Tax Implications of the Latest Stimulus Bill

Tax Implications of the Latest Stimulus Bill

December 23, 2020

Hot off the presses (in this case, from our favorite financial advisor analyst MIchael Kitces): "After months of debate about providing additional economic relief in response to the coronavirus pandemic, the latest “Coronavirus Stimulus 2.0” bill passed out of Congress on December 21, 2020, as an attachment to the larger 5,000+ page Consolidated Appropriations Act of 2021, which provides Federal funding through September 2021, extends and amends various expiring tax provisions, and addresses several other financial planning-related issues.

The relief legislation includes:

  1. a fresh round of $600 stimulus checks (based on Adjusted Gross Income limits of $75,000 for single filers and $150K for married filing jointly filers)
  2. extensions to unemployment benefits (including another $300/week of unemployment insurance relief for 11 weeks).

In addition, small businesses will also gain access to a greatly expanded Employee Retention Tax Credit (potentially up to $7,000/employee/quarter) if they experienced at least a 20% decline in quarterly revenue, and a new forgivable Paycheck Protection Program (PPP2) loan opportunity if revenue was down by at least 25% in any quarter of 2020.

In addition, the Coronavirus Stimulus 2.0 legislation includes a wide range of Personal Income Tax planning relief provisions, including:

  • an extension of the 100%-of-AGI limit on cash contributions to a charity into 2021,
  • the opportunity to carry forward unused Flexible Spending Account balances in 2021 (both medical and dependent care) - it remains an employer decision on this.
  • opportunity to change your 2021 FSA amounts.
  • a reduction in the hurdle for Medical Expense Deductions to ‘permanently’ return to 7.5%-of-AGI,
  • the ability to deduct meals and entertainment expenses at restaurants for 100% of the expense,
  • the deadline to repay deferred 2020 Social Security taxes over the entire 2021 (this mostly impacts Federal employees).
  • the elimination of the Tuition and Related Expenses deduction for education to be replaced with an expanded (and even more generous) Lifetime Learning Credit, and more.

On the other hand, it’s notable that some widely discussed potential changes were not included, from additional relief on Required Minimum Distributions, to further relief on student loan deferrals (though the legislation does authorize a substantive change to FAFSA forms for Financial Aid in the future!).

Fortunately, the Coronavirus Stimulus 2.0 legislation does not introduce a number of ultra-short-term end-of-year planning needs – as some prior end-of-year tax legislation has in the past – but does set the table for significant planning opportunities with clients (especially small business owner clients still suffering from the pandemic) as 2020 comes to a close and into 2021!"