The Consolidated Appropriations Act, 2021: The Individual Provisions

The Consolidated Appropriations Act, 2021 was passed by both houses of Congress on Dec. 21, 2020 and signed into law by the President on Dec. 27, 2020.  The bill contained several provisions and tax extenders affecting individuals and individual income taxes. We have listed the key provisions below.

Additional Stimulus Payments- Distribution in Process

• • $600 per individual ($1,200 joint) plus $600 per dependent child
  • Phase-out begins at $75,000 single adjusted gross income (AGI) ($150,000 joint) and is phased out at a rate of 5% up to $87,000 AGI ($174,000 joint)
    • Payments computed based on AGI per 2019 tax returns filed
    • Joint threshold also applies to those filing as surviving spouse
  • Payment is computed as a refundable credit against 2020 taxes
    • Any underpayment will be recovered upon filing of your 2020 tax return
    • Overpayments are not required to be repaid
  • For married couples with one nonresident alien spouse, both taxpayers are eligible for this payment
  • Check the status of your payment here.

Teachers above the line deduction of $250 for expenses will now include the cost of personal protective equipment (PPE) and other supplies used to prevent the spread of COVID-19.

• • Will apply to costs incurred after March 12, 2020
  • Additional guidance is to be issued

Earned Income and Child Tax credits can be computed using the greater of 2019 or 2020 earned income.

Emergency financial aid grants, under CARES Act, paid after March 26, 2020 to college students will not be includable in taxable income.

Provisions regarding retirement plan distributions from certain plans have been loosened.

• • 10% penalty on early withdrawals has been waived for qualified COVID-19 related distributions up to $100,000
  • Inclusion of taxable distributions can be spread over 3 years OR
  • Taxable distributions can be repaid within 3 years
  • Money purchase pension plans have been added as qualified plans retroactive to the CARES Act
  • Amounts withdrawn for home purchases but not used may be recontributed
  • Maximum loan amount allowable by a plan has been increased from $50,000 to $100,000

Credits and deductions for higher education have been updated for tax years beginning after 2020.

• • Phaseout threshold of Lifetime Learning Credit has been increased to match threshold of American Opportunities Tax Credit
    • Credit phases out at 1% for every $100 of AGI in excess of $80,000 ($160,000 joint) up to $90,000 ($180,000 joint)
  • Option to take a deduction for qualified tuition and related expenses has been repealed

Certain tax provisions which expired at end of 2020 have been extended for ranges of one year to as long as permanently:

• • $300 ($600 joint) above the line charitable donation deduction for non-itemizers and the 100% AGI limitation on cash contributions have been extended through 2021
  • Treatment of qualified mortgage insurance premiums as deductible qualified residence interest itemized deduction has been extended through 2021
    • For joint filers only
    • Phases out at 10% for each $1,000 in excess of $100,000
  • Exclusion from taxable income of the forgiveness of principal residence debt has been extended through 2025
    • Applies to amounts up to $750,000 reduced from $2,000,000
  • Reduction of medical itemized deduction floor to 7.5% from 10% has been extended permanently

For more information on any of these individual changes or for additional guidance, please contact one of our tax advisors today.

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