The dark clouds of the coronavirus pandemic continue to hang heavy over all of us, but even these clouds have a silver lining. The Consolidated Appropriations Act (CAA), signed into law on Dec. 27, 2020, provides for a second round of stimulus payments ($600 per taxpayer and qualifying child), an expansion of the Paycheck Protection Program (PPP), and numerous tax provisions and extensions that benefit both individuals and businesses.

The 2021 tax year brings additional relief in the form of increased contribution limits to retirement accounts, an increase in the standard deduction, and increases in other tax-related limitations and thresholds. (Under our country’s tax code, the standard deduction is a dollar amount that non-itemizers may subtract from their income before income tax is applied.)

In this post, we highlight recent tax provisions, extensions, limits and thresholds you should be aware of as you prepare your 2020 taxes and plan for the coming 2021 tax year.

CAA Provisions for Individuals, Payroll, and Businesses

Consolidated Appropriations Act (CAA) provisions apply to individuals, payroll, and businesses, as presented in the following sections.

Provisions for Individual Taxpayers

The CAA offers the following benefits for individual taxpayers:

  • Increased deduction for medical expenses: The CAA permanently lowers the limitation for deducting medical expenses from 10 percent of adjusted gross income (AGI) to 7.5 percent.
  • Charitable contribution deduction for taxpayers who don’t itemize: The CAA extends the non-itemizer deduction for up to $300 of cash donations ($600 for married couples filing jointly) to qualified charities through 2021.
  • No AGI limit for cash donations to qualified charities: Previous law limited charitable contributions to qualified organizations to 60 percent of AGI. The Coronavirus Aid, Relief, and Economic Security (CARES) act removed that limitation for 2020, and the CAA removes the limitation for 2021.
  • Education credits: The CAA removes the above-the-line deduction for tuition and fees and expands the application of the Lifetime Learning credit to tax years 2021 and beyond.
  • Exclusion for certain employer payments of student loans: The CARES act temporarily expanded the definition of employer-sponsored educational assistance to include qualified student loan payments made to employees in 2020. Under this provision, employees are not taxed for employer payments of their qualified student loans up to $5,250 per employee. The CAA extends the exclusion through 2025.
  • Exclusion from income for forgiveness of debt for a qualified principal residence: Forgiven debt is generally treated as taxable income. The CARES act included an exception for debt used to acquire a personal residence up to $2 million for a married couple. This exception was set to expire in 2020. The CAA extends the exclusion through 2025, but at a reduced amount of $750,000.
  • Deduction for qualified mortgage insurance premiums: The CAA extends this deduction through 2021.
  • Penalty-free early retirement plan distributions: The CAA allows for distributions from retirement plans of up to $100,000 without the 10 percent early distributions penalty. However, distributions will be subject to income tax over a three-year period.

Payroll Tax Provisions

  • Flexible Spending Account (FSA) plan carryovers: If you own or operate a small business, you may allow a carryover of unused FSA funds from 2020 to 2021 and from 2021 to 2022, or extend the grace period for spending unused FSA funds to 12 months after the plan year.
  • Extended FFCRA credits for paid sick and family leave: The Families First Coronavirus Response Act (FFCRA), passed earlier in 2020, provided employers a payroll tax credit for paid sick and family leave due to COVID-19. The CCA extends this credit through March 31, 2021.
  • Employer tax credit for paid family and medical leave: Under earlier tax law, businesses could claim a general business credit for paid family and medical leave up to 12 weeks per year. The CCA extends this credit, which was set to expire at the end of 2020, through 2025.
  • Work opportunity credit: This credit, which is available to employers for hiring individuals from certain targeted groups, was set to expire at the end of 2020. The CAA extends it through 2025.
  • Expansion of Employee Retention Credit (“ERC”): The CARES Act provided a 50 percent credit for companies that continued to pay their employees during a COVID-19 imposed lockdown. The CAA expands eligibility for the ERC, increases the credit to 70 percent, and extends it through June 30, 2021.
  • Extension of deferred payroll taxes: An executive memorandum signed in August 2020 allowed employers to defer the employee’s share of social security taxes between Sept. 1, 2020 and Dec. 31, 2020 and repay the taxes through a reduction in the employee’s pay between Jan. 1, 2021 and April 30, 2021. The CAA extends the required repayment period to Dec. 31, 2021.

Business Tax Provisions

  • Deductions for expenses paid using PPP loan proceeds: The CAA (Consolidated Appropriations Act) clarifies the original intent of the Paycheck Protection Program (PPP) and allows for full deduction of any expense paid for using PPP loan proceeds.
  • 100 percent deduction for business lunches: The CAA temporarily allows for a full deduction for the cost of business-related food and beverages provided by restaurants and paid for or incurred in 2021 or 2022.
  • Qualified disaster relief contributions up to 100 percent of taxable income: The CAA creates a new category of “qualified disaster relief contributions” for qualifying contributions. Contributions must be made between Jan. 1, 2020 and 60 days after passage of the Act, which falls on Feb. 25, 2021.
  • Accelerated depreciation of residential rental property: Real property trades or businesses subject to the interest expense limitations of 163(j) may choose to make an election, under which the interest limitations will not apply. However, the taxpayer must use ADS depreciation rules, resulting in a longer useful life and lower depreciation expense each year. Under prior law, residential rental property placed in service prior to Jan. 1, 2018 was subject to a 40-year ADS useful life. The CAA changes this to a 30-year ADS useful life if the taxpayer was not subject to ADS prior to Jan. 1, 2018.

Additional CCA Details

The above overview touches on some of the most significant tax provisions contained in the 5,500-plus page CCA legislation. Contact us at Stees, Walker & Company, LLP (SWC) to find out more about how the CAA may affect taxes for you or your business.

Six Key Tax Limitations and Thresholds

As you plan for tax year 2021, be aware that some limitations and thresholds will change in 2021, while some will remain the same. For example, while the maximum tax-deferred contributions to an IRA will stay the same, the standard deduction for individuals and married couples is set to increase slightly.

Specifically, here are six key tax limitations and thresholds you need to be aware of:

  1. IRA contributions limits are unchanged from 2020 to 2021. If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100 percent of your earned income. If you’re 50 years or older, you can make another $1,000 “catch up” contribution.
  2. 401(k) plan contribution limits are unchanged from 2020 to 2021. You can contribute up to $19,500 to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re 50 years or older.
  3. The threshold for withholding and paying FICA tax for domestic employees increased $100 from 2020 to 2021. If you hire and pay a domestic employee $2,300 or more, you must withhold and pay FICA tax for that employee. The threshold was $2,200 in 2020. (To be clear, domestic employee refers to a babysitter or housecleaner who works in your home.)
  4. The wage cap for paying Social Security tax changes from $137,700 in 2020 to $142,800 in 2021. In 2021, you pay Social Security tax only on the first $142,800 you earn and not on any amount over that. However, you pay Medicare tax on all earned income.
  5. The standard deduction for 2021 is increasing slightly. The Tax Cuts and Jobs Act (TCJA) eliminated the tax benefit of itemizing deductions for many people by significantly increasing the standard deduction and reducing or eliminating various itemized deductions. For 2021, the standard deduction amount for single filers is $12,550 (up from $12,400 in 2020). For married couples filing jointly, the standard deduction is $25,100 (up from $24,800), and for heads of households, the amount is $18,800 (up from $18,650).
  6. The gift tax annual exclusion for 2021 remains at $15,000. This amount is adjusted in $1,000 increments, so it typically increases only every few years.

There are a lot of changes this tax year, and if you’re concerned about overlooking one of the many tax breaks for which you might be entitled, don’t fret. We’re here specifically to help you navigate the complexities of the U.S. tax code and maximize your tax savings at the federal, state, and local levels, so you can keep more of the money you earned through your hard work and investments.

What’s most important is that if you do have any questions about the potential tax implications of recent legislation, contact us as soon as possible, so we can help you plan ahead and begin to implement your tax-saving plan.

– – – – – – –

Disclaimer: The information in this blog post about potential tax implications of recent legislation is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at Stees, Walker & Company, LLP (SWC), nor is the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.