CAA: Individual Tax Provisions & Extensions
by Bethany Banks
The Consolidated Appropriations Act, 2021 (2021 CAA) was signed into law in late December and contains many new tax laws aimed at providing additional relief to American taxpayers. There are many new tax provisions and extensions of existing laws within the 2021 CAA and this update will highlight many of the individual provisions that we have not already covered.
Medical Expense Deduction Floor
The 2021 CAA makes the adjusted gross income (AGI) floor for itemized unreimbursed medical & dental expense deduction permanently 7.5% of adjusted gross income for all taxpayers. Before the 2021 CAA, the floor for 2021 forward was scheduled to be 10% of AGI unless the taxpayer was 65 or older. This is effective for years beginning after December 31, 2020 and means more taxpayers will be able to benefit from the medical expense deduction in the coming years.
Qualified Tuition and Lifetime Learning
The 2021 CAA caps the 2020 qualified tuition deduction. For years beginning after December 31, 2020 the qualified tuition deduction is repealed and replaced with Lifetime Learning credit which has increased phase-out limits.
Pre-2021 Qualified Tuition Deduction Caps
|Deduction Cap||Status other than MFJ AGI Below||Married Filing Joint AGI below|
Post-2020 phase-out limits between
|Status other than MFJ AGI Below||Married Filing Joint AGI below|
Minimum age for distributions during working retirement
This amendment allows 55 & older employees in the building and construction industry to take distributions from certain pension plans while not having left employment without causing the plan to lose the status of a qualified trust.
Charitable contributions by non-itemizers
Earlier legislation had allowed for taxpayers who do not itemize to take an above the line deduction for charitable contributions in 2020 of $300. This act expands the timeframe and allows the above the line deduction for charitable contributions in 2021 as well on the 2021 tax return. In addition, in 2021 joint filers may deduct up to $600 for charitable contributions while all others are limited to $300. The 2020 non-itemizers charitable deduction is capped at $300 regardless of filing status. If the deduction is overstated there are increased penalties for underpayments of tax.
Health & Dependent Care Flex Spending Arrangements
Many taxpayers who fund health and dependent care flex spending arrangements (FSA) have found themselves unable to use all of the amounts they set aside during 2020. Either they found themselves not using as much of the FSA for medical purposes due to the reticence to seek care in the middle of a pandemic for fear of contagion or inability to obtain appointments/treatment or they ceased to use dependent care with dependents being sequestered at home for online school. A big concern was what would happen with those funds contributed that were unused and would typically not be allowed to be carried over.
The Act has expanded the carryover period for both 2020 and 2021. Employers may allow a carryover of the unused benefits up to the full annual amount for 12 months after the end of the plan year for 2020 and 2021. There is also a special carryforward rule for those whose dependent aged out during the pandemic. Plans may allow employees who cease to participate to continue to receive reimbursement from unused benefits or contributions through the end of the plan year in which participation ceased including any grace period.
Employers opting to provide these benefits to their employees will be required to amend their plan documents to allow for such provisions to be added. The Act provides employers with a timeline for making these plan amendments.
2020 Child Tax Credit and Earned Income Credit
On the 2020 tax return, taxpayers may elect to use their 2019 earned income for purposes of determining the refundable child tax credit and earned income credit if their 2019 earned income is greater than their earned income for 2020. Those credits base the amount on a percentage of the taxpayer’s earned income.
$250 Educator Expense Deduction
Eligible educators can claim the $250 above-the-line deduction for expenses for PPE, disinfectant, and other supplies for preventing the spread of COVID purchased after March 12, 2020.
Charitable Contribution Limitation
Earlier legislation temporarily allowed qualified charitable contributions up to 100% of the taxpayer’s adjusted gross income for 2020. This has been extended to include 2021 as well.
Qualified Principal Residence Indebtedness Discharge – Exclusion from Gross Income
Usually, forgiveness of debt is considered taxable income. This exclusion allowed income from forgiveness of debt on qualified principal residence to be excluded from income up to a limit. The exclusion from gross income for discharge of qualified principal residence indebtedness has been extended through the end of 2025. It is important to note that the maximum amount of the exclusion has been reduced. Starting January 1, 2021 through December 31, 2025, the maximum exclusion is $750,000 ($375,000 if married filing separate).
Mortgage Insurance premiums as Qualified Residence Interest
Taxpayers with qualified mortgage insurance premiums may treat that as interest when considering the mortgage interest deduction for tax year 2021. The extension is only for one year and limitations are unchanged.
Health Insurance Costs for Eligible Individuals
The 2021 CAA expands the eligible coverage months to include calendar year 2021 for purposes of the refundable credit of premiums paid.
Energy-Efficient Homes Credit
The 2021 CAA extends the credit for new energy-efficient homes to include qualified new energy-efficient homes acquired before January 1, 2022.
Residential Energy-Efficient Property
The credit for residential energy-efficient property is extended under the 2021 CAA allowing a credit for property placed in service before 2024. This provision also includes biomass fuel property while removing biomass fuel property from the nonbusiness energy property credit.
As always, please reach out to your trusted BRC tax advisor if you have any questions.
The following are additional articles that cover other important topics impacted by the 2021 CAA:
- Click Here: Business Tax Provisions and Extensions
- Click Here: PPP Loan Recipients May Now Claim Employee Retention Credit for Wages Paid During 2020
- Click Here: Payroll Tax Relief Provisions
- Click Here: Continued Assistance for Unemployed Workers
- Click Here: Benefits to Affordable Housing Industry and Families Who Qualify for Rental Assistance
- Click Here: Additional Provisions of the Education Stabilization Fund
- Click Here: Latest COVID-19 Legislation Will Bring Much Needed Small Business Relief (PPP Loans)
- Click Here: Additional Recovery Rebates for Individuals
- Click Here: Latest COVID-19 Legislation Provides Tax Deductibility of PPP Expenses