2021 Consolidated Appropriations Act-Individual Tax Provisions
The 2021 Consolidated Appropriations Act (“Act”) recently signed into law addresses both individual and business taxpayers. The Act contains numerous provisions related to individual taxpayers.

The following are some of the individual taxpayer key provisions :

  • Direct payments to certain individual taxpayers. The Act will make advance payments of $600/taxpayer and $600/qualifying child. The credit will phase out starting at $75,000 for a single taxpayer, $112,500 for a head of household taxpayer, and $150,000 for a married filing jointly taxpayer. Taxpayers that have direct deposit information on file will have the payment deposited to the account on file. If there is no account on file, taxpayers will have a check or debit card mailed to them. If for any reason the taxpayer did not receive a payment, they will be able to claim the refund on their 2020 individual income tax return. If an individual receives a payment that exceeds their eligible credit (calculated on 2020 return), they will not have to repay the credit.

  • 7.5% floor for medical expense deductions is made permanent. Medical expenses can be deducted as an itemized deduction on an individual tax return, but the amount must exceed 7.5% of a taxpayer’s adjusted gross income on their tax return to be counted.

  • Above the line charitable contribution extended through 2021. In 2020, taxpayers who do not itemize will be able to take a deduction of up to $300 for cash contributions to qualified charitable organizations. In 2021, this amount has increased to $600 for taxpayers filing a joint return, and remains at $300 for all other filing statuses.

  • Modification of limit on charitable contributions. Under prior law, individuals could not take an itemized deduction for charitable contributions of more than 60% of adjusted gross income. The Act has removed this limitation for 2020 and 2021 tax returns.

  • Mortgage insurance premiums deduction extension. Mortgage insurance premiums paid in connection with qualifying acquisition indebtedness on a taxpayer’s residence are deductible as an itemized deduction on an individual tax return. The deduction begins to phase out at $100,000 adjusted gross income ($50,000 married filing separately. The Act extended this deduction through 2021.

  • Exclusion for discharge of qualified mortgage debt extended, limits lowered. If a lender discharges debt, the general rule is that the taxpayer must include the debt in income. If “qualified principal residence debt” is discharged before the end of 2020, a taxpayer can exclude up to $2 million from gross income on their tax return ($1 million for married filing separately status). The Act extends the exclusion through the end of 2025, but reduces the amount that can be excluded from income to $750,000 ($375,000 married filing separately).

  • Education deduction/credit changes. The Act repeals the qualified tuition deduction for years beginning after December 31, 2020, but increases the income limitations for the Lifetime Learning Credit to match the income limitations for the American Opportunity Tax Credit. Both credits now begin to phase out when modified adjusted gross income is $160,000 married filing jointly or $80,000 for all other filing statuses.

  • $250 educator expense deduction applies to PPE. Eligible educators (ex.-K-12 teachers) previously could claim up to a $250 deduction for educational supplies purchased personally for the classroom. The Act expands the supplies eligible for the deduction to personal protective equipment (“PPE”), disinfectant, and other supplies used for the prevention of the spread of COVID-19 that were purchased after March 12, 2020.

  • Refundable child tax credit (“CTC”) and earned income credit (“EIC”). Individuals may elect to substitute the earned income for 2019 when determining the refundable portion of the CTC and EIC if that amount is greater than 2020 earned income.

  • Health and dependent care flexible spending arrangements (“FSA”). The Act permits health and dependent care FSAs to extend the grace period for plan years ending in 2020 and 2021 to 12 months after the end of the plan year to receive reimbursements from the plan. The Act also permits health and dependent care FSAs to allow employees to change the amount of election in 2021 prospectively.

  • 10% early withdrawal penalty does not apply to “qualified disaster distributions”. An individual under the age of 59 ½ is normally subject to a 10% early withdrawal penalty for a distribution from a retirement plan. The Act allows an exception to the penalty for up to $100,000 of qualified disaster distributions (reduced by prior year qualified disaster distributions). Any amounts required to be included in income that are withdrawn as qualified disaster distributions will be included ratably over a three year tax period beginning with the year of withdrawal. A taxpayer can elect to include all distributions in taxable income in the year of withdrawal.

  • Increased limit for retirement plan loans made because of a qualified disaster. Typically, a loan from a retirement plan to an individual cannot exceed $50,000. The Act increases the allowable loan amount from a retirement plan to $100,000 if the loan is made because of a qualified disaster and meets other requirements.

  • Net Disaster Loss. The Act permits individuals who have a net disaster loss (as modified by the Act) to increase their standard deduction amount by the amount of the net disaster loss.

  • Nonbusiness energy property credit extension. The Act extends this credit for various energy efficient property installed in a principal residence through 2021. The credit is subject to a lifetime cap of $500.

  • Residential energy-efficient property (REEP) credit extension. The phasedown of the REEP credit has been extended for two years. A 26% credit for qualifying property (certain solar, fuel cell, wind, and geothermal property) is extended through the end of 2022 and a 22% rate for 2023 and 2024. Biomass fuel property has been added to the list of types of property eligible for the credit.

About Shelton & Company, CPAs, P.C.

Shelton & Company, CPAs, P.C. is a CPA firm specializing in the accounting needs of construction contractors and their related companies. If you have any questions about the information provided here or for more information about our firm, please contact us at 1-800-446-2534 or visit us on the web at www.ConstructionCPAs.com