The new economic relief law passed by Congress at the end of 2020 provides a bevy of tax breaks for individuals and businesses. This includes several extensions and modifications of provisions in the Coronavirus Aid, Relief and Economic Security Act (CARES) Act. The changes in the economic relief law are many (considering it was near 5,600 pages long!), so the following is just a brief overview of a dozen key changes contained within:
- Economic stimulus payments: The new law authorizes a second round of economic stimulus payments. As before, there’s no current tax liability, because these are technically advance payments of a refundable credit. The payment is $600 for each individual, plus $600 for each qualified child, but begins to phase out at an adjusted gross income (AGI) of $75,000 for single filers and $150,000 for joint filers.
- PPP loans: The massive Paycheck Protection Program (PPP) has been extended and modified, but loans still may be forgiven without any tax consequences if certain requirements are met. In addition, undoing an IRS Notice issued last year, the new law clarifies that a business may actually deduct expenses paid with PPP loan proceeds.
- Charitable deductions: The CARES Act established a brand-new deduction for monetary charitable donations made by non-itemizers, up to a maximum of $300 per filer, for 2020. The new law extends this above-the-line deduction for donors through 2021 and doubles the maximum to $600 for joint filers.
- Employee retention credits: Under the CARES Act an employer could claim an employee retention credit (ERC) for 50 percent of the first $10,000 of qualified wages paid in 2020, for a maximum $5,000 credit per employee. The new law extends the ERC and increases the maximum credit to $14,000 for qualified wages paid in the first two quarters of 2021.
- Medical expense deductions: In the past, a taxpayer could deduct unreimbursed medical expenses in excess of 10 percent of AGI. This threshold was temporarily lowered to 7.5 percent of AGI, but the lower threshold was set to expire after 2020. Now the new law extends it through 2021 and thereafter. Best of all, this change is permanent.
- Education tax breaks: The tuition-and-fees deduction, scheduled to expire after 2020, has been repealed. But there’s a trade-off: Beginning in 2021, the new law increases the phase-out ranges for the Lifetime Learning Credit (LLC) to match the ranges for the American Opportunity Tax Credit (AOTC).
- Flexible spending accounts: Previously, rollovers of unused funds in flexible spending accounts (FSAs) used for qualified health care expenses were limited and not available at all for dependent care FSAs. The new law allows participants in both types of FSAs to roll over funds from 2020 to 2021 and again from 2021 to 2022.
- Family and medical leave credit: The Families First Coronavirus Response Act (FFCRA)—passed soon after the CARES Act—provided employers with a tax credit in 2020 for offering paid family and medical leaves resulting from the COVID-19 pandemic. This credit has been extended, with modifications, through March 31, 2021.
- Business meals: Under prior law, deductions for business meals claimed by employers were limited to 50 percent of the cost. The new law increases the deduction to 100 percent of the cost for the next two years—2021 and 2022.
- Payroll tax deferral: Based on an executive order in August, an employer had the option of deferring the employee portion of the Social Security tax component of payroll tax due for the last four months of 2020. The initial deadline was April 30, 2021. Now the new law extends the due date to December 31, 2021.
- Family tax credits: The new law permits taxpayers to refer to “earned income” on their 2019 returns for purposes of determining the earned income tax credit (EITC) and the refundable portion of the child tax credit (CTC) for the 2020 tax year.
- Tax extenders. The new law also extends numerous provisions that were set to expire after 2020. Among others, this includes five-year extensions for the Work Opportunity Tax Credit (WOTC), the tax exclusion for mortgage forgiveness and tax incentives for empowerment zones. Various other provisions were extended for one or two years.
Stay tuned for more details as we absorb the details of the 5,593-page spending/tax bill.