On December 27, 2020 the President signed into law the 5,600 page Consolidated Appropriations Act (CAA), 2021. Within the CAA there are two COVID related bills, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). These bills contain many tax and non-tax related items. This update will focus on the some of the individual tax provisions.
New Stimulus Payments
The COVIDTRA portion of the Act includes an additional stimulus payment for individuals. Individual taxpayers will receive recovery rebates (stimulus payments) in the amount of $600 per taxpayer ($1,200 married filing jointly) as well as $600 per qualifying child. These payments are advances on 2020 tax credits. Eligibility will be determined based on 2019 adjusted gross income (AGI). The credit begins to phase out starting at AGI of $75,000 for single filers, $112,500 for heads of household, and $150,000 for joint filers. As done with the previous stimulus payment, funds will be received either via direct deposit or paper check.
The CARES act that was passed in March of 2020 offers enhanced tax incentives for making charitable contributions for the 2020 tax year. This includes a $300 above-the-line deduction for individuals that do not itemize as well as the ability to make cash contributions up to 100% of AGI for taxpayers that itemize. The TCDTR portion of the new bill extends both of these new provisions through 2021 and increases the 2021 deduction for married filing joint filers to $600.
Educator Expense Deduction
Eligible educators were previously allowed a $250 deduction for unreimbursed expenses for classroom materials, such as books, supplies, or other equipment. The COVIDTRA expands the deduction to include unreimbursed expenses for the cost of personal protective equipment, disinfectant and other supplies for the prevention of the spread of COVID-19. The new law will apply to expenses paid or incurred after March 12, 2020.
Child Tax (CTC) and Earned Income Tax (EIC) Credits
The child tax and earned income tax credits are based on earned income from wages, salaries, tips and other employee compensation. Under the new TCDTR for 2020 credit calculations, taxpayers may elect to substitute their 2019 earned income, if higher than 2020, for the calculation of these two credits.
Emergency Financial Aid Grants
Under the new Act, emergency financial aid grants previously authorized by the CARES Act will be excluded from the gross income of college and university students. This provision applies to grants made after March 26, 2020.