The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (What you really need to know!)

January 27, 2021
Business, Covid-19, Small Business, Taxes

New Stimulus Law Grants Eight Tax Breaks for 1040 Filers

The new, massive stimulus bill enacted into law on December 27, 2020, contains eight new tax breaks designed to help the non-business taxpayer. None of these tax breaks are earthshaking by themselves, but together they add up to a nice tax break.

Enlarged Charitable Contribution Tax Deductions

Because of the Tax Cuts and Jobs Act roughly doubling the standard deduction, most people did not meet the itemized deduction threshold. Due to this most people did not get any tax benefits from their charitable contributions. Let’s face it, most of us make donations for the tax write offs. No judgement, just truth. I’m guilty of it!

The Coronavirus Aid, Relief, and Economic Security (CARES) Act attempted to help struggling charities that rely on donations. It added a new $300, charitable deduction for cash contributions by non-itemizers to tax-qualified charities during 2020.

This is an across the board amount whether you are filing single or married.

Warning: Interestingly, the new law also adds a special 50 percent penalty for taxpayers who cheat by taking this deduction without actually making the cash contributions they claim on their return.

Extension of CARES Act Elimination of AGI Limit on Charitable Contributions

Now, for Schedule A (itemized deductions) the new regulation allows for 100% of your Adjusted Gross Income to be deducted. Yay!

Before it used to be 60%, this adjustment will only be allowed for your 2020 taxes. According to The Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Keep in mind this is for the amount of charitable cash contributions to qualified charities (not including donor-advised funds).

Lengthened Payroll Tax Deferral Repayment Period

Back in August, an executive order allowing employers to defer withholding the employee portion of the Social Security tax due for September through December 2020. The idea was to increase employee take-home pay during these months (the employee Social Security payroll tax is 6.2 percent of up to $137,700 in wages during 2020).

This was purely voluntary, and few private employers took advantage of the deferral.

We advised against it because it would cause you to pay more in 2021.

If you did so, your new deadline to pay back the social security you didn’t pay last year has been extended from April 30 to December 31, 2021. Yay, for the extension, however the point remains the same you still need to pay this money back!

7.5 % AGI Floor for Medical Expense Deduction Made Permanent

For people itemizing their deductions, medical expenses were deductible only if, and to the extent, they exceed a percentage of the taxpayer’s AGI. over the last couple of years that rate has fluctuate between 10 and 7.5% of your Adjusted Gross Income.

The rate is 7.5 percent of AGI for 2020, The Taxpayer Certainty and Disaster Tax Relief Act of 2020 makes the 7.5 percent of AGI floor permanent. Yay!

This makes it a bit easier for taxpayers who itemize to deduct their medical expenses.

Flexible Spending Account Carryovers

Previously, employees who have health flexible spending accounts (FSAs) were only allowed to carry over a maximum of $550 of unused funds in the account to use the following year.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows employees to carry over any unused 2020 balances in their health FSAs to 2021. Moreover, any remaining balance at the end of 2021 may be carried over to 2022.

Something to Note: Employers are not required to allow such carryovers in their FSA plan; it’s purely voluntary for the employer.

Earned Income Tax Credit and Child Tax Credit

Two of the most important federal programs that benefit the working class are the earned income tax credit (EITC) and the child tax credit (CTC). The EITC and the CTC are based on a taxpayer’s family size and earned income. The more earned income, the larger the credits, subject to maximum limits.

But due to the COVID-19 pandemic, the earned income of many low-income taxpayers declined dramatically during 2020.

For purposes of the EITC and the CTC only, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 permits taxpayers to substitute their earned income for 2019 if it is greater than their earned income for 2020.

This will result in larger tax credits for these low-income taxpayers. Yay!

Educator Expense Deduction Includes PPE

Teachers of kindergarten through grade 12 may take an above-the-line deduction of up to $250 for books, supplies, and other equipment they purchase with their own money for use in the classroom. This has always been the case.

The COVID-related Tax Relief Act adds to this deduction expenses for personal protective equipment (PPE), disinfectant, and other supplies used to prevent the spread of COVID-19.

Something to note: Only PPE and supplies purchased after March 12, 2020, qualify. The deduction remains a maximum of $250.

Note that the educator expense deduction is not available for homeschoolers, including parents who are teaching their children at home during the pandemic. It’s only for professional educators who work at least 900 hours during the school year. (Sorry parents!)

Goodbye, Tuition and Fees Deduction—Hello, Expanded Lifetime Learning Credit

The tax code contains a bewildering array of deductions and credits for higher education, including the American opportunity tax credit, the lifetime learning credit, and the tuition and fees deduction.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 is making the lifetime learning credit available to more taxpayers by increasing the phaseout range for the credit and phasing out the tuition and fee deduction. (more on that later)

The 2020 lifetime learning credit phaseout range is $59,000 to $69,000 for single filers, and $118,000 to $138,000 for joint filers.

In other words it stays the same this year, however, next year the income ranges increase. The Phase out for single filers will be $80,000 to $90,000, and $160,000 to $180,000 for joint filers. This is the same as the American opportunity tax credit phaseout range.

The main purpose here seems to be to simplify the tax code by reducing the number of education-related tax benefits taxpayers have to deal with. (Woo Hoo! Someone thought to streamline education tax credits!)

The lifetime learning credit offers a credit of 20 percent of up to $10,000 in education expenses, for a maximum credit of $2,000.

The tuition and fee deduction was just that, a deduction, it would allow for up to $4000. However, most taxpayers did not receive close to that deduction. The LLC and AOTC are actual credits not deductions.

If it sounds a little muddy, just remember this, the new way gives you more opportunity for a bigger refund!

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