The $600 Stimulus Bill Tax Changes

The New Stimulus Check:

The amounts for this are $600 for each adult individual (meaning a married couple filing jointly gets $1200) as well as dependents age 16 or under as of 2019. The rules are almost exactly the same as the previous checks, which are covered in great detail in older posts on the subject. Here I am going to cover things in a lot less detail, highlighting the major differences.

First, if the place your first stimulus went is still active, the new stimulus should go there, and you don’t need to take any action. If it is not still open, you can update it at irs.gov using the big “Get My Economic Impact Payment” button. The button doesn’t do much right now since they are still programming for the new payment, but it should be soon.

Payments are based on 2019 tax returns, social security or VA disability information for non-filers, or information you provided for the previous $1200 payments. They are tax free advances on your 2020 taxes and will be recalculated when you file your 2020 tax return, and any additional money you are due will be provided then, but no repayment is due if you would have been entitled to less.

I highly recommend e-filing a 2020 tax return, using direct deposit if possible, to make sure you get everything you are entitled to, and to keep your information with the IRS as up to date as possible. Who knows, they may want to send more money! I think this is one of the enduring tax lessons from the pandemic – file a tax return even when not required.

The income limitations for the new stimulus payments were slightly modified from the previous ones. The phaseout starts at the same point, but the payments go down faster as your income goes up. Phaseout starts at $75,000 for Single and Married Filing Separate (MFS) filers, $112,500 for Head of Household (HH), and $150,000 for Married Filing Joint and Qualified Widowers (MFJ/QW). If your income is below those numbers, you should get a full payment. Single and MFS filers get nothing once income hits $87,000 and MFJ/QW filers get nothing when income hits $174,000. HH goes away at $124,000.

The Rest of the Tax Changes (from the latest bill):

This is a broad overview of the rule changes.

1. Charity: You can deduct up to $300 in cash contributions to charity on 2020 even if you don’t normally itemize. Cash means cash/check/credit but not donation of things or time. There is a penalty of 20% of taxes for cheating on this. For 2021 the limit is $600 and the penalty 50%. You can also donate up to 100% of your Adjusted Gross Income in cash to charities in 2020 and 2021 (old limit was 50% and 60% depending on the year) 

2. Retirement Plans: The period for 401k and IRA exemption from the 10% penalty on withdrawals from these plans due to COVID was extended to 60 days after 12/27/2020 (2/25/2021 if my math is correct). This applies to up to $100,000 in withdrawals due to COVID and the rules allowing stretching taxes for three years or repaying within 3 years apply to these withdrawals. Basically, you can take money out, up to $100,000 due to needing it for COVID caused problems all the way out to late February of 2021, though you can’t pull $100,000 in 2020 AND 2021. The $100,000 limit applies to ALL Coronavirus distributions.

3. Disaster Losses: The changes to deducting disaster losses above $500 due to COVID was also extended for 60 days after December 27th, 2020. This suspended the 10% of income rule that meant that a disaster had to be ENORMOUS before it made a difference on your taxes.

4. Business Meal Deduction: I have heard this one called the “3 Martini Lunch Rule”. For 2021 and 2022, the 50% limit on meal deduction for businesses was raised to 100%. Simply put, a business owner can deduct 100% of business-related meals including those with clients.

5. Education Credits: The Tuition and Fees Deduction will be in effect for 2020, but not after. The Lifetime Learning Credit and American Opportunity Credit will have their income limits matched (The LLC limit raised to equal the AOC limit) starting in 2021.

6. Sick and Family Leave: The qualifying period for employers to claim credits for paying employees while they are out sick or taking care of family due to COVID was extended to 3/31/2021. This applies to self-employed taxpayers who are out sick or shutdown and the law allows them to calculate based on 2019 or 2020 income whichever is better.

7. Payroll Tax Holiday: For those who took advantage of not having to pay Social Security Tax in the last quarter of 2020, the payback period has been extended for all of 2021, vice just the first few months. This means paybacks will be smaller, but last longer. This mostly applies to military and some Federal employees, though some civilian employers might have allowed opting in.

8. Paycheck Protection Program: More money was made available and eligible employers can come for more money if they meet certain requirements. The law was clarified to explicitly state that even if the loan is forgiven, expenses paid by loan proceeds remain deductible if allowed by current tax law.

9. Earned Income Tax Credit (and child credits): You can use 2019 income vice 2020 income if it gets better results. This applies to EITC, Child Tax Credit and Additional Child Tax Credit. You use 2019 income for calculating all of them or none of them. You can’t pick and choose.

10. Educator Expense: The $250 deduction for teachers paying for classroom supplies includes costs for protective equipment and other COVID related supplies such as masks or disinfectants.   

11. Flexible Spending Accounts: Normally these accounts, which are usually used for childcare and health care, must be used before the end of the calendar year or the money is lost. Employers have several options for relief in this case, including allowing rollover of money to be used in 2021. Also, money for childcare normally has to be used only for children under the age of 13. This age limit was raised to under 14 for 2021 only.

Changes to Expiring Tax Provisions:

Mortgage Insurance Premiums remain deductible into 2021

Principle Residence Cancelled Debt Exclusion was extended through 2025, but the amount allowed to be excluded was reduced to $750,000 ($375,000 if MFS) starting in 2022.

The Non-Business Energy Efficient Credit was extended to 2021.

Exclusion of employer paid student loans of up to $5250 per year was extended through 2025.

The Solar Credit phaseout was modified and slightly extended. The percentage used for calculating the credit is 26% in 2021 and 2022, and 22% in 2023. The credit is not currently available for 2024 and later.

The increase in the percentage above which medical expenses were deductible was permanently changed back to 7.5%. It was supposed to go up to 10% with the passage of the Affordable Care Act but has been pushed of repeatedly and is now finally dead.