The Consolidated Appropriations Act, 2021 (CAA, 2021) was signed into law on December 27, 2020, extending federal income tax breaks that were revised to accommodate the economic impact of the Coronavirus pandemic.
Dozens of these federal income tax breaks were close to expiring on December 31, 2020. The Tax Payer Certainty and Disaster Tax Relief Act of 2020 (TCDTR) and the COVID-related Tax Relief Act (COVIDTRA) were folded into the CAA, 2021.
Below are a series of tax breaks that benefit individual taxpayers based on the CAA, 2021.
College Tuition Deduction Replaced by Liberalized Education Credit
- For the 2020 tax year, the college tuition deduction can be up to $4,000 for lower income individuals and up to $2,000 for middle income individuals.
- Taxpayers with Modified Adjusted Gross Income (MAGI) up to $65,000, or up to $130,000 for married joint-filers, can deduct qualified expenses up to $4,000.
- Taxpayers with MAGI between $65,001 and $80,000, or between $130,001 and $160,000 for married joint-filers, can deduct up to $2,000.
- The allowable 2020 deduction is zero if MAGI is more than $80,000, or more than $160,000 for married joint-filers.
- If your 2020 income allows you to be eligible for the deduction, you can claim it whether you itemize or not.
- The TCDTR repeals the college tuition write-off for 2021 and beyond. In addition, the new law aligns the phase-out rule for the Lifetime Learning credit, which could be worth up to $2,000 annually, with a more favorable phase-out rule for the American Opportunity credit, which can be worth up to $2,500 per student. The TCDTR trades the old-law write-off for the more favorable new-law Lifetime Learning credit phase-out rule.
- After this TCDTR change, both education tax credits are phase out for 2021 and beyond between MAGI of $80,001 and $90,000 for unmarried individuals and between $160,001 and $180,000 for married joint-filing couples.
- Before the TCDTR, the Lifetime Learning credit was phased out for 2020 between MAGI of $59,001 and $69,000 for unmarried individuals and between $118,001 and $138,000 for married joint-filing couples.
Tax-free Treatment of Employer Payments of Student Loans Extended
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows federal income tax-free treatment for payments made by employer-sponsored educational assistance plans towards student loan debts of participating employees.
- Between March 28, 2020 and December 31, 2020, up to $5,250 per employee could be paid out (toward principal of interest) with no federal income tax hit for the employee.
- Employers could also deduct these payments.
- The TCDTR extended this tax break to qualifying student loan debt payments through December 31, 2025.
Intersection of Emergency College Financial Aid Grands and Higher Education Tax Credits
- Eligible individuals can claim the American Opportunity credit (worth up to $2,500 per student) or the Lifetime Learning credit (worth up to $2,000) for qualifying higher education expenses. However, expenses paid from federal-income-tax-free sources generally can’t be used to claim these credits.
- The COVIDTRA allows federal-income-tax-free treatment to certain CARES Act emergency financial aid grants to college students. Under this exception, expenses paid with these tax-free grants can be used to claim the two higher education tax credits. This exception applies to qualified emergency financial aid grants made after March 26, 2020 pursuant to the CARES Act.
Lower Itemized Medical Expense Deduction Threshold Now Permanent
- The Tax Cuts and Jobs Act (TCJA) reduced the itemized medical deduction to 7.5% of Adjusted Gross Income (AGI). The threshold was supposed to increase to 10% of AGI for 2021 and beyond.
- The TCDTR has locked in the 7.5% of AGI threshold for 2021 and beyond.
Tax-free Treatment of Forgiven Principal Residence Mortgage Debt Extended with Lower Limits
- A forgiven debt typically counts as a taxable Cancellation of Debt (COD) income. But, an exception applies to COD income from canceled mortgage debt that was used to purchase a primary residence (i.e. your home). Under the exception, up to $2 million ($1 million for married individuals who filed separately) of COD income from primary residence acquisition debt that was cancelled from 2007-2020 qualified as a federal income tax-free item.
- The TCDTR has extended this tax break to cover primary residence mortgage debt that is forgiven from 2021-2025. But, the maximum amount of forgiven debt that can be treated as tax-free for that time period is reduced to $750,000 ($375,000 for married individuals who file separately).
Mortgage Insurance Premium Write-Off Extended
- Deductible qualified residence interest typically includes premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence. The TCDTR has extended this break through 2021. This deduction usually doesn’t apply to higher-income individuals.
$500 Credit for Energy-Efficient Home Improvements Extended
- The installation of certain energy-saving improvements to your primary residence allows individual taxpayers to claim a federal income tax credit of up to $500. Unfortunately, this is a lifetime limitation.
- The TCDTR extends this tax break to cover qualifying improvements done in 2021. But, if you’ve claimed this credit for an earlier year, you might not be eligible for any additional credit.
Larger Credit for Residential Solar Energy Equipment Extended
- Qualifying solar energy equipment for your home that was installed in 2020 is afforded a 26% credit rate. This rate was scheduled to drop to 22% for service in 2021, and then disappear for 2022 and beyond. The TCDTR extends the 26% to cover equipment installed in 2021 and 2022, and extends the 22% rate to cover equipment installed in 2023. The credit is scheduled to expire for 2024 and beyond.
Credit for Fuel Cell Vehicles Extended for 2021 Purchases
- Individual taxpayers can claim a federal income tax credit for vehicles propelled by chemically combining oxygen and hydrogen to create electricity. For vehicles weighing 8,500 or less, the base credit is $4,000. Heavier vehicles can qualify for credits up to $40,000. An additional $1,000 to $4,000 credit is available to cars and light trucks to extend their fuel extend their fuel economy to meet federal standards.
Credit for Electric Motorcycles Extended for 2021 Purchases
- The 10% federal income tax credit for purchases of qualifying electric-powered two-wheeled vehicles manufactured primarily for use on public roads and capable of at least 45 miles per hour (electric-powered motorcycles) can be worth up to $2,500.
Credit for Alternative Fuel Vehicle Refueling Equipment Extended
- There is a personal and business federal income tax credit for up to 30% of the cost of installing non-hydrogen alternative fuel equipment (i.e. for a Tesla or other electric vehicle). The TCDTR extends this break to cover qualifying 2021 expenses.
Charitable Deductions for Non-Itemizers Extended and Expanded
- For the 2020 tax year, individual tax payers who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities. The same limit applies to single taxpayers and married joint-filing couples. The TCDTR extends the $300 break and doubles the deduction limit to $600 for married joint-filing couples for cash contributions made in 2021.
Larger Charitable Deduction Limit for Generous Donors Extended
- Before 2020, individuals couldn’t claim an itemized charitable deduction for cash contributions to IRS-approved charities that exceeded 60% of AGI. The CARES Act suspended the AGI limit for qualifying charitable deductions made in 2020 and the TCDTR extends this suspension into 2021.
Liberalized Rule for Calculating 2002 Refundable Child Credit and Earned Income Credit
- Eligible taxpayers can claim a refundable Child Tax Credit (CTC) equal to 15% of earned income in excess of $2,500. The refundable Earned Income Tax Credit (EITC) equals the applicable percentage of an eligible taxpayer’s earned income. Many individuals have had a lower earned income in 2020 due to the Coronavirus pandemic’s economic fallout, which could result in lower credits. So the TCDTE allows taxpayers to use either their 2020 earned income or their 2019 earned income, if that’s more than what they made in 2020.
Liberalized Rules for Flexible Spending Account (FSA) Balances
- An employer-sponsored health FSA can allow an employee to carry over up to $550 of his or her unused FSA balance into the following plan year. Depending on the employer, an additional grace period can be offered to give employees up to 2 ½ months after last year’s plan has ended, to submit qualifying expenses.
- For plan years ending in 2020 and 2021, the TCDTE allows employers to extend health FSA and dependent care FSA grace periods up to 12 months into the following plan year.
- The employer can also allow an employee who chooses not to have an FSA during calendar year 2020 or 2021 to continue to receive reimbursements from unused balances through the end of the plan year.
Liberalized Rule for Educator Expenses and Deductions
- Eligible K-12 teachers are entitled to a $250 annual above-the-line deduction for certain school-related expenses paid out of their own pockets. The COVIDTRA states that by no later than February 28, 2021, the IRS must issue official guidance that clarifies whether PPE or other supplies used to prevent the spread of COVID-19 counts as an allowable expense. This guidance will apply to expenses paid or incurred after March 12, 2020.
If you have any questions about the tax credits listed above, contact KRD at 847-240-1040 or contact us online.