On December 27, 2020, President Trump signed the Consolidated Appropriations Act of 2021 (CAA 2021) to fund the government for the balance of the fiscal year. Included in the CAA are provisions that provide some benefits to many individuals who have suffered financial hardship due to the COVID-19 pandemic (collectively, COVIDTRA).
The following are some of the provisions of the COVIDTRA affecting individual taxpayers.
Extension of Unemployment Insurance Compensation Benefits
For many individuals, the additional 13 weeks of unemployment benefits (beyond the basic 26 weeks) were scheduled to end on December 26, 2020. COVIDTRA extends the period for which an individual may receive unemployment benefits for an additional 11 weeks, ending March 14, 2021, for a maximum of 50 weeks of unemployment benefits (COVIDTRA Division N, Title I, section 201).
This provision also covers self-employed individuals, gig workers, and other nontraditional workers. It extends, through March 14, 2021, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provision that reimbursed states for the cost of waiving the “waiting week” for regular unemployment compensation. Another provision sets the reimbursement percentage for weeks ending after December 26, 2020, at 50%. It also limits payment of retroactive benefits to weeks of unemployment after December 1, 2020 (COVIDTRA Division N, Title I, section 201).
These provisions are all effective as if they had been enacted as part of the CARES Act.
Additional Unemployment Benefits
Individuals receiving unemployment benefits will receive an additional $300 per week beginning December 26, 2020, through March 14, 2021 (COVIDTRA Division N, Title II, section 203). This provision also covers self-employed individuals, gig workers, and other nontraditional workers. It is effective as if it had been enacted as part of the CARES Act.
Direct Payments to Individuals (Recovery Rebate)
COVIDTRA provides for a second round of direct payments to individuals, similar to the Recovery Rebates sent out as part of the CARES Act. For individuals with adjusted gross income (AGI) income up to $75,000, the act provides a $600 payment, phasing out at a rate of $5 for every $100 in AGI above $75,000. The payment is phased out entirely for an individual with AGI of $87,000. Married couples with combined AGI up to $150,000 would receive $1,200, subject to the same phaseout as that applying to individuals. The payment would be completely phased out for married couples with AGI of $174,000 or more. The provision also provides an additional $600 per child under age 17, also subject to phaseout. Eligibility and benefit levels would be based on 2019 income tax filings. Individuals will not be required to repay any overpayment when filing their 2020 taxes next year (COVIDTRA Division N, Title II, section 272).
Changes to Charitable Contributions
Changes to the above-the-line charitable contribution. Individuals who do not itemize their deductions may take an above-the-line deduction towards AGI of $300 ($600 for married filing jointly). In addition, the penalty for overstatement of qualified charitable contributions is increased from 20% to 50% [COVIDTRA Division EE, Title I, section 212(a)]. The provisions are effective for taxable years beginning after December 31, 2020.
Modification of the limitation on charitable contributions. The 50% limitation for individuals making qualified charitable contributions in cash will not apply for tax years 2020 and 2021 [COVIDTRA Division EE, Title II, section 213
Exclusion from Gross Income of Discharge of Qualified Personal Residence Indebtedness
The exclusion from gross income of the discharge of qualified personal residence indebtedness under IRC section 108(a)(1)(E) has been extended to qualified personal residence indebtedness that is discharged prior to January 1, 2026 (formerly December 31, 2020).
This is effective for discharges of indebtedness occurring after December 31, 2020 [COVIDTRA Division O, Title I, section 114].
Educator Expense Deduction
The act adds personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID-19 to those expenses that qualify for the $250 educator expense deduction (COVIDTRA Division N, section 275). This provision is effective for expenses paid or incurred after March 12, 2020.
Deduction for Qualified Tuition and Related Expenses Replaced by Increased Income Limitation on Lifetime Learning Credit
The deduction for qualified tuition and related expenses has been repealed and replaced by increased limitations for the Lifetime Learning Credit. The new limitations are as follows:
The American Opportunity Tax Credit and the Lifetime Learning Credit shall each be reduced (but not below zero) by the amount which bears the same ratio to each such credit as follows:
The taxpayer’s modified adjusted gross income for such taxable year, over $80,000 ($160,000 in the case of a joint return), bears to $10,000 ($20,000 in the case of joint return). [COVIDTRA Division EE, Title I, section 104]
The repeal of both deduction for qualified tuition and related expenses and the increased limitations for the American Opportunity and the Lifetime Learning Tax Credits are effective for taxable years beginning after December 31, 2020.
Reduction in the Medical Expanse Deduction Floor
COVIDTRA permanently reinstates the medical expense deduction floor at 7.5%, allowing individuals to deduct unreimbursed medical expenses that exceed 7.5% of AGI, instead of 10% (COVIDTRA Division EE, Title I, section 101). This provision is effective for taxable years beginning after December 31, 2020.
Child Tax Credit and EITC
The act permits taxpayers to elect to determine their refundable child tax credit for 2020 by substituting their earned income from 2019, if that amount is greater than the taxpayer’s earned income for 2020. Likewise, the act permits taxpayers to elect to determine their earned income tax credit for 2020 by substituting their 2019 earned income if that amount is greater than the taxpayer’s 2020 earned income (COVIDTRA Division O, Title II, section 211).
Both provisions are effective for tax year 2020.
Benefits Provided to Volunteer Firefighters and Emergency Medical Responders
COVIDTRA makes permanent the exclusion of any qualified state and local tax benefits received by volunteer firefighters or emergency medical responders [COVIDTRA Division EE, Title I, section 103]. This provision is effective for benefits received on or after December 31, 2020.
Nonbusiness Energy Property
The credit for nonbusiness energy property under IRC section 25C—as applies to any advanced main air circulating fan, for any qualified natural gas, propane, or oil furnace or hot water boiler, as well as for any item of energy-efficient building property—has been extended through December 31, 2021 [COVIDTRA Division EE, Title I, section 141].