On December 27, 2020, the Consolidated Appropriations Act of 2021 was signed into law. This legislation addresses a second round of stimulus checks, extended federal enhancements to unemployment benefits, new PPP funding, and a host of tax impacts. We’ll review the highlights below and invite you to reach out for more information.
In this second round of stimulus payments, each person in your household, including dependents, may be eligible receive up to $600. The payments are subject to phase-outs above the following thresholds: Adjusted Gross Income (AGI) of $75,000 for single, $112,500 for Head of Household, $150,000 for Married Filing Jointly.
As before, the IRS will determine eligibility based on the AGI from your 2019 tax return. The payment is considered an advance of a 2020 tax credit. If your income in 2019 is higher than the threshold, but your 2020 income qualifies, you’ll receive a credit when you file your 2020 taxes. If you receive a payment based upon your 2019 income but your 2020 income disqualifies you, you will not have to repay the stimulus payment. You also don’t have to repay a payment received by someone who passed away in 2020, when the stimulus payment was based on their 2019 tax return.
There may be the opportunity for parents to receive a stimulus payment for a dependent based upon their 2019 tax return, and for that same dependent to claim his or her own 2020 tax credit, if they’re no longer dependents when filing their 2020 tax returns.
There is a separate bill in the Senate, proposing an increase the $600 payments to $2,000, although it seems unlikely this will occur.
Additional Federal unemployment benefits of $300 per week will be added to state unemployment benefits for 11 weeks. Each state has different unemployment benefits, but for many, this extra federal payment will almost double their unemployment. Recipients of unemployment benefits should know that these benefits are taxable.
Small Business – Payroll Protection Program Loans
An additional $35 billion of funding has been approved to enable businesses to remain open and continue funding payroll. To qualify for the second round (PPP 2):
- Must have a maximum of 300 employees
- Must have experienced a 25% drop in revenue in any one quarter of 2020
- Must have applied for and spent a PPP 1 loan, before applying for a PPP 2 loan
- The maximum loan amount is capped at $2M, or 2.5 times average monthly payroll
- Exception for Accommodation and Food Services Businesses: 3.5 times average monthly payroll
Enhancements to the PPP Program
- Expenses paid with PPP funds are now deductible (retroactively this year) even if the PPP loan has been forgiven
- You can have a PPP loan forgiven and also use the Employer Retention Credit but cannot “double dip” (cannot use same expenses for both programs)
- Expanded covered business expenses
- PPP loan forgiveness application is one page for loans under $150,000 and lenders are prohibited from requesting any backup documentation
Other Items of Interest
Flexible Savings Accounts – Ordinarily you must spend everything you have contributed to your FSA in that calendar year. Employers are now allowed to amend their plan to allow unused FSA funds to roll into 2021 and any unused funds at the end of 2021 may roll into 2022.
Qualified Charitable Contributions – In 2020, above the line deductions of up to $300 were allowed, regardless of filing status. In 2021, married couples filing jointly can now each take a $300 above the line deduction, for a total of $600. Donations must be made in cash; contributions to donor advised funds or 509(a)(3) are not eligible. This deduction is only available for taxpayers who do not itemize.
FAFSA Form – A simplified application with fewer questions will be released effective July 2023.
Education Tax Deductions and Credits – Beginning in 2021 the qualified tuition and education expense deduction will be eliminated. It is replaced by higher phase outs for the American Opportunity Tax Credit and the Lifetime Learning Credit, $80,000 for single and $180,000 for married filing joint.
Employer Education Assistance – Employers can give employees up to $5,250/year, tax-free, toward student loan payments – either current education expenses or already incurred debt.
Qualified Disaster Distributions – Similar to the special allowance on distributions from IRAs for Coronavirus-related circumstances, this allows distributions of up to $100,000 from retirement plans and IRAs with generous taxation and repayment options for individuals residing in a presidentially declared disaster area. Qualified disaster loans from retirement plans are permitted up to $100,000 or 100% of a participant’s vested account balance with the repayment period extended up to one year.
Business Meal Expenses – Meals provided by a restaurant are fully deductible business expenses in 2021 and 2022 (not in 2020).
Required Minimum Distributions (RMDs) – There is no mention of another waiver of RMDs in 2021.
We encourage you to contact your RTD advisor for additional information on this new relief package.