New Year 2021: Coronavirus Stimulus Round 2

As COVID-19 carved its destructive path through the economy in 2020, Congress provided stimulus and relief provisions in the CARES Act. As the crisis continued, it was widely acknowledged that a second round of stimulus would be needed, and soon.

The new stimulus was finally passed into law near year-end, included in a massive spending bill called the Consolidated Appropriations Act of 2021. At a total cost of $2.3 Trillion, this Act will join the $2.2 Trillion CARES Act as two of the largest spending measures ever enacted.

In this article, we will focus on the provisions that are most relevant to personal finances.

New stimulus payments

The new economic relief law will send a second stimulus payment of up to $600 to each eligible adult and each qualifying child age 16 and younger. Individuals will receive the full $600 if the Adjusted Gross Income (AGI) on their 2019 tax return was under $75,000 ($150,000 for those married and filing jointly). The payment is reduced for incomes above those amounts, and fully phased out for single filers with incomes above $100,000 ($200,000 for married filing jointly). Payments will be sent as direct deposits for those who e-filed their 2019 tax returns and as checks in the mail for those who filed paper tax returns.  

Required Minimum Distributions resume

The new stimulus did not waive the Required Minimum Distribution (RMD) for 2021, so people who are subject to RMDs will be required to take a distribution in 2021. The RMD requirements were modified under the 2019 SECURE Act, which raised the beginning age to 72. People of any age with inherited IRAs will also be required to take a minimum distribution in 2021.

Medical expense deduction hurdle restored

The 2020 Act permanently reduces the AGI ‘hurdle rate’ for medical expense deductions to 7.5% of AGI. In recent years, the hurdle rate had oscillated between 7.5% and 10% of AGI. Now, the 7.5% rate is restored for all taxpayers, for all future years.

Charitable contribution provisions extended for 2021

The 2019 CARES Act made two significant provisions related to charitable gifts. First, it increased the limit on cash contributions to 100% of AGI. Second, it introduced a new $300 “Above the Line” deduction for charitable contributions. Both these provisions were set to expire in 2020, but the 2020 Appropriations Act extends them through 2021. Further, it increases the above the line deduction to $600 for joint filers.

Employee provisions

The Appropriations Act extended the CARES Act federally subsidized unemployment benefits to April 5, 2021. This includes the Pandemic Unemployment Assistance, which provides unemployment benefits to individuals who are not normally eligible to receive such benefits, such as self-employed individuals. The $300 increase to “regular’ unemployment compensation was also extended for 11 weeks.

The Appropriations Act introduced a new relief provision for unused Flexible Spending Account balances. Normally, unused balances are forfeited but the relief provision allows employers to roll unused balances from the end of 2020 into 2021 and from 2021 into 2022.

Small business provisions

The Appropriations Act reopens the Paycheck Protection Program (PPP) and makes meaningful revisions to the PPP rules. For those businesses who have yet to receive a loan under the Paycheck Protection Program, the ability to apply for ‘round one’ financing will be reopened. The qualifications and the rules for that program remain largely the same, save for the additional changes authorized by the Act discussed below.

Other notable provisions

  • Qualified Disaster Distributions from retirement accounts and plan loans for individuals who qualify based on areas deemed a federal disaster area will be continued, except now the reason for the declaration of a federal disaster area must be something other than COVID-19.
  • Educators buying their own COVID-19 supplies for their classrooms will be able to claim a $250 “above-the-line” deduction for those expenses as part of their overall Educator Expenses deduction.
  • Student loan relief was NOT extended past the end of 2020, and so suspended loan payments will resume, as will collection efforts for defaulted federal student loans.
  • Mortgage insurance premiums remain deductible through 2021 (subject to phase out limits).
  • Energy-Efficient Homes Credit and Qualified Fuel Cell Motor Vehicle Credits are extended through 2021.

Planning notes and opportunities

The Appropriations Act of 2021 comes shortly after the CARES Act of 2020 and the SECURE Act of 2019. Together, these laws represent a massive number of changes. Planning opportunities arising from these changes will vary depending on your own circumstances. 2021 is sure to be a busy year as we review our clients’ finances and uncover opportunities. As always, our analysis and advice will be based on the client’s overall financial plan, changes in their situation, as well as the changes in the laws. Contact us to learn more about how we can help you.

About Jon Beyrer

Jon Beyrer, EA, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Compliance Officer. As a lead advisor, he focuses on helping families achieve their goals with sound wealth planning. In the community, Jon serves on several boards and is co-founder of the Professional Alliance for Children, a legal/financial charity for families of ill children. He has been quoted in The Wall Street Journal, The New York Times, and the Journal of Financial Planning. Jon lives in San Diego with his family.

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