The recent COVID relief bill brings many provisions to taxpayers.  Below is a summary of these changes that may impact your tax return filing for 2020:

Direct-to-taxpayer recovery rebate. This was covered in one of our last posts; please click here to read more.

DEDUCTIONS

• $250 educator expense deduction applies to PPE, other COVID-related supplies. The Act provides that eligible educators (i.e., kindergarten-through-grade-12 teachers, instructors, etc.) can claim the existing $250 above-the-line educator expense deduction for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 bought after March 12, 2020.
• 7.5%-of-AGI “floor” on medical expense deductions is made permanent. The Act makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, set to increase to 10% of adjusted gross income after 2020.  The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later years
• Mortgage insurance premium deduction extended. The Act extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to a phase-out based on the taxpayer’s adjusted gross income.
• Above-the-line charitable contribution deduction extended through 2021; increased penalty for abuse. For 2020, individuals who do not itemize deductions can take up to a $300 above-the-line deduction for cash contributions to “qualified charitable organizations.” The Act extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains $300 for other taxpayers). Taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty (previously, 20%).
• Allowance of charitable contributions up to 100% of an individual’s adjusted gross income extended. In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 increased to 100% of the individual’s adjusted gross income. (The usual limit is 60% of adjusted gross income.) The Act extends this rule through 2021.

EXCLUSIONS FROM INCOME

• Exclusion for benefits provided to volunteer firefighters and emergency medical responders made permanent. Emergency workers who are members of a “qualified volunteer emergency response organization” can exclude from gross income state or local government payments received and state or local tax relief provided on account of their volunteer services. This exclusion was due to expire at the end of 2020, but the Act made it permanent.
• Exclusion for discharge of qualified mortgage debt extended, with limits of excludable discharge lowered. If a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. Under an exclusion due to expire at the end of 2020, a taxpayer can exclude from taxable income up to $2 million ($1 million for married individuals filing separately) of discharged debt if “qualified principal residence debt” is discharged. The Act extends this exclusion through the end of 2025 but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately).
• Extension of exclusion for certain employer payments of student loans.  Qualifying educational assistance provided under an employer’s qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee’s income. The CARES Act added “eligible student loan repayments” made after March 27, 2020, and before January 1, 2021, for this exclusion. The payments, subject to the overall $5,250 per employee limit, can be principal or interest on a qualified student loan by the employer, whether paid to the employee or a lender. The Act extends the exclusion for eligible student loan repayments through the end of 2025.

TAX CREDITS

• Individuals may elect to base 2020 refundable child tax credit (CTC) and earned income credit (EIC) on 2019 earned income.  Suppose an individual’s CTC exceeds the taxpayer’s tax liability. In that case, the taxpayer is eligible for a refundable credit equal to 15% percent of the taxpayer’s taxable “earned income” for the tax year, plus the EIC equals a percentage of the taxpayer’s “earned income.” For both credits, earned income means wages, salaries, tips, and other employee compensation if includible in gross income for the tax year. But for determining the refundable CTC and the EIC for 2020, the Act allows taxpayers to elect to substitute the earned income for the preceding tax year if that amount is greater than the taxpayer’s earned income for 2020.
• Health coverage tax credit (HCTC) for certain eligible individuals’ health insurance costs is extended. A refundable credit (HCTC) is allowed for 72.5% of the cost of health insurance premiums paid by certain individuals, such as individuals eligible for Trade Adjustment Assistance due to a qualifying job loss and individuals between 55 and 64 years old with defined-benefit pension plans taken over by the Pension Benefit Guaranty Corporation. The HCTC was due to expire at the end of 2020, but the Act extended it through 2021.
• New Markets tax credit extended. The New Markets credit provides a substantial tax credit to either individual or corporate taxpayers that invest in low-income communities. This credit was due to expire at the end of 2020, but the Act extended it through 2025. Carryovers of the credit were extended, as well.
• Nonbusiness energy property credit extended. A credit is available for purchases of “nonbusiness energy property”—i.e., qualifying energy improvements to a taxpayer’s main home. The Act extends this credit, which was due to expire at the end of 2020, through 2021.
• Qualified fuel cell motor vehicle credit extended. A credit for purchases of new qualified fuel cell motor vehicles, due to expire at the end of 2020, was extended by the Act through the end of 2021
• 2-wheeled plug-in electric vehicle credit extended. The 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500) was extended until the end of 2021 by the Act.
• Residential energy-efficient property (REEP) credit extended; bio-mass fuel property expenditures included. Individual taxpayers are allowed a personal tax credit equal to the applicable percentages of qualified solar electric property expenditures, including qualified solar water heating property, fuel cell property, small wind energy property, and geothermal heat pump property. The REEP credit was to expire at the end of 2021, with a phase-down of the credit during 2020 and 2021. The Act extends the credit phase-down period by two years—through the end of 2023; the REEP credit will not apply after 2023. The Act also adds qualified biomass fuel property expenditures to the list of expenditures qualifying for the credit, effective beginning in 2021.

DISASTER-RELATED CHANGES IN RETIREMENT PLAN RULES

• 10% early withdrawal penalty does not apply to qualified disaster distributions from retirement plans. A 10% early withdrawal penalty generally applies to a distribution from an employer retirement plan to an employee under the age of 59½. The Act provides that the 10% early withdrawal penalty does not apply to any “qualified disaster distribution” from an eligible retirement plan. The aggregate amount of distributions received by an individual treated as qualified disaster distributions may not exceed $100,000, over the aggregate amounts treated as qualified disaster distributions received by that individual for all prior tax years.
• Increased limit for plan loans made because of a qualified disaster. Generally, a loan from a retirement plan to a retirement plan participant cannot exceed $50,000. Plan loans over this amount are considered taxable distributions to the participant. The Act increases the allowable amount of a loan from a retirement plan to $100,000 if the loan is made because of a qualified disaster and meets various other requirements.

Please schedule an appointment to discuss with one of our tax preparers.