Following is an overview of key provisions in the recent COVID relief legislation signed by the President on December 27, 2020, that affects individuals. The legislation is the COVID-related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), both of which are part of the Consolidated Appropriations Act, 2021 (CAA, 2021).
Individual Recovery Rebate/Economic Impact Payment
The COVIDTRA provides for a refundable recovery rebate credit for 2020 that will be paid in advance to eligible individuals, often automatically, early in 2021. These payments are in addition to the direct payments/rebates of $1,200 ($2,400 for married couples) issued earlier in 2020 under the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act, 3/27/2020), which was called an Economic Impact Payment (EIP).
The amount of the COVIDTRA rebate is $600 to eligible taxpayers or up to $1,200 for married couples filing joint returns. Parents will receive an additional $600 for each qualifying dependent child under age 17. Thus, a married couple with two qualifying children under 17 will receive $2,400, unless a phase-out applies.
U.S. citizens and residents are eligible for a full payment if their adjusted gross income (AGI) is under $75,000 for singles or married filing separately, $112,500 for heads of household, and $150,000 for married couples filing jointly and surviving spouses. The recipient must not be the dependent of another taxpayer and must have a social security number that authorizes employment in the U.S.
For individuals whose AGI exceeds the above thresholds, the payment amount is phased out at the rate of $5 for each $100 of income. Thus, the payment is completely phased out for single filers with AGI over $87,000 and for joint filers with no children with AGI over $174,000. For a married couple with two children, the payment will be completely phased out if their AGI exceeds $198,000.
Nonresident aliens, persons who qualify as another person's dependent, and estates or trusts do not qualify for the rebate. Taxpayers without a Social Security number are likewise ineligible, but if only one spouse on a joint return has a Social Security number, that spouse is eligible for a $600 payment. Children must also have a Social Security number to qualify for the $600-per-child payments.
Treasury must make the advance payments based on the information on 2019 tax returns. Eligible taxpayers who claimed their CARES Act EIPs by providing information through the non-filer portal on IRS's website will also receive these additional payments. If you filed your 2019 tax return, the IRS will use the AGI and dependents from that return to calculate the payment amount. The IRS will deposit the payment directly into the bank account reflected on the return. The IRS has developed a web-based tool called Get My Payment, www.irs.gov/coronavirus/get-my-payment, for individuals to provide banking information to IRS, so that payments can be received by direct deposit rather than by check sent in the mail. The tool includes the date the payment is scheduled to be issued to the individual.
If you receive Social Security, Supplemental Security Income, Social Security Disability Income, Railroad Retirement, or Veterans' compensation and pension benefits, and you are not required to file a 2019 tax return, you do not have to file to receive a payment. The IRS will generate an automatic payment using information from the Social Security Administration and the Department of Veterans Affairs. The payment will be made by direct deposit or paper check, in the same manner as the recipient's regular benefits.
Non-filers who have a dependent child under age 17 must register their dependents on the Non-Filers: Enter Payment Info Here tool on the IRS website to receive the additional payment of $600 per child. Non-filers who receive the rebate before registering a dependent child can still get the additional $600 payment by filing a 2020 income tax return on which the dependent is listed.
Taxpayers who receive an advance payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the credit determined on the taxpayer's 2020 return exceeds the amount of the advance payment, taxpayers receive the difference as a refundable tax credit.
Advance payments of the rebates are generally not subject to offset for past due federal or state debts, and they are protected from bank garnishment or levy by private creditors or debt collectors.
Pro-Taxpayer Changes to CARES Act EIP Rules
As noted above, the CARES Act provided EIPs. The COVIDTRA makes the following changes to the CARES Act EIP:
- Provides that the $150,000 limit on adjusted gross income before the credit amount starts to phase out, which, under the CARES Act, applied to joint returns, also applies to surviving spouses. This change may allow taxpayers who qualify to use the surviving-spouse filing status to claim a larger EIP on their 2020 returns.
- Makes the requirement to provide IRS with the taxpayer's identification number identical to the same requirement under the new rebate, as noted earlier.
The federal unemployment insurance benefits provided by the CARES Act are renewed to provide an additional $300 per week for all workers receiving unemployment benefits through March 14, 2021.
The COVIDTRA provides that eligible educators (i.e., kindergarten through grade 12 teachers, instructors, etc.) can claim the existing $250 above-the-line educator expense deduction for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 that were bought after March 12, 2020. IRS is directed to issue guidance to that effect by February 28, 2021.
The COVIDTRA makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense itemized deductions, which was to have increased to 10% of adjusted gross income after 2020. The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later years.
The COVIDTRA extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to a phase-out based on the taxpayer's adjusted gross income.
For 2020, individuals who do not itemize deductions can take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations. The COVIDTRA extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains at $300 for other taxpayers). Taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%).
In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual's adjusted gross income. (The usual limit is 60% of adjusted gross income.) The COVIDTRA extends this rule through 2021.
Exclusions from Income
Emergency workers who are members of a qualified volunteer emergency response organization can exclude from gross income certain state or local government payments received and state or local tax relief provided on account of their volunteer services. This exclusion was due to expire at the end of 2020, but the COVIDTRA made it permanent.
Usually, if a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. Under an exclusion that was due to expire at the end of 2020, a taxpayer can exclude from gross income up to $2 million ($1 million for married individuals filing separately) of discharge-of-debt income if qualified principal residence debt is discharged. The COVIDTRA extends this exclusion through the end of 2025, but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately).
Qualifying educational assistance provided under an employer's qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee's income. The CARES Act added to the types of payments that are eligible for this exclusion "eligible student loan repayments" made after March 27, 2020, and before January 1, 2021. These payments, which are subject to the overall $5,250 per employee limit for all educational payments, are payments of principal or interest on a qualified student loan by the employer, whether paid to the employee or a lender. The COVIDTRA extends the exclusion for eligible student loan repayments through the end of 2025.
Individuals may elect to base 2020 refundable child tax credit (CTC) and earned income credit (EIC) on 2019 earned income. If a taxpayer’s CTC exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer's taxable "earned income" for the tax year as exceeds $2,500. The EIC equals a percentage of the taxpayer's "earned income." For both of these credits, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. In determining the refundable CTC and the EIC for 2020, the COVIDTRA allows taxpayers to elect to substitute the earned income for the preceding tax year (2019), if that amount is greater than the taxpayer's earned income for 2020.
A refundable credit (known as the health coverage tax credit or "HCTC") is allowed for 72.5% of the cost of health insurance premiums paid by certain individuals (i.e., individuals eligible for Trade Adjustment Assistance due to a qualifying job loss, and individuals between 55 and 64 years old whose defined-benefit pension plans were taken over by the Pension Benefit Guaranty Corporation). The HCTC was due to expire at the end of 2020, but the COVIDTRA extended it through 2021.
The New Markets credit provides a substantial tax credit to either individual or corporate taxpayers that invest in low-income communities. This credit was due to expire at the end of 2020, but the COVIDTRA extended it through the end of 2025. Carryovers of the credit were extended as well.
A credit is available for purchases of nonbusiness energy property (i.e., qualifying energy improvements to a taxpayer's main home). The COVIDTRA extends this credit, which was due to expire at the end of 2020, through 2021.
The credit for purchases of new qualified fuel cell motor vehicles, which was due to expire at the end of 2020, was extended by the COVIDTRA through the end of 2021.
The 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500) was extended until the end of 2021 by the COVIDTRA.
Individual taxpayers are allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. The REEP credit was due to expire at the end of 2021, with a phase-down of the credit operating during 2020 and 2021. The COVIDTRA extends the phase-down period of the credit by two years-through the end of 2023. The REEP credit will not apply after 2023. The COVIDTRA also adds qualified biomass fuel property expenditures to the list of expenditures qualifying for the credit, effective beginning in 2021.
Disaster-Related Changes in Retirement Plan Rules
A 10% early withdrawal penalty generally applies to, among other things, a distribution from an employer retirement plan to an employee who is under the age of 59½. The COVIDTRA provides that the 10% early withdrawal penalty does not apply to any qualified disaster distribution from an eligible retirement plan. The aggregate amount of distributions received by an individual that may be treated as qualified disaster distributions for any tax year may not exceed the excess, if any, of $100,000, over the aggregate amounts treated as qualified disaster distributions received by that individual for all prior tax years.
Generally, a loan from a retirement plan to a retirement plan participant cannot exceed $50,000. Plan loans over this amount are considered taxable distributions to the participant. The COVIDTRA increases the allowable amount of a loan from a retirement plan to $100,000 if the loan is made because of a qualified disaster and meets various other requirements