Stimulus Round 2: Key Provisions that Could Impact Your Taxes in 2020 and Beyond

As you know, Congress passed a Consolidated Appropriations Act in late December, which included a second round of provisions for COVID relief and economic stimulus.  If your income did not exceed the phase out range, you may have already received a stimulus check as a result of this spending package.  However, the Appropriations Act (which spanned over 5,000 pages) contained a number of additional provisions that could impact your taxes for 2020 or future years.  We boil it down below, discussing the provisions most likely to impact our clients.

Stimulus Payments.  The Appropriations Act included a stimulus payment of $600 for every qualifying individual and every dependent child (under the age of 17).  Just like the CARES Act in the spring, the stimulus payments were only available to individuals with income under a certain threshold, and the IRS used taxpayers’ 2019 tax returns to determine their income level.

If your income dropped between 2019 and 2020, causing you to be eligible for more/all of the stimulus payments, you will be able to claim that money on your 2020 tax return through the “Recovery Rebate Credit.”  This also applies to individuals who added dependent children (e.g. through birth or adoption) in 2020 and for young adults, who were claimed as dependents on their parents’ 2019 taxes but no longer qualify as dependents in 2020.  Note, however, if young adult children could be claimed as dependents on their parents’ tax return for 2020, they cannot collect the stimulus payments just by filing their own taxes.  In other words, if they were under 19 years old (or under 24 years old and a full-time student) and their parents paid at least half of their living expenses during the year, they do not qualify for the stimulus—whether they file their own taxes or not.

Unemployment Benefits.  For those on unemployment, the Appropriations Act extended benefits by 11 weeks (in addition to the 26-week standard amount in most states and the 13-week extension from the CARES Act).  It also extended the extra $300 weekly Pandemic Unemployment benefit during that time.  If taxpayers’ unemployment benefits had run out prior to the Act, they should be reinstated automatically to claim the additional 11 weeks.  Finally, there were many administrative errors with unemployment benefits in 2020, given the influx of applicants and the number of changes to benefits during that time.  The Appropriations Act gives states discretion to waive any overpayment, rather than withholding benefits to collect the money back, if it was an honest mistake and the overpayment would be painful for the claimant to repay. 

Remember though that all unemployment benefits are taxable.  If you collected unemployment but were employed for a portion of the year as well, you may still be in a relatively high tax bracket.  Even if you opted to have the 10% flat tax withholding deducted from your unemployment benefits, you may owe additional tax on your tax return.

Charitable Giving.  You may recall that the CARES Act created a new deduction for charitable giving, available to those who take the standard deduction (instead of itemizing deductions) on their 2020 taxes.  Eligible persons can deduct $300 from their Adjusted Gross Income (AGI) for cash gifts made directly to charity in 2020.  The recent Appropriations Act extended this deduction to 2021, increased the deduction to $600 for married couples filing jointly, and changed the deduction to affect taxable income rather than AGI.  Be sure to keep records of your charitable giving though if you plan to claim this deduction.  The Appropriations Act also increased the penalty for taxpayers who overstate this deduction.

Flexible Spending Accounts.  Many individuals save to Flexible Spending Accounts (FSAs) through their employer but were unable to use the savings on health or dependent care expenses in 2020 due to changes resulting from the pandemic.  Usually, any balances in an FSA would disappear at the end of the year, but the Appropriations Act allows taxpayers to roll over unused balances from 2020 to 2021 and from 2021 to 2022.  It also allows employers to permit a mid-year change in employees’ FSA contribution amount in 2021 and to extend the age limit for dependent care benefits from 12 to 13.  If these items apply to you, be sure to check whether your employer is opting to adopt these changes.

Medical Expense Deductions.  Under the Appropriations Act, taxpayers can deduct medical expenses that exceed 7.5% of their AGI on their itemized deductions.  Without Congressional action, that threshold would have increased to 10% for all taxpayers in 2021.  If you’re curious which expenses qualify for this deduction, check out more details (including an interactive assistant) on the IRS website.

Please let us know if you have any questions about these issues or about your tax strategy in general.  With the 2018 tax law, the SECURE Act, the CARES Act, and this latest Appropriations Act, there have been quite a lot of changes in the past couple years.  We are here to help you navigate the ever-changing tax environment and try to minimize taxes where possible as you pursue your financial goals.