The Consolidated Appropriations ACT, 2021 (CAA 2021), P.L. 116-260, was signed into law on December 27, 2020. The CAA is a major federal government funding bill that also includes economic stimulus payments related to the coronavirus pandemic. According to an analysis by GovTrack.us, a nongovernment source of legislative information and statistics, the bill (H.R. 133) that became the means for the passage of the CAA 2021 is the “fifth longest bill” to be passed by Congress in U.S. history.
It contains 32 divisions, which makes it like a book with 32 chapters, of which two divisions (i.e., chapters) provide tax relief (Division N) and extension (Division EE) provisions for individual taxpayers.
Section 273(a) of the COVID-Related Tax Relief Act of 2020 (Division N of the CAA) remedies the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, in which certain taxpayers qualified for a direct, nontaxable rebate amount depending on their tax filing status and if their adjusted gross income (AGI) was below a threshold level. The threshold levels where the rebate began to phase out were $150,000 of AGI for joint filers, $112,500 of AGI for head of household filers, and $75,000 of AGI for all other filers.
Moreover, the rebate for joint return filers was $2,400—double the $1,200 other taxpayers received. Taxpayers filing as surviving spouses would fall into the lowest threshold and only qualify for $1,200. This legislation would be contrary to the general treatment of surviving spouse filers who generally receive the same treatment as taxpayers filing a joint tax return. Section 273(a) of the CAA, therefore, retroactively amends Internal Revenue Code (IRC) §6428 to apply to surviving spouses as if included in the CARES Act.
Section 272 of the COVID-Related Tax Relief Act of 2020 provides an additional $600 ($1,200 for joint and surviving spouse filers) under the same AGI phaseout rules given under the CARES Act (see IRC §6428A). In addition, any individual who was deceased before January 1, 2020—or, in the case of a joint tax return, if both taxpayers were deceased before January 1, 2020—no rebate amount shall be determined with respect to any qualifying child of the taxpayer.
A $250 above-the-line deduction to reduce AGI is available for eligible educators for certain nonreimbursed trade or business expenses under the CAA ($500 if married, filing jointly, and both spouses are eligible educators). Eligible educators include teachers, instructors, counselors, principals, or aides who provide elementary through secondary (i.e., kindergarten through grade 12) education for at least 900 hours during a school year.
Qualified expenses include ordinary and necessary expenses for professional development courses, books, supplies, equipment (including computer equipment, software, and supplies), and other materials used in the classroom. Section 275 of the COVID-Related Tax Relief Act of 2020 expands the definition of qualified expenses per IRC §62(a)(2)(D)(ii) to include amounts spent for personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of coronavirus incurred or paid after March 12, 2020.
Rev. Proc. 2021-15 (published February 4, 2021) contains regulations and other guidance to clarify these new expenses. It provides a safe harbor by specifying that the COVID-19 protective items include but aren’t limited to face masks; disinfectant; hand soap and sanitizer; disposable gloves; tape, paint, or chalk for marking social distancing; physical barriers such as clear plexiglass; air purifiers; and any other items recommended by the Centers for Disease Control and Prevention to be used in the prevention of the spread of COVID-19.
The CARES Act provides taxpayers to take an above-the-line deduction of up to $300 to reduce AGI in lieu of taking an itemized deduction for qualified charitable contributions. This tax option is available for filing 2020 tax returns if the taxpayer doesn’t elect to itemize his or her deductions. This deduction is limited to $300 per tax return; therefore, taxpayers filing a joint tax return are limited to a $300 deduction on their 2020 tax return.
As a result, §212 of the Taxpayer Certainty and Disaster Tax Relief (TCDTR) Act of 2020 (Division EE of the CAA) amends IRC §170 for the above-the-line charitable contribution deduction. The first amendment is to extend the deduction through 2021. The second amendment is to allow taxpayers filing a joint tax return in 2021 to deduct $600 (instead of $300 on their 2020 tax return) for qualified charitable contributions. Therefore, those filing joint tax returns are limited to $300 on their 2020 tax return and $600 on their 2021 tax return. The third amendment of the TCDTR Act increases the penalty to 50% (up from 20%) for the portion of an underpayment in the case of an overstatement of qualified charitable contributions.
The TCDTR Act of 2020 also affects flexible spending arrangements (FSAs). In general, an employer that sponsors an FSA can provide its employees one of two options to allow the employees to carry over unused contributions to the following year. The first option (grace period rule) allows the employee to use the unused funds at the end of the year through the first two-and-a-half months of the following year. The second option (carryover rule) allows the employee to carry over up to $550 of the unused funds in the following year. Under the TCDTR Act, any unused FSA funds can be carried over to the following year.
For those employees participating in an employer-sponsored dependent-care FSA, the same special treatment is available for 2020 and 2021. That is, any unused benefits at the end of 2020 (or 2021) can be used in 2021 (or 2022), respectively.
The TCDTR Act of 2020 extended several other code sections applicable to individuals. The medical expense deduction floor of 7.5% per IRC §213 was due to increase to 10% beginning in tax year 2019. The TCDTR Act of 2019 had extended the 7.5% floor through tax year 2020. But §101 of the TCDTR Act of 2020 repeals the 10% floor, therefore making the 7.5% floor permanent (at least until Congress changes it again).
IRC §127 provides an exclusion from gross income for amounts paid by an employer for educational assistance of up to $5,250 annually. Educational assistance means the payment of expenses incurred by or on behalf of an employee by the employer for expenses including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment. Section 2206 of the CARES Act expanded the meaning of the term “educational assistance” to include payments of principal or interest made by an employer on a qualified education loan incurred by the employee (not spouse or children) and only for the period of March 27, 2020, through December 31, 2020. Section 120 of the TCDTR Act of 2020 extends this exclusion through December 31, 2025.
© 2021 A.P. Curatola