The Consolidated Appropriations Act of 2021 (CAA) (H.R. 133), which has become notorious for its length of 5,593 pages, funds the government for its fiscal year ending September 30, 2021, and makes major tax changes for individuals. Signed into law on December 27, 2020, the CAA also incorporates various measures to provide certain financial assistance to individuals. The following is a brief roundup of these key changes. Most of the changes are effective after 2020, but some of them affect 2020 income tax returns.

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Second “Stimulus” Payment

The second “stimulus” payment is $600 per individual, as well as $600 per eligible child. The definition of “eligible child” tracks that used for the child tax credit (i.e., a child under age 17 by the end of the year). For taxpayers without dependents, the full second round payment applies only if adjusted gross income (AGI) in 2019 falls below set limits ($75,000 for singles, $112,500 for heads of households, $150,000 for joint filers). The full payment phases out by 5% for every $100 above the applicable AGI threshold. Thus, there is no payment when AGI reaches another threshold ($87,000 for singles, $124,500 for heads of households, $174,000 for joint filers); this threshold is lower than the one used for the first round payment. Like the economic impact payment earlier in 2020, this second payment is a refundable tax credit (IRC section 6428A); unlike the first payment, however, this second stimulus payment may not be used by the government or creditors as an offset to child support or any other payments (e.g., levy, attachment, garnishment, other legal process, operation of any bankruptcy or insolvency law).

The CAA instructs the IRS to work with the Social Security Administration, the Railroad Retirement Board, and the Department of Veterans Affairs to ensure that individuals whose gross income does not require them to file returns, and consequently did not show AGI for 2019, will receive the payments for which they are eligible.

Unemployment Benefits

Unemployment benefits usually are paid by state unemployment funds to qualified individuals. Under the CAA, in addition to any state unemployment benefits, there is a $300 per week benefit payable through March 14, 2021.

This pandemic unemployment assistance (PUA) may be paid to self-employed individuals, including independent contractors and gig workers. As in the case of employees, the additional benefit runs for 11 weeks.

Regular unemployment benefits as well as these supplemental payments are includible in gross income. There is no automatic federal income tax withholding on the benefits, but individuals can opt for 10% withholding by filing IRS Form W-4V.

Exclusions from AGI

Students who receive education assistance due to the coronavirus (COVID-19) pandemic are not taxed on this benefit. This assistance covers emergency costs experienced by the students from their higher-education institutions.

As a general rule, the cancellation of debt is includible in gross income; the cancellation of home mortgage debt, however, is exempt from this rule, within limits. Through 2020, the cap on the exclusion was debt up to $2 million. The CAA extends the exemption through 2025, but limits it to $750,000 of home mortgage debt [IRC section 108(a)(1)(E)].

The exclusion from employees’ income for those who enjoy repayment of student loan debt under a company’s educational assistance plan was supposed to apply only through 2020, but has been extended for five more years. The cap on this exclusion is $5,250 per year.

The exclusion from AGI for certain benefits received by volunteer firefighters and emergency medical responders, which had been set to expire at the end of 2020, has been made permanent (IRC section 139B).

Above-the-line Deductions

The deduction from AGI for tuition and fees, which expired on December 31, 2020, has not been extended. Education credits discussed below continue to be a way to reduce the cost of higher education.

The educator expense deduction for classroom costs continues to be limited to $250, as adjusted for inflation. However, the CAA includes as eligible expenses the cost of personal protective equipment (PPE) and other supplies to prevent the spread of COVID-19. This change is retroactive to supplies purchased after March 12, 2020.

For individuals who claim the standard deduction, the $300 above-the-line deduction for cash donations to charity has been extended through 2021. For 2020, this deduction applies “per taxpayer unit” so that singles and joint filers have the same limit. Under CAA, in 2021, the deduction is per individual, so that joint filers can deduct up to $600.

Itemized Deductions

For those who itemize personal deductions rather than claiming the standard deduction, only medical expenses above a threshold amount can be taken into account. The 7.5% AGI floor had been set to expire at the end of 2020, but the CAA has made this threshold permanent [IRC section 213(f)]. It applies to all taxpayers, regardless of age.

The ability to treat mortgage insurance premiums as deductible home mortgage interest for those with income below set levels had been set to expire at the end of 2020. The CAA extended this break for one year [IRC section 163(h)].

For 2020, itemizers can elect to deduct cash contributions up to 100% of AGI; the CAA extends this election through 2021. The penalty for overstating charitable contribution deductions, however, increases from 20% to 50% of the underpayment (IRC section 6662).

Tax Credits

The amount of the earned income tax credit (IRC section 32) and the additional child tax credit [IRC section 24(d)] has not been increased. Under the CAA, individuals may elect to use their 2019 income in figuring these credits for 2020. This may produce larger credits if 2019 income is higher. Using this option, however, is not advisable if one’s 2019 income is so high that it results in a phaseout of the credits.

Signed into law on December 27, 2020, the CAA also incorporates various measures to provide certain financial assistance to individuals.

Through 2020, different modified AGIs apply for the two education credits: the lifetime learning credit and the American Opportunity Tax Credit (AOTC). Starting in 2021, the MAGI limits for the lifetime learning credit have been aligned with those for the AOTC.

The CAA made some changes for energy-related tax credits. The residential energy credit for solar and other renewal energy property was extended for two years (IRC section 25D). The nonbusiness energy credit for adding insulation, storm doors, and other similar energy-saving property to a principal residence, which had been set to expire at the end of 2020, was extended for one year (IRC section 25C). The 10% credit for a plug-in electric drive motorcycle, which was also set to expire at the end of 2020, now applies through 2021 (IRC section 30D).

The health coverage tax credit of 72.5% of premiums for eligible trade adjustment assistance recipients and eligible pension recipients receiving benefits from the Pension Benefit Guaranty Corporation, which had been set to expire at the end of 2020, was extended for one more year (IRC section 35).

Other Changes

The CAA made various tax provisions for disaster relief applicable to federally declared disasters occurring on or after January 1, 2020, and ending 60 days after December 27, 2020 (i.e., ending after February 25, 2021). This was done to avoid the need for Congress to specify the disasters to which this relief applies. Tax-related disaster relief includes a net disaster loss deduction whether itemizing or claiming the standard deduction, higher limits on loans from qualified retirement plans, an exemption from the 10% early distribution penalty for withdrawals from qualified retirement plans and IRAs, the spread of such distributions over three years unless an election is made to report them in full in the year of the distribution, and the option to recontribute withdrawals within three years.

Individuals whose employers opted to defer the employees’ share of Social Security taxes (part of FICA) for wages paid from September 1, 2020, through December 31, 2020, were supposed to be paid from January 1, 2021, through April 30, 2021. The payment period has been extended through the end of 2021. If the deferred taxes are not fully deposited by December 31, 2021, then interest and penalties will be imposed on employers, not employees, starting January 1, 2022.

Altogether, these changes mean that the IRS will need to revise some instructions for 2020 returns. Also expect to see additional IRS guidance on the new rules. What’s more, the new Congress may create other tax breaks, or add restrictions to existing ones, in the coming year.

Sidney Kess, JD, LLM, CPA, is of counsel to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Advisory Board.
Joseph Buble, CPA, is a partner.
James Grimaldi, JD,CPA, is a partner, also with Citrin Cooperman & Co., LLP. Reprinted with permission from New York Law Journal © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited; contact 877-257-3382.