How COVID-19 Legislation May Affect Your Taxes

Similar to these 22 tax law changes that have happened that you should know about…

The Consolidated Appropriations Act (CAA), signed into law Dec. 27, 2020, provides extensive relief in response to the COVID-19 pandemic, such as another round of “recovery rebate” payments to individuals and an expansion of the Paycheck Protection Program (PPP) for businesses and other employers. The legislation includes some tax relief as well.

A brief overview

Here’s a brief overview of some of the tax-related provisions that may affect you or your business:

Individuals

  • Permanent reduction of adjusted gross income (AGI) floor to 7.5% for medical expense deductions
  • Extended nonitemizer deduction for up to $300 of cash donations ($600 for married couples filing jointly) to qualified charities through 2021
  • Extended 100% of AGI deduction limit for cash donations to qualified charities through 2021
  • Extended exclusion for certain employer payments of student loans through 2025

Businesses and other employers

  • Clarification of tax treatment for PPP loans, certain loan forgiveness and other financial assistance under COVID-19 legislation
  • Extended payroll tax credits for paid leave required under the Families First Coronavirus Response Act (FFCRA) through March 2021
  • Extended and expanded tax credits for retaining employees under the Coronavirus Aid, Relief and Economic Security (CARES) Act through June 2021
  • 100% business meals deduction for food and beverages provided by restaurants in 2021 and 2022
  • Extended Work Opportunity credit through 2025
  • Extended New Markets credit through 2025
  • Extended family medical leave credit through 2025

More details

This is just a brief look at some of the most significant tax-related provisions in this 5,500+ page legislation. Contact us for more details on how the CAA may affect you.

6 Key Tax Q&As for 2021

Right now, you may be more concerned about your 2020 tax bill than you are about how to handle your personal finances in the new year. However, as you deal with your annual tax filing, it’s a good idea to also familiarize yourself with pertinent amounts that may have changed for 2021.

Not all tax figures are adjusted for inflation and, even if they are, they may be unchanged or change only slightly each year because of low inflation. In addition, some tax amounts can only change with new tax legislation. Here are six commonly asked (and answered) Q&As about 2021 tax-related figures:

1. How much can I contribute to an IRA for 2021? If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2020.)

2. I have a 401(k) plan through my job. How much can I contribute to it? For 2021, you can contribute up to $19,500 to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older. (These amounts are also the same as they were for 2020.)

3. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? In 2021, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners and other domestic employees is increasing to $2,300 from $2,200 for 2020.

4. How much do I have to earn in 2021 before I can stop paying Social Security tax on my salary? The Social Security tax wage base is $142,800 for 2021, up from $137,700 for 2020. That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

5. What’s the standard deduction for 2021? The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by significantly increasing the standard deduction and reducing or eliminating various itemized deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800 for 2020). For single filers, the amount is $12,550 (up from $12,400) and, for heads of households, it’s $18,800 (up from $18,650).

So, if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t benefit from itemizing for 2021.

6. How much can I give to one person without triggering a gift tax return in 2021? The gift tax annual exclusion for 2021 is $15,000, unchanged from last year. This amount is only adjusted in $1,000 increments, so it typically increases only every few years.

[I am not a financial planner or advisor — none of this is financial advice.]