The Act contains numerous changes to personal income taxes. Some of the more substantive changes include:
PAYMENT OF DEFERRED PAYROLL TAXES EXTENDED TO DECEMBER 31, 2021 — Through executive order, employees were allowed to defer their share of Social Security taxes incurred from September 1 to December 31, 2020. Payment of these deferred taxes was supposed to happen between January 1 and April 20, 2021. As part of this Act, repayments can now be repaid from January 1 to December 31, 2021. Employers had the option to offer deferment of payroll taxes to employees, but many did not do so.
PERMANENT REDUCTION IN HURDLE FOR MEDICAL EXPENSE DEDUCTIONS — Medical expenses can now be deducted on tax returns when medical expenses exceed 7.5% of adjusted gross income (AGI), down from 10%. This change is permanent.
DECUCTIONS FOR COLLEGE EXPENSES — 2020 is the last year that the above-the-line deduction for tuition and related expenses can be claimed. However, this Act replaced the above-the-line deduction by increasing the phase out ranges for the current Lifetime Learning Credit. Starting in 2021, the Lifetime Learning Credit phase out ranges will be aligned with the American Opportunity Tax Credit, phasing out from $80,000 to $90,000 for single taxpayers (up from $59,000 to $69,000) and from $160,000 to $180,000 for joint taxpayers (up from $118,000 to $138,000).
CHARITABLE CONTRI BUTION DEDUCTIONS — The CARES Act created an above-the-line deduction for cash contributions made to charitable organizations for individuals who do not itemize deductions. The deduction was for 2020 only with a maximum cap of $300 for both single and joint taxpayers. This benefit has been extended through 2021, and in 2021, joint taxpayers can claim a maximum of $600. The ability to deduct up to 100% (up from 60%) of an individual’s AGI as a qualified charitable contribution when making an all cash contribution has also been extended through the end of 2021.
EARNED INCOME AND CHILD TAX CREDITS — Since many individuals were out of work for a good portion of 2020, they may not have enough earned income to qualify for the full earned income or child tax credits. This Act allows individuals to use their 2019 earned income to calculate the amount they will receive for either credit for 2020.
memPloyeR Payments of student loans — Originally authorized by the CARES Act for 2020 only, employers can provide up to $5,250 of annual tax-free education assistance to pay the principal or interest on an employee’s qualified student loan debt through 2025. Neither the employer nor the employee is liable for employment taxes on this amount.
DISCHARGE OF QUALIFIED PRINCIPAL RESIDENCE DEBT — The Act extends the period of time that forgiven debt for a primary residence may be excluded from income through 2025. Beginning in 2021, the maximum amount of debt that can be discharged is reduced from $2 million to $750,000 for joint filers and from $1 million to $375,000 for single filers.
CARRY-FORWARD OF FLEXIBLE SPENDING ACCOUNT FUNDS — Typically, funds remaining in an individual’s dependent care or health flexible spending accounts at the end of the year are forfeited, with employers able to provide some limited relief. This Act allows employers to let employees roll forward any unused 2020 balances to 2021 and any unused 2021 balance to 2022. Employers are not required to do this. Also, employees can modify future contributions for 2021 only. Individuals who cease participation in the plan during 2020 and 2021 can receive reimbursements through the end of the plan year that participation ceased.
EDUCATOR EXPENSES INCLUDE COVID-19 RELATED SUPPLIES— The above-the-line deduction of $250 per educator includes expenses for personal-protective equipment, disinfectant, and other supplies used for the prevention of the spread of COVID-19 incurred after March 13, 2020.
mmoRtgage insuRance PRemiums — The deduction for mortgage insurance premiums has been extended through 2021, subject to phase out limits.