Second Stimulus Bill: Updates and Planning Opportunities
January 6, 2021. By Olga Okaty:
The second stimulus bill recently passed by Congress and signed by the President enhances and expands a number of economic relief measures and tax provisions that will bring much needed assistance to individuals and businesses across the nation in the months ahead. The following summary discusses the topics below and some of the major provisions and planning opportunities presented by this latest round of stimulus legislation.
- Stimulus Checks
- Unemployment Benefits
- Paycheck Protection Program
- Business Tax Credits/Deductions
- Medical Deductions
- Charitable Deductions
- FSA and Child Tax Credit Adjustments
- Education/Educator Deductions
- PMI/Energy Credit Changes
- Student Loan Requirements
- Future Required Minimum Distributions
Stimulus Checks On the Way – A second round of stimulus checks (known as Additional Recovery Rebates) of $600 per eligible taxpayer will be sent to qualifying individuals based on the 2019 Adjusted Gross Income (AGI) thresholds below. Eligible individuals include the taxpayer(s) filing the return, as well as any children for whom a Child Tax Credit may be claimed (must be younger than age 17).
The Rebate is phased out by $5 for every $100 of AGI that exceeded these thresholds. Accordingly, the phaseout amount will vary between taxpayers, depending upon their income and total Rebate amount for all eligible individuals in their household.
- Single = $75,000 threshold, completely phased out at $87,000
- Married Filing Joint = $150,000 threshold, completely phased out at $174,000
- Head of Household = $112,500 threshold, completely phased out at $124,500
Individuals whose 2019 AGI was too high for the Rebate but who qualify based on 2020 AGI will receive a credit on their 2020 tax return upon filing. There are no tax penalties or claw backs for individuals who qualified for the Rebate based in 2019 AGI but whose 2020 income would have prevented them from qualifying; they may keep the Rebate with no adverse consequences.
Rebates will be direct deposited or mailed to most taxpayers automatically. More details may be found here: https://www.irs.gov/coronavirus/economic-impact-payments
Unemployment Benefits Extended – Federally subsidized unemployment benefits which expired at the end of December 2020 will be extended for 11 weeks through the middle of March 2021, and will be increased by $300 for this duration, providing individuals $300 weekly in addition to their regular state unemployment benefits. Pandemic unemployment assistance, which provides unemployment benefits to self-employed individuals and others who are not normally eligible to receive such benefits, is also extended to supply benefits for a maximum of 11 weeks (up to April 5, 2021), including the additional $300 weekly.
Paycheck Protection Program Enhanced – Businesses affected by the pandemic that did not receive a loan through the original round of PPP last year will have a new opportunity to apply for forgivable ‘round one’ financing. Businesses that already received and spent original PPP funds but need additional funds will be able to apply for more funding through round two of PPP provided by the new bill (PPP2). However, the qualification requirements will be stricter, including a decrease in revenue of more than 25% in any quarter in 2020, as compared to the same quarter in 2019, in order to qualify. For a full overview of the enhanced Paycheck Protection Program, please refer to the following article: https://www.kitces.com/blog/coronavirus-stimulus-2-omnibus-consolidated-appropriations-act-2021-stimulus-checks.
Expenses Paid with Forgiven PPP Funds Now Deductible – This provision will come as a huge relief for many small businesses whose PPP loan was forgiven, but whose expenses funded by the PPP loan were not tax deductible, according to initial guidance from the IRS. This would have resulted in an outsized tax bill for 2020, but the new stimulus bill clarifies and addresses this issue by explicitly allowing the deductibility of such expenses.
Employee Retention Tax Credit Expanded – Small businesses will be able to take advantage of a substantially expanded Employee Retention Tax Credit of up to $7,000/employee/quarter if they experienced at least a 20% drop in year-over-year quarterly revenues. For a full overview of the expanded Employee Retention Tax Credit, please refer to the following article: https://www.kitces.com/blog/coronavirus-stimulus-2-omnibus-consolidated-appropriations-act-2021-stimulus-checks.
Meal Expenses Deduction Expanded to 100% – In an effort to help the restaurant industry recover, the bill increases the previous 50% deduction for business meals, including food and beverage, to 100% for 2021 and 2022.
Deferred Payroll Tax Repayment Deadline Extended – The deadline to repay their share of 2020 Social Security taxes for those employees who deferred such taxes into 2021 has been extended from April 30, 2021 to December 31, 2021, with proportional repayments from January 1 through December 31, 2021. While most private employers did not adopt this change given logistical constraints, the Federal government did and therefore eligible Federal employees who were forced to defer such taxes will be able to take advantage of the repayment extension.
Exclusion for Employer Payments of Student Loans Extended – This benefit, previously expiring in 2020 but now extended through 2025, allows an employer to provide up to $5,250 annually in tax-free education assistance to pay down an employee’s qualified student debt.
Medical Expense Deduction AGI Limit Permanently Reduced – For those taxpayers who itemize deductions, the hurdle to be able to deduct medical expenses has been permanently reduced from 10% to 7.5% of AGI.
CARES Act Charitable Deduction Increased – Last year, the CARES Act instituted an above-the-line $300 deduction for cash contributions made to charitable organizations, benefitting individuals who do not typically itemize deductions. This deduction was originally capped at a flat $300 regardless of filing status. The new stimulus bill doubles it to $600 for married filing jointly taxpayers for 2021 only.
Charitable Deduction 100% AGI Election Extended for Cash Contributions – Cash contributions to qualified charities are typically deductible (as in itemized deduction) up to 60% of AGI. The CARES Act provided taxpayers the election to deduct up to 100% of AGI for 2020, and the new stimulus bill extends this provision through 2021. This includes cash contributions to public and private charities, but not to donor-advised funds or 509(a)(3) supporting organizations.
Flexible Spending Accounts Carryforward and Contribution Adjustment – The new stimulus bill permits employers to allow employees to carry forward any unused 2020 balances in flexible spending accounts (both Dependent Care and Healthcare) into 2021, and to carry forward any unused 2021 balances into 2022. Typically, such balances are forfeited either at year-end or a few months thereafter. Providing the carryforward option will be up to each employer ultimately, and employees should inquire with their HR departments whether this option will be available for their FSA plans. As another exception, the bill also authorizes FSA plans to permit participants to modify future contributions to the FSA in 2021; typically, such contribution elections are irrevocable.
Earned Income Tax Credit and Additional Child Tax Credit Changes – To help offset the impact of lost income on the ability to claim the Earned Income Tax Credit and the Additional Child Tax Credit, the new stimulus bill permits individuals to use their 2019 earned income to calculate the amount of either credit for 2020.
Education Deduction Changes – The Tuition and Related Expenses above-the-line deduction has been eliminated effective 2021 and will be replaced by an expanded and more valuable Lifetime Learning Credit with higher income phaseouts. Effective 2021, the Lifetime Learning Credit will phase out at AGI between $80,000 and $90,000 for single filers, and AGI between $160,00 and $180,000 for joint filers.
Educator Expenses to Include Covid-19 Related Supplies – Alongside classroom supplies, educators may now deduct supplies related to Covid-19 purchased after March 13, 2020, including personal protective equipment and disinfectant. The total above-the-line deduction for classroom and Covid-19 supplies remains capped at $250 annually per educator.
PMI Deductibility Extended – Mortgage insurance premiums remain deductible through 2021, subject to phaseout limits.
Energy Credits Extended – The Energy-Efficient Homes Credit and Qualified Fuel Cell Motor Vehicle Credits are both extended through 2021.
Surprisingly, two popular relief provisions from 2020 were not extended, including the following:
No Additional Student Loan Relief – While the CARES Act last year suspended required loan payments and collection efforts on defaulted student loans, and reset the interest rate to 0%, these provisions will expire on January 31, 2021 and have not been extended.
No Waiver of Future Required Minimum Distributions – While required minimum distributions (RMDs) from IRAs and qualified plans were suspended in 2020, this provision was not extended and RMDs remain mandatory for 2021.
As always, our financial planning team is here to answer any questions pertaining to this new legislation, and we look forward to helping our clients take advantage of these new measures and opportunities through personalized action plans and thoughtful collaborations with their tax professionals.