2021 Tax Law Changes Impacting Individuals

calendar iconJanuary 8, 2021

The Consolidated Appropriations Act, 2021 (the “Act”) includes several provisions that impact individual taxpayers. Foremost among these is the new $600 per person economic stimulus payment. This refundable tax credit is available for taxpayers, their spouses, and each qualifying child. The credit begins to phase out starting with modified adjusted gross income of $75,000 for non-married taxpayers, $150,000 for married taxpayers, and $112,500 for taxpayers filing as heads of household. The IRS has already begun the process of issuing these payments. Taxpayers who do not receive payments before filing their returns can claim the refundable credit on their 2020 tax returns.

For taxpayers who itemize deductions, the Act makes a permanent change to the tax law by setting the threshold for unreimbursed medical expense deductions at 7.5 percent of adjusted gross income (“AGI”). Before the Act, the threshold was raised to 10 percent of AGI. Also, for taxpayers itemizing charitable contribution deductions, the Act extends for another year the income limit on charitable contribution deductions that was raised by the CARES Act. The limit of 60 percent of AGI is again raised to 100 percent of AGI for 2021.

For taxpayers who do not itemize, the Act provides for a $300 deduction above and beyond the standard deduction for cash contributions made to qualifying organizations in 2021. The Act also clarifies that married taxpayers filing jointly will be eligible for up to $600 of contribution deductions in 2021.

Taxpayers facing difficult financial situations may benefit from the Section 108(a)(1)(E) exclusion from income for discharge of indebtedness on a principal residence. The Act extends this exclusion provision for five years. The Act also lowers the amount of discharged debt that can be excluded from income under this provision to no more $750,000. The previous amount was as much as $2 million.

The Act also provides the following:

  • A one-year extension for the 10 percent credit for qualified nonbusiness energy property;
  • Modifications to rules for flexible spending accounts allowing them to be rolled forward from 2020 to 2021 and from 2021 to 2022.
  • Changes to rules for qualified distributions from retirement plans for taxpayers impacted by declared disasters.
  • Increases to the standard deduction for the net amount of personal casualty loss incurred by a taxpayer due to a designated disaster.
  • Higher income phase out thresholds for the Lifetime Learning Credit, but no renewal of the deduction for qualified tuition and related expenses.

Finally, the Act incorporates the No Surprises Act which includes a prohibition on certain surprise medical bills. These surprise medical bills often occur when a patient receives care from an out-of-network provider at an in-network facility. This is not a tax provision in the Act, but may prove beneficial to taxpayers seeking medical care.

Please reach out to your Cherry Bekaert tax advisor with questions or guidance with these tax law changes.

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