A $900 Billion Stimulus bill was signed into law on December 27, 2020. It is the second stimulus bill in response to the COVID-19 pandemic. There is a lot of information in this most recent stimulus bill, as the full text was almost 5,600 pages long. So that you don’t have to read the whole bill, here are six highlights of the Stimulus bill which will impact most people.
1) Individual Payments Under Stimulus Bill:
The most anticipated and talked about component of the bill is the direct payments going to individual taxpayers. The bill provides up to $600 for individual adults with an adjusted gross income of up to $75,000 a year. Taxpayers filing as Head of Household on their tax return who earn up to $112,500 would get $1,200. A couple filing as married filing jointly on their tax return who earn up to $150,000 would get $1,200. The payment received will be reduced above these income amounts.
A correction was made to the previous bill so that people who have passed away will be excluded from receiving a payment. Eligible families with dependent children will receive an additional $600 per child.
As with the previous payments, the initial payment will be sent out based on 2019 income as reported on federal tax returns. If your income increases in 2020 such that you qualify for the payment in 2019 but you are over the threshold for receiving payments in 2020, you do not have to repay the payment you received based on your 2019 income. However, if your income in 2019 is too high to receive the payment but then your income falls below the threshold for receiving the payment in 2020, you will receive a credit when you file your 2020 income tax return.
The payment received is considered a tax credit and not income, therefore you will not pay income taxes on the payment you receive. As with the previous payments, those who receive income from Social Security and are below the income tax filing threshold will receive their payment as a direct deposit to their bank account, similar to how they receive their Social Security payments.
2) FSA Rollovers:
Flexible Spending Accounts, or FSA’s, are accounts offered as an employee benefit to help pay for medical, dental or dependent care expenses. During the open enrollment period, typically at the end of the calendar year, you elect to defer a set amount from your next year’s salary into the FSA account. The advantage of the FSA is your taxable income is reduced by the amount you defer into the FSA.
The money in the FSA is then used during the year for eligible expenses. The money in the FSA must be used up during the year, with some minor exceptions, or you forfeit any money left in the account at the end of the year. The problem many people ran into because of the pandemic is they didn’t have enough eligible expense to use the money in the FSA account during 2020. For example, many camps and daycare places were closed, many people didn’t feel comfortable going to the dentist or doctor for routine care, or many people lost jobs and didn’t require daycare services. Prior to the Stimulus bill passing, unused money in the FSA account would be forfeited.
The Stimulus bill allows for rollovers of unused FSA assets from 2020 to 2021, and it also allows for rollovers of unused FSA assets from 2021 to 2022. This will prevent many people from forfeiting the assets which they elected to go to their FSA accounts during the open enrollment period. If you have any quesions about your specific FSA account be sure to contact your employer.
3) Charitable Deductions Under Stimulus Bill:
The charitable deductions created by the CARES Act have been extended into 2021 as well as modified a little bit.
The CARES Act created up to a $300 tax dedcution for taxpayers who use the standard deduction for their 2020 income taxes. The donation must be made with cash, credit card or check and must be paid directly to an IRS approved charitable organization by December 31, 2020.
Among the highlights of the Stimulus bill is that the bill extended the charitable tax deduction for taxpayers who use the standard deduction to apply for 2021 as well. However, the deduction was modified in that the deduction is $300 for a taxpayer filing single and $600 for married filing jointly taxpayers. Under the CARES Act the deduction was for a total of $300 per tax return, regardless of filing status. Similar to the charitable tax deduction under the CARES Act, the charitable deduction under the Stimulus bill must be made by cash, check or credit card payment directly to the qualified charitable organization by December 31, 2021.
4) Paycheck Protection Program (PPP):
The good news for small business owners is that Congress added about $285 billion to the loan facility. Small business owners can apply for their first loan, or they can go back and apply for a second loan even if they have already taken a loan earlier in the year.
The Stimulus bill expanded the definition of a qualified expense for loan forgiveness purposes. This is not a full list, but qualifying expenses include property damage, supplier costs, worker protection expenditures, as well as employee wages and operating expenses like rent and utilities.
An important aspect of the Stimulus bill is that PPP loan forgiveness is not reportable as taxable income. Normally, any loan which is forgiven is considered taxable income by the IRS, so this is an important provision of the Stimulus bill. If part or all of your PPP loan is forgiven you do not have to report it as taxable income.
In addition, the Stimulus bill clarified that businesses can still deduct the expenses used to qualify for PPP loan forgiveness as business expenses. There was a great deal of controversy around this topic due to the CARES Act, so it is very helpful to get clarification about the deductibilty of the buinsess expenses used to qualify for PPP loan forgiveness. Be sure to talk to the person who prepares your business tax returns to make sure you get this right on your tax return.
5) Unemployement Insurance Benefits:
Unemployment benefits have been extended for 11 weeks. They were set to expire December 2020. The unemployment insurance benefits extension continues to include benefits for gig workers, self employed persons and independent contractors. Prior to the CARES Act, these types of employees were not entitled to unemployment benefits. In addition, there is a supplemental $300 per week additional payment for those receiving unemployment insurance benefits.
6) Vaccine Distribution Under Stimulus Bill:
The last of the highlights of the Stimulus bill list is Congress has put just over $60 billion into vaccine distribution, tracing and testing efforts. This is welcome news that resources are being funnelled into compating the virus and helping us get to the other side of the pandemic which has effected so many people around the world.
To get more information on the Stimulus bill www.taxfoundations.org is a great resource. The IRS website also has more information including answers to commonly asked questions in a FAQ format at www.irs.gov.
Disclaimer: This article is provided for general information and illustrations purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult with a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Tricia Rosen, and all rights are reserved. Read the full disclaimer.