Just before 2020 ended, we received a new, much anticipated COVID-19 relief package called The Consolidated Appropriations Act of 2021. Clocking in at $900 billion, this relief bill came with a lot of items that will have an effect on your taxes for this and future years.
Here we’ve created a summary of just how this second stimulus package and COVID Relief Bill will affect your taxes.
Second stimulus payment
The biggest headline of this relief bill is the additional $600 per person stimulus payment. This is similar to the $1,200 per person stimulus payment received under the CARES Act. This new stimulus payment gives every person who earns under $75,000 (single filers, or $150,000 joint filers) a check for $600.
How does this affect your taxes?
These stimulus payments aren’t considered taxable income. Just like the prior stimulus payment, these payments are a refundable tax credit for 2020 that we are receiving in advance. A tax credit reduces your tax liability dollar for dollar. And a refundable tax credit means you’ll receive money back even if you have no tax liability.
These payments are a tax credit against your 2020 taxes. But the IRS is using 2019 tax information to determine if you qualify for these advance stimulus payments. Even if you don’t qualify for a stimulus payment based on your 2019 tax return information, you could still wind up with this tax credit after you file your 2020 taxes.
For example, if you earned $175,000 in 2019, you wouldn’t be mailed a stimulus check. But if you earned less in 2020, say $45,000, when you file your 2020 tax return you’ll receive that tax credit.
What if the opposite is true? Say you earned $45,000 in 2019 and were sent stimulus checks, but you actually earned $200,000 in 2020 and shouldn’t have qualified for the stimulus payments. Good news—you would not have to pay your stimulus back as part of your 2020 tax return.
With many workers still unemployed, this relief bill extends unemployment benefits and offers an additional $300 per week for unemployed persons through mid-March. This includes Pandemic Unemployment Assistance (PUA) for people who usually aren’t eligible for unemployment benefits (for example, gig workers).
While additional income while you need it is great, don’t forget the tax implications. Unemployment income is considered taxable and you will need to pay income tax on it. The simplest way to do this is to have your state unemployment office withhold it from each payment.
Extended Tax Credits and Deductions
In addition to those two important payments above, the bill also included a number of tax credits and deductions that will be extended for 2021 and beyond. These include:
If you itemize deductions on your tax return, you can continue to include medical expenses that exceed 7.5% of your adjusted gross income as deductions. The threshold was supposed to increase to 10% of your adjusted gross income, but with this COVID relief bill, the 7.5% threshold is now permanent.
Lifetime Learning Credit
For 2021 and onward, the tuition deduction of up to $4,000 has been eliminated. But in its place the Lifetime Learning Tax Credit has been expanded. This tax credit of up to $2,000 annually will now have higher phase-out limits, so more people can qualify.
When debt is forgiven, it usually counts as taxable income. An exception was made for debt forgiveness on your principal residence. From 2007 - 2020, debt forgiven on your principal residence was tax-free (up to $2 million).
This exception has now been extended through 2025, though the total tax-free amount forgiven has been reduced to $750,000.
If you pay private mortgage insurance (PMI) on your primary or secondary home, you may have been able to take a deduction for those payments. That deduction has been extended so you can keep enjoying that tax break.
Employer Payments to Student Loan Debt
Does your employer help repay your student loan? That used to be taxable income to you but under the CARES Act, any payments between March 28, 2020 and December 31, 2020, were tax-free, up to $5,250. Under this new bill that has been extended through 2025.
Green Tax Credits
There were a few green tax credits that were extended as a part of this relief bill. These include:
- Plug-in Motorcycle: The tax credit for purchasing plug-in motorcycles has been extended. You can claim a tax credit for 10% of the purchase price, up to $2,500.
- Charging station: If you install a charging station at home for your electric car, you could be eligible for a credit of 30% of the installation charge, up to $1,000.
- Energy efficient home improvements: A credit of up to $500 to make energy-efficient home improvements has been extended.
Previously, if you made a charitable donation, you could only deduct it if you itemized taxes. The CARES Act changed that so that cash donations up to $300 (or $600 if married filing jointly) could be deducted from taxable income, even if a person doesn’t itemize deductions. This relief bill extends that charitable deduction through 2021.
Making Sense of Changes
With everything that happened in 2020, there are a lot of changes that will be hitting your taxes this year and in future years. If you need help making sense of it all and filing everything correctly on your tax return, Taxfyle can help. Our tax professionals file your tax return for you, making tax season easy, stress-free, and affordable.