Dear Tax Constituent:
On December 27, 2020, the President signed the Consolidated Appropriations Act of 2021 (CAA or the Act) into law. This more than 5,500 page law contains many subsections, including the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). We have highlighted some major provisions affecting individuals below.
New recovery rebate
The COVIDTRA provides a refundable tax credit to eligible individuals in the amount of $600 per eligible family member. The credit is $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income.
The term "eligible individual" does not include any nonresident alien, anyone who qualifies as another person's dependent, and estates or trusts.
The credit is available on the taxpayer's 2020 return, and provides for Treasury to issue advance payments based on the information on 2019 tax returns. Eligible taxpayers treated as providing returns through the nonfiler portal with respect to their EIP, will also receive payments.
In general, taxpayers without an eligible Social Security number are not eligible for the payment. However, married taxpayers filing jointly where one spouse has a Social Security Number and one spouse does not are eligible for a payment of $600, in addition to $600 per child with a Social Security Number.
If the amount of the credit determined on the taxpayer’s 2020 tax return exceeds the amount of the advance payment based on the taxpayer’s 2019 tax return, the taxpayer will not be required to repay any amount of the payment, but will instead receive the difference as a refundable tax credit.
Emergency financial aid grants
An individual taxpayer may claim the American opportunity tax credit and/or the Lifetime Learning credit for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouses, and their dependents. However, higher education expenses paid for by tax-exempt income can’t be used to claim either of these credits. Under the new law, COVIDTRA excludes certain CARES Act emergency financial aid grants made after March 26, 2020, from the gross income of college and university students. This provision also holds students harmless for purposes of determining their eligibility for the American Opportunity and Lifetime Learning tax credits.
Certain Charitable Contributions Deductible by Non-Itemizers
For 2020 and 2021, individuals who normally do not itemize deductions may take up to a $300 ($600 for married filers) above-the-line deduction for cash contributions to qualified charitable organizations. A 50% penalty applies to tax underpayments attributable to any overstated cash contribution by non-itemizers.
Net disaster losses of individuals are allowed as an addition to the standard deduction, subject to $500 per-casualty floor but exempt from 10%-of-AGI limitation
Prior to the enactment of the CAA, losses of property not connected with a trade or business or a transaction entered into for profit were considered as personal casualty losses if the loss arose from fire, storm, shipwreck, or other casualty. Such personal casualty losses not reimbursed by insurance and if related to a federally declared disaster could be claimed as itemized deductions subject to additional limits of $100 per casualty and a floor of 10% of Adjusted Gross Income.
The TCDTR provides special rules for individuals who have a net disaster loss for any tax year. "Net disaster loss" means the excess of qualified disaster-related personal casualty losses over personal casualty gains. "Qualified disaster-related personal casualty losses" means personal casualty losses that arise in a qualified disaster area on or after the first day of the incident period of the qualified disaster to which the area relates, and that are attributable to the qualified disaster.
The TCDTR increases the per-casualty floor for qualified disaster-related personal casualty losses from $100 to $500. Under the TCDTR, the 10%-of-AGI limitation doesn't apply to the net disaster loss. The TCDTR treats the net disaster loss as an addition to the individual's standard deduction, rather than as an itemized deduction. Although the standard deduction is disallowed for alternative minimum tax purposes, that disallowance does not apply to the increased amount attributable to the net disaster loss.
Tax Extenders
Reduction in Medical Expense Deduction Floor
Under pre-Act law, for tax years beginning before Jan. 1, 2021, individuals could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of AGI. The CAA makes the 7.5% threshold permanent, applicable for tax years beginning after Dec. 31, 2020.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness and Reduction in Maximum Indebtedness Limits
Under pre-Act law, discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately), was, in tax years beginning before Jan. 1, 2021, excluded from gross income. The exclusion also applied to qualified principal residence indebtedness discharged pursuant to a binding written agreement entered into before Jan. 1, 2021. The CAA extends this exclusion to discharges of indebtedness before Jan. 1, 2026. The Act also reduces the above maximum acquisition indebtedness limits to $750,000 and $375,000, respectively.
Treatment of mortgage insurance premiums as qualified residence interest
Under pre-Act law, mortgage insurance premiums paid or accrued before Jan. 1, 2021 by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence were treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's adjusted gross income (AGI). The amount allowable as a deduction was phased out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeded $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction wasn't allowed if the taxpayer's AGI exceeded $110,000 ($55,000 in the case of married individual filing a separate return). The CAA extends this treatment through 2021 for amounts paid or incurred after Dec. 31, 2020.
Credit for Health Insurance Costs of Eligible Individuals
The Internal Revenue Code (the Code) provides a refundable credit (commonly referred to as the health coverage tax credit or “HCTC”) equal to 72.5% of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance. The CAA extends this credit by one year, through 2022, applicable to months beginning after Dec. 31, 2020.
Nonbusiness Energy Property
The Code allows a credit of 10% of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences. The Code allows credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans, and is subject to a lifetime cap of $500. The CAA extends this credit through 2021, for property placed in service after Dec. 31, 2020.
Residential energy-efficient property credit extended, bio-mass fuel property expenditures included
Under pre-Act law, individual taxpayers were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. Under a phasedown provision, the REEP applicable percentage was 30% for property placed in service after Dec. 31, 2016, and before Jan. 1, 2020, 26% for property placed in service after Dec. 31, 2019, and before Jan. 1, 2021, and 22% for property placed in service after Dec. 31, 2020, and before Jan. 1, 2022 The REEP credit did not apply to property placed in service after Dec. 31, 2021.
For property placed in service after Dec. 31, 2020, the CAA extends the phasedown of the credit by two years by providing that the 26% rate applies to property placed in service before Jan. 1, 2023, and the 22% rate applies to property placed in service after Dec. 31, 2022, and before Jan. 1, 2024. Therefore, the REEP credit will no longer apply for property placed in service after Dec. 31, 2023.
In addition, as to expenditures paid or incurred in tax years beginning after Dec. 31, 2020, the Act adds qualified biomass fuel property expenditures to the list of expenditures qualifying for the credit. A qualified biomass fuel property expenditure is an expenditure for property (i) which uses the burning of bio-mass fuel (i.e., any plant-derived fuel available on a renewable or recurring basis) to heat a dwelling unit located in the U.S. and used as a residence by the taxpayer, or to heat water for use in the dwelling unit, and (ii) which has a thermal efficiency rating of at least 75% (measured by the higher heating value of the fuel).
If you would like more information on these topics or another tax topic of interest to you, please contact our office.
—McAvoy + Co, CPA