The long-awaited second stimulus package, known as the COVID Relief Bill, has passed. The stimulus package includes individual payments, unemployment benefits, aid for small businesses, assistance against surprise medical bills, rental protections, and food security.
The most anticipated portion of the stimulus package is the individual payments. Those eligible are single filers with an adjusted gross income of up to $75,000, head of household filers up to $112,500, and married filers up to $150,000. This is based on the income reported on the 2019 tax return. The taxpayer and spouse are eligible for $600 each. For each dependent whom you claimed a 2019 child tax credit for, you are also eligible to receive $600. Generally, to claim the child tax credit, the child must have been under age 17 on December 31, 2019.
The big question now is when will people start receiving their stimulus checks? The answer is no one knows just quite yet. IRS wants to start sending payments out quickly. They will go out again in three phases: direct deposits, paper checks, and debit cards. More clarification should be out on that in the next few days.
IRS will not keep your stimulus check to pay any outstanding debts. Your 2020 refund will not be reduced by any stimulus payments received if you received the correct amount. You will be required to reconcile the amount of stimulus payments received on your 2020 tax return by calculating a Recovery Rebate Credit. If you did not receive all the stimulus funds you were entitled to, you can claim the additional amount you are eligible for and get it as part of your 2020 federal refund or reduce any balance due in 2020. If you received more than you are eligible for, you would need to repay the excess you received.
To file your tax return and help reconcile the stimulus payments you received, you will be receiving IRS Notice 1444. Your tax preparer will want this notice to fill out your Recovery Rebate Credit.
Unemployment benefits have also been extended in the COVID Relief bill. Individuals are now eligible for another 11 weeks of federal jobless benefits until March 14, 2021. The additional benefit amount is $300 per week, half the amount previously provided by the CARES Act. The CARES Act waived the “waiting week” that makes individuals ineligible to receive unemployment benefits for the first week they are unemployed. This waiver continues under the COVID Relief bill.
There is also an extension of Pandemic Unemployment Assistance, a program for independent contractors and freelancers for the same 11 week period. This program provides independent contractors and freelancers an additional $100 per week.
We have seen the adjusted gross income (AGI) limit for itemizable medical expenses fluctuate between 7.5% and 10% of AGI for several years. Some years, your age determined which percentage applied to you. The stimulus package restores the AGI limit for medical expenses to 7.5% for all future years and applies to all taxpayers regardless of age. You must be able to itemize to take advantage of this medical expense deduction.
We have discussed several times the changes to 2020 charitable contributions because of the CARES Act. In 2020, all taxpayers can take an above-the-line deduction of $300 made to charitable organizations, both single and joint filers. The contributions must have been made in the form of cash or cash equivalent, and you must have documentation reflecting the donation.
This has been extended to include 2021. For 2021, the marriage penalty has been removed, allowing joint filers to claim a deduction of up to $600.
Dependent Care Flexible Spending accounts and Health Flexible Spending Accounts (FSAs) are generally funded with amounts that must be used during the year for dependent care and medical expenses. Any unused money had to be used by the end of the year – the “use it or lose it” provision.
Some employers had provisions that allowed up to $550 to be carried forward and used in the first two months of the new year. With 2020 being an unusual year, employers can now permit employees to carry all unused 2020 funds to 2021 and all 2021 funds to 2022.
This is not a mandatory provision. It is at the discretion of the employer. Reach out to your HR or benefits department to determine if your plan will allow this provision.
Small businesses also received some relief in this stimulus package. Those who have previously obtained Paycheck Protection Loan (PPP) loans may be eligible for additional loan amounts. Those that did not previously receive funds may be eligible for new funds. The rules are stricter this time, and you will need to show eligibility to apply. Ask your tax preparer or banking institution if you are eligible to apply for the new PPP funds.
The CARES Act made the PPP loan forgiveness not taxable. IRS’s interpretation of the CARES Act was not to allow a deduction for the expenses paid with the loan proceeds. This was not Congress’s intention. The COVID Relief bill clarifies this and allows for both the loan forgiveness and a deduction of the expenses.
For 2021 and 2022, business owners will be allowed to deduct 100% of meals and entertainment expenses. This is not retroactive for 2020. The intent is to encourage business spending at restaurants. The 100% deduction is allowed only to the extent that the expenses incurred “for food or beverages provided by a restaurant.” Both in-restaurant-dining and takeout would qualify. More clarification is needed to address expenses like room service and bars that do not serve substantial food.
Rental protections have been extended for another month. These protections mean a landlord cannot evict tenants behind on rent before January 31, 2021. If you owe back rent, we suggest you start working with your landlord to avoid eviction notices coming in early February. A landlord is more likely to be willing to work with you if you are proactive in making payment arrangements.
Another feature of this stimulus package is a ban on surprise medical bills. The bill makes it illegal for hospitals to charge patients out-of-network or air transport fees when they do not have a choice. If you incur expenses because of being out-of-town or being forced out-of-network because of lack of hospital space in your hometown, you should be charged in-network fees.
No student loan forgiveness was included in this package. Student loan payments are currently suspended without interest for most federal student loan borrowers until January 31, 2021. This suspension did not apply to private student loans. Payments and interest will begin on February 1, 2021.
If you are capable, we recommend that you start making voluntary payments now to reduce future interest charges. You can request that these voluntary payments be applied to the highest interest rate loans to maximize those savings.
If your income has been reduced due to COVID restrictions, you may qualify for lower student loan payments if you choose the income repayment option. Reach out to your lender to determine eligibility. In some cases, those payments could even continue to be zero if your income is low enough.
If you are unsure of any of these changes affect you, contact your tax preparer. With all the uncertainty about COVID relief, do not miss out on what you are entitled to receive. There is a lot of confusion, and circumstances are different for everyone. It is crucial that you know what applies to your circumstances and situation.
