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New Act Provides Relief for Pandemic Weary Individuals

January 31, 2021

by Laurie Kaplan, Partner, MichaelSilver

On December 27, 2020, President Trump signed the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (Act). While the Act was designed to provide emergency relief to ailing businesses, it also presented new tax legislation that impacted individuals. As part of the Act, individuals who received an economic impact (stimulus) payment last year, may be eligible to receive a second stimulus payment of up to $600 per eligible family member. We will discuss a few of the most significant provisions that will affect taxpayers 2020 tax filings.

Additional Economic Impact Payments (EIP)

The Act provides a refundable tax credit in the amount of $600 per taxpayer ($1,200 for married filing jointly (MFJ)), plus an additional $600 per qualifying child. The phaseouts are lower this time around—just because you received an EIP last time does not mean you will receive one this time. Phaseouts start at $75,000 of modified adjusted gross income ($150,000 for MFJ) and payments are reduced at a rate of $5 per $100 of additional income. Second stimulus payments have been issued already and will be automatically sent to qualified taxpayers who received the initial EIP.

What if you were entitled to an EIP but did not receive one? Not to worry, you will be able to claim the missed payment when you file your 2020 tax return.

Increased Charitable Deductions Allowed

Feeling charitably inclined? Taxpayers can deduct up to 100% of their adjusted gross income (AGI) on cash donations made to qualifying charities instead of the normal 50% limit. This provision is in effect for both 2020 and 2021. Private foundations and donor advised funds are excluded from this provision. However, they are still a valuable tax savings strategy particularly if the donations are made with appreciated stock.

Normally, taxpayers who claim the standard deduction because they do not have enough deductions to itemize on the tax return are not able to benefit from charitable contributions. However, there are special provisions in effect which allow an above-the-line deduction for non-itemizers of $300 for 2020 and $300 Single ($600 MFJ) for 2021.

Additional Flexibility Provided for Distributions from IRA Accounts

Prior legislation eliminated the requirement for required minimum distributions (RMDs) for 2020. However, while not required, some taxpayers took distributions to replace lost or decreased income due to the pandemic. You could take up to $10,000 in distributions from your IRA in 2020 and include it in income over three years as long as it qualified as a coronavirus-related distribution. You also have the option to repay it over three years and avoid paying income tax at all.

What is a coronavirus-related distribution? This includes a taxpayer who was diagnosed or had an immediate family member diagnosed with COVID-19 during 2020. Further, it includes a taxpayer or family member who experienced adverse financial consequences due to quarantine, furlough, reduction in hours worked, reduced hours of operation for a business owner, loss of a job and similar circumstances.

Other Provisions 

You can now make deductible IRA contributions if you are still working. Previously you had to stop making these contributions once you turned 70½. 

The threshold for deductible medical expenses remains at 7.5% of AGI. This was set to increase to 10% for 2021, but the Act permanently lowered the threshold to 7.5%.