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January 2021

TaxBrief Keeping you informed January 2021
Stimulus payment rebate
A second refundable recovery rebate credit for
2020, paid in advance to eligible individuals, began
at the end of 2020 and continues into 2021. These
payments are in addition to the economic impact
payments previously provided.
The amount of the rebate is $600 per eligible
taxpayer ($1,200 for married filing jointly), plus
$600 per qualifying child under age 17. The credit
is phased out at a rate of $5 per $100 of additional
income starting at $150,000 of modified adjusted
gross income for those filing tax returns jointly
or as surviving spouses, $112,500 for heads of
household and $75,000 for single taxpayers.
The advance payments will be based on the
information on 2019 tax returns. Nonresident
aliens, persons who qualify as another person’s
dependent, and estates or trusts don’t qualify for
the rebate. Taxpayers without a Social Security
number are also ineligible. However, if only one
spouse on a joint return has a Social Security
The recently passed Consolidated Appropriations Act, 2021, provides additional relief to taxpayers impacted
by the COVID-19 pandemic. Here’s a brief overview of some of the key provisions.
Rita Bhayani CPA, CMA
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number, that spouse is eligible for a $600 payment.
Children must also have a Social Security number
to qualify for the $600-per-child payments.
Taxpayers who receive an advance payment
exceeding the amount of their eligible credit (as later
calculated on the 2020 return) will not have to repay
any of the overpayment. If the amount of the credit
determined on the taxpayer’s 2020 return exceeds
the amount of the advance payment, taxpayers
receive the difference as a refundable tax credit.
Advance payments of the rebates are generally not
subject to offset for past-due federal or state debts,
and they are protected from bank garnishment or
levy by private creditors or debt collectors.
Deductions
For eligible taxpayers, the following deductions
are available:
• The $250 educator expense deduction applies
to PPE and other COVID-related supplies.
Eligible educators (i.e., kindergarten through
grade 12 teachers, instructors, etc.) can claim
the existing $250 above-the-line educator
expense deduction for personal protective
equipment, disinfectant and other supplies
purchased after March 12, 2020, and used for
the prevention of the spread of COVID-19.
• The 7.5%-of-adjusted-gross-income threshold
on medical expense deductions has been made
permanent. It was scheduled to increase to 10%
of adjusted gross income after 2020.
• The mortgage insurance premium deduction,
subject to a phaseout based on the taxpayer’s
adjusted gross income, has been extended
through the end of 2021.
• The above-the-line charitable contribution
deduction is extended through 2021. For 2020,
individuals who don’t itemize deductions can take
up to a $300 ($150 if married filing separately)
above-the-line deduction for cash contributions to
qualified charitable organizations. This deduction
remains through 2021 and increases the deduction
allowed on a joint return to $600 (it remains at
$300 for all other taxpayers). Overstating this
deduction is subject to a 50% penalty.
Tax credits
Take note of the following updates on these
popular credits:
• Individuals may elect to base a 2020 refundable
child tax credit (CTC) and earned income
credit (EIC) on 2019 earned income. If an
individual’s CTC exceeds the taxpayer’s
tax liability, the taxpayer is eligible for a
refundable credit equal to 15% of the amount
of the taxpayer’s taxable earned income for the
tax year that exceeds $2,500. The EIC equals
a percentage of the taxpayer’s earned income.
For both credits, earned income means wages,
salaries, tips and other employee compensation
if includible in gross income for the tax year.
To determine the refundable CTC and the EIC
for 2020, taxpayers can elect to substitute the
earned income for the preceding tax year if that
amount is greater than the taxpayer’s earned
income for 2020.
• The residential energy-efficient property
(REEP) credit is extended two years. Used by
individual taxpayers for qualified property and
due to expire at the end of 2021, the phase-down
period of the REEP credit is extended through
Dec. 31, 2023.
Exclusions from income
The following items are excluded from income:
• The exclusion for benefits provided to volunteer
firefighters and emergency medical responders
is made permanent. Emergency workers who
are members of a qualified volunteer emergency
response organization can exclude from gross
income certain state or local government
payments received and state or local tax relief
provided on account of their volunteer services.
• The exclusion for discharge of qualified
mortgage debt is extended, but limits on the
amount of excludable discharge are lowered.
Usually, if a lender cancels a debt, such as
a mortgage, the borrower must include the
discharged amount in gross income. Under an
exclusion that was due to expire at the end of
2020 but was extended through the end of 2025,
a taxpayer can exclude from gross income up
to the applicable threshold qualified principal
residence debt discharged. The threshold
was $2 million ($1 million for married filing
separately) for discharges of indebtedness
before Jan. 1, 2021. After 2020, it is reduced to
$750,000 ($375,000 for married filing separately).
• The exclusion for certain employer payments
of student loans is extended. Qualifying
educational assistance provided under an
employer’s qualified educational assistance
program, up to an annual maximum of $5,250,
is excluded from the employee’s income
through 2025. For the types of payments that
are eligible for this exclusion, the CARES
Act added “eligible student loan repayments”
made after March 27, 2020, and before Jan. 1,
2021, which was extended through Dec. 31,
2025. These payments, which are subject to
the overall $5,250 per-employee limit for all
educational payments, are payments of principal
or interest on a qualified student loan by the
employer, whether paid to the employee or
a lender. Additional educational assistance
program requirements apply to shareholders.
Disaster-related changes
in retirement plan rules
The Consolidated Appropriations Act, 2021, also
eases the following retirement plan rules:
• The 10% early withdrawal penalty does not
apply to qualified disaster distributions from
retirement plans. A 10% early withdrawal
penalty generally applies to, among other
things, a distribution from an employer
retirement plan to an employee who is under
age 59½. However, the 10% early withdrawal
penalty doesn’t apply to any qualified disaster
distribution from an eligible retirement plan.
The aggregate amount of distributions received
by an individual that may be treated as qualified
disaster distributions for any tax year may not
exceed the excess (if any) of $100,000, over the
aggregate amounts treated as qualified disaster
distributions received by that individual for all
prior tax years.
• The limit for plan loans made because of a
qualified disaster has increased. Generally,
a loan from a retirement plan to a retirement
plan participant cannot exceed $50,000. Plan
loans over this amount are considered taxable
distributions to the participant. The allowable
amount of a loan from a retirement plan was
increased to $100,000 if the loan is made
because of a qualified disaster and meets
various other requirements.
Important note
As always, I’m here for you during these trying
and often confusing times. COVID-19 is affecting
each of us in a unique way, and I’m proud to be a
reliable, knowledgeable and sympathetic resource
for you as we continue to move forward. Please
stay safe and healthy!
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Jan 2021.pdf
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Suchit Bhayani,
Jun 19, 2021, 5:23 PM
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