The Consolidated Appropriations Act, 2021 was signed into law by President Donald Trump on December 27, 2020. This act included a wide range of additional Coronavirus aid as well as extensions of expiring tax relief packages. At a whopping 5,593 pages, it is the longest bill ever passed by Congress according to the Senate Historical Office. That said, we want to provide a high-level overview of the potential tax impacts that Division EE of the Consolidated Appropriations Act, called the Taxpayer Certainty and Disaster Tax Relief Act of 2020, may have on individuals in the upcoming tax year.
Medical Expense Deduction Floor
The act returns the medical expense deduction floor to 7.5% of adjusted gross income. This change applies to tax years beginning after December 31, 2020.
The Affordable Care Act raised the threshold to 10% of AGI so that, for 2013 through 2017, individuals under age 65 could claim an itemized deduction for unreimbursed medical expenses only to the extent that those expenses exceeded 10% of AGI, while the threshold remained 7.5% of AGI for individuals age 65 and older. The threshold was scheduled to increase to and remain at 10% for all taxpayers, but Congress temporarily restored the 7.5% threshold for everyone first for 2017 and 2018, then for 2019 and 2020, before making the change permanent.
Charitable Contribution Deduction
The $300 ($600 for joint return filers) above-the-line charitable contribution deduction for qualified contributions made by non-itemizers has been extended through 2021.
The temporary charitable contribution limit provided in the CARES Act has been extended for 2021. The limitation will remain at 100% (previously 60%) only for deductible cash contributions to a public charity.
Transition from Tuition Deduction to Increased Income Limit on Lifetime Learning Credit
The deduction for qualified tuition and related expenses has been repealed. This change applies to tax years beginning after December 31, 2020.
The income limitations on the Lifetime Learning Credit have been increased. The phaseout will begin at modified adjusted gross income of $80,000 ($160,000 for joint returns). These amounts will not be adjusted for inflation.
Mortgage Insurance Premiums
The act extends the treatment of mortgage insurance premiums as deductible qualified residence interest for one additional year, through December 31, 2021.
Health and Dependent Care Flexible Spending Arrangements
The new legislation allows plans that include a health flexible spending arrangement (FSA) or a dependent care FSA to continue to be treated as cafeteria plans when they permit:
- The FSA to carryover unused benefits up to the full annual amount from the plan year ending in 2020 to the plan year ending in 2021, and the plan year ending in 2021 to the plan year ending in 2022,
- Extension of the grace period for unused benefits or contributions for a plan year ending in 2020 or 2021 to 12 months after the end of the plan year,
- An employee to make a prospective change in election amounts for plan years ending in 2021 without a status change.
A plan that includes a health FSA may allow an employee who ends participation in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of that plan year, including any grace period. Plans may extend the maximum age of eligible dependents from 12 to 13 for dependent care FSAs for the 2020 plan year, and unused amounts from the 2020 plan year may be carried over into the 2021 plan year.
What You Should Do
These changes we’ve discussed could present tax planning opportunities for 2021. Specifically, these changes should be assessed when planning itemized deduction strategies. We recommend you consult with your tax professional before making any tax-related decisions. If you feel that any of the changes above could potentially impact you and your financial planning, please call the Tull Financial Group office to discuss your specific tax situation at (757) 436-1122 or contact us through the contact form on our website, and a financial advisor will reach out to you to see how we may assist with your tax planning needs.
Reproduced with permission from Bloomberg Tax & Accounting. Published December 31, 2020. Copyright 2021 by The Bureau of National Affairs, Inc. (800-372-1033) https://pro.bloombergtax.com/