Tax Planning

Tax Changes in the December 2020 COVID-19 Relief Bill (Consolidated Appropriations Act, 2021)

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by Alli Thomas

Jan 27, 2021

Most people are familiar with the $600 stimulus payments promised by the Consolidated Appropriations Act, 2021 (otherwise known as the COVID-19 relief bill) that was signed into law on December 27, 2020.

In addition to the stimulus payments, the law included a number of other provisions. Here are some of the notable tax changes it contains:

1. Charitable contribution deductions: for 2020, the limit on cash contributions to qualified charitable organizations was increased to 100% of the taxpayer’s adjusted gross income—up from 60% in 2019. This will remain in effect through 2021.

For 2020, filers who don’t itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charities. This applies to contributions through 2021. For those who are married joint filers, the limit is $600. If a taxpayer overstates their contribution when claiming this deduction, there is a 50% penalty (up from 20% in 2019).

2. Medical expense deductions: the bill permanently changed the “hurdle rate” or floor for medical expenses to 7.5% of a taxpayer’s adjusted gross income. Previously, the rate ping-ponged between 7.5% and 10% of adjusted gross income. This is a big win—especially older Americans, who tend to have high medical costs. Eligible medical expenses include premiums for Medicare Parts B and D and supplemental insurance for you, your spouse and your dependents. Travel costs—mileage, tolls and parking—to and from the doctor’s office are also eligible.

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3. Flexible spending accounts: If you have an FSA and didn’t spend your entire balance in 2020, it will roll over into this year (instead of the typical “use it or lose it” treatment for unspent FSA funds). Additionally, any balance in your FSA at the end of this year will roll over to 2022. However, double-check with your Benefits Department or Human Resources to confirm that this provision applies to your FSA—the new law says a plan will not fail to qualify and receive its intended tax benefits because it allows participants to roll over FSA balances.

4. Business meals: the restaurant industry certainly took a beating in 2020. The new bill provides for a 100% deduction for all business meals in restaurants—in hopes that more businesspeople will dine out.

5. Discharged debt forgiveness: for homeowners who had a mortgage balance forgiven due to a short sale or a foreclosure on their home before January 1, 2021, the maximum amount of forgiven debt that may be discharged was cut from $2 million to $750,000 for joint filers and from $1 million to $375,000 for single filers. This provision will remain in effect through 2025.

If you have questions about the new provisions of the bill—or want to make sure that you maximize the benefits offered by it—click here to schedule a free meeting with one of our advisors.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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