carry forward rule to allow the employer plan to continue to qualify for as cafeteria plan if the employer allows for distributions for dependent care flexible spending arrangements where the dependent aged out during the pandemic. (TCDTR Sec. 214)
Highlights of Some Relevant Tax Provisions Expiring after 2020, Extended Under CAA
- Itemized Deduction – Medical Expense Threshold for Deduction: 7.5% Adjusted Gross Income threshold will continue to be applied to tax years 2021 and later (extended permanently).
- Itemized Deduction – Qualified Mortgage Interest Deduction: Mortgage Insurance Premiums may be deducted in 2021 as qualified residence mortgage interest to the extent paid and related to 2021.
- Credit for Qualified Energy Efficient Home Improvements: Credit of 10% of costs of qualifying energy improvements, subject to a lifetime cap of $500, extended for improvements undertaken in 2021.
- Credit for New Qualified Fuel Cell Vehicles under IRC Section 30B: Credit extended for qualified purchases in 2021.
- Credit for Alternative Vehicle Refueling Property under IRC Section 30C: Credit extended for qualified purchases/installation in 2021.
- Employer Qualified Education Assistance to an Employee: Pursuant to a plan under IRC Section 127, loan payments on behalf of an employee by an employer, subject to an annual limit, may be excluded from the employee’s gross income for payments made prior to January 1, 2026.
Keiter’s Opportunity Advisors are dedicated to serving the complex tax needs of privately-held business owners, corporate executives, and high net worth families. We will continue to share our insights on the finalized individual and business tax provisions in the coming months. Questions on these or other tax matters? Please contact your tax advisor or Keiter representative or Email | Phone: 804.747.0000. We are here to help.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.