Consolidated Appropriations Act, 2021: What You Need to Know
On 12/27/20, this act was signed into law which extends certain provisions that were passed back in March with the CARES Act (see our earlier blog). While the most noteworthy aspects about this act are the $600 stimulus check and extended unemployment benefits, this new law does present some tax planning and financial planning opportunities. Below we go over some of the major aspects:
$600 Stimulus Check & Income Limitation
This second wave of stimulus checks follows similar guidelines as when the first $1,200 checks were sent earlier this year. Depending on your AGI, filing status and children that qualify for the Child Tax Credit, the amount you receive can decrease after crossing certain income thresholds. For every $100 made beyond these thresholds, your stimulus check benefit be reduced by $5. Below are the phase-out thresholds depending on your filing status:
- Single Filer: $75,000
- Joint Filer: $150,000
- Head of Household Filer: $112,500
Below is a handy chart that illustrates how much you can expect to receive once the AGI thresholds are crossed:
Unemployment Benefits Extension
Back in March when the CARES act was passed, unemployment benefits were increased by an extra $600/week. While this benefit ended in July, this new law has once again increased weekly benefits for the next 11 weeks, albeit at lower $300/week additional benefit.
Under normal circumstances, the maximum period of receiving unemployment benefits is 26 weeks (6 months). Given the current situation, some individuals may find themselves in a situation where this 6-month period will end soon. This new law has extended Unemployment Compensation benefit period as well as the Pandemic Unemployment Assistance Program (designed to provide unemployment benefits for self-employed individuals) for an additional 11-week period.
Required Minimum Distributions in 2021
The waiver of RMDs from retirement accounts (i.e. IRAs, 401k plans, etc.…) for 2020 will not be extended for 2021. As such, individuals (age 72+ in 2021) should begin preparing for RMDs in 2021. With this, comes tax planning scenarios and the potential use of Qualified Charitable Distribution if you are charitably inclined.
Charitable Contribution Tax Benefits
One of the tax benefits included in the CARES act back in March 2020 was the introduction of an above-the-line deduction for cash contributions made to qualified charities. Initially, this deduction was capped at $300 for taxpayers filing single or jointly. For joint filers, this could have been construed as a penalty as they could not get $300 per spouse. This new law extends this deduction for 2021 as well as removing the restriction for joint fliers, essentially allowing them to claim a deduction of up to $600. It should be noted that this ‘above-the-line’ charitable deduction is only available to those who are claiming the standard deduction in 2021. If you are itemizing deductions, then you cannot claim this above-the-line deduction.
Another charitable tax benefit that has been extended for 2021 is the ability to deduct up to 100% of your AGI through cash contributions to a qualified charity. Any carry forward charitable contributions cannot be counted towards the total deductible cash contributions. Contributions must be made in throughout the year in order to qualify for this benefit. It is unlikely that many people would want to deduct 100% of their income, so we do not anticipate recommending this for many clients.
Income Thresholds for the Lifetime Learning Credit
2020 is now the final year in which the above-the-line Tuition and Related Expenses deduction can be taken. While it is unfortunate that some taxpayer will miss out on this, beginning in 2021, taxpayers will be able to take advantage of higher income thresholds in order to qualify for the Lifetime Learning Credit. The new income for 2021 are as follows:
- $80,000 - $90,000 for single filers (up from $40,000 - $50,000)
- $160,000 - $180,000 for joint filers (up from $80,000 - $200,000)
Basically, both the Lifetime Learning Credit and the American Opportunity Credit will share the same income limits going forward.
Beginning 07/01/2023, the FAFSA will be undergoing major changes. For starters, the application itself will be simplified by reducing the number of questions, from the current 108 to about one-third of this amount.
The Expected Family Contribution (i.e., financial assets used to determine financial aid awards) will be referred as the Student Aid Index. In general, FAFSA applicants can expect a simpler application and simpler formula that can help this annual process go smoother.
Tuition Loan Reimbursement
The CARES act introduced a provision that would allow small businesses to provide up to $5,250 of annual, tax-free education reimbursement to employees paying down principal or interest on qualified student loans.
For both the employer and the employee, this provision would eliminate the employment tax liability up the $5,250 limit. Before this new law, this tax benefit was only available for the 2020 tax year. Now, it has been extended through 2025.
With this tumultuous year wrapping up, consulting with a fee-only financial advisor about these upcoming changes & more will help you navigate what lies ahead for you.
Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.