The Consolidated Appropriations Act of 2021…In Under 5500 Pages!
Does the excitement of the new Consolidated Appropriations Act of 2021 keep you awake at night? If so, you can find all 5,593 pages here on Congress’s website and I’m confident your insomnia will be cured by page 3.
Like most of you, I skipped most of the tiny print of the bill in favor of (many) various articles from reputable sources, including the text of the bill, to summarize the key points relevant to my clients, friends, family and readers. In an effort to keep this summary to under 50 pages, many details and even some significant proposals have been left out or significantly simplified (for example, the naming and partitioning of the bills). Finally, it’s worth noting that two significant bills were sent to the President on Monday; the Defense bill and the Stimulus bill (simplified aliases). The former bill was vetoed by the president Wednesday afternoon and the Stimulus bill which this summary will focus on, was threatened by a video posted to the President’s Twitter account Tuesday night.
Will it Pass?
While I have little confidence in the public’s ability to accurately predict short-term market movements, I have even less in their (or my) ability to guess what the President will do (or say) over any given 24 hour period. As of this writing Thursday December 24th, the bill is not law and it seems the most likely outcomes are:
- The president signs the bill as is – not likely.
- He vetoes the bill where it’s sent back to Congress and they override the veto.
- The President sends it back (with or without a veto) and the Democrats are able to shore up additional Republican support to address the primary objections presented by the president – namely that the $600 stimulus checks are too low.
- Or it’s sent back to congress to further negotiate terms the President – and ironically the Republicans – will both support, though as of Thursday morning, Republicans have stated they will not support increasing the individual checks to $2,000.
The final option is that after months of wrangling, Congress (and the Treasury Secretary Mnuchin) are unable to get a bill together that would be acceptable to the President, and millions of Americans are left struggling without additional support. In any case, to the extent that it passes, it’s unlikely that there will be material changes to the rest of the bill.
The Checks
Similar to the first round, eligible individuals – taxpayers and those dependents for whom the taxpayer is eligible to claim a Child Tax Credit (those under 17) – will receive $600, subject to income phaseouts. These phaseouts will vary based on the number eligible individuals, i.e., the more dependents, the more you can earn and still receive some credit. The credit will be reduced by $5 for every $100 over the payor’s AGI threshold (phaseout) limit.
For example, a husband and wife filing jointly (MFJ) with two eligible children would receive a base amount of $2400 (4 x $600). The threshold limit for MFJ is $150K (regardless of the number of dependents). If they have 160K of AGI (10K over the limit), their $2400 base amount would be reduced by $500 (10,000/100 x 5) for a total of $1900 stimulus check. Even with the same AGI and phaseout, the Bradys – with a bunch of children – would have a higher base amount, and would not have the same $500 reduction.
Paycheck Protection Program (PPP) V2.0
If you liked the first movie, you’ll love the sequel!
Version 2.0 of the PPP reads a lot like the first round, but with some notable changes (and many other not-so-notable changes I won’t address here). Like the first round of PPP, small business owners (now defined as sub-300 employees, with some exceptions based on industry for v2.0) may apply for a forgivable loan. Importantly, and in an adjustment to the original CARES act, expenses paid with forgiven PPP loans (from the original PPP) will be deductible. This updated rule will apply to those loans provided (and forgiven) under both versions of the PPP. This is welcome news for PPP recipients as funded loans may have otherwise potentially unnaturally inflated recipients’ taxable incomes.
Those who received funding under the original PPP may apply for additional funds under V2.0, although they’ll be required to show that in at least one quarter of 2020, their revenue was down 25% or more over the same period in 2019. Finally, there will be a simplified loan forgiveness process for those loans up to $150,000 – the vast majority of the loans funded under the original PPP (though not the majority of dollars distributed).
Unemployment Benefits
While there are a number of changes to unemployment benefits, no doubt the headline will be about the additional $300 weekly benefit the Federal government will add to an unemployed person’s state-determined benefit. While this is half the amount of the first benefit that expired earlier this year, it’s notable that the average unemployment benefit is roughly $400 (although, for the numbers geeks – there is a large standard deviation given the variability in state unemployment benefits) so it will help the average unemployed worker substantially. The government will continue to subsidize these benefits for eligible persons through the middle of March 2021, an extension of about 11 weeks.
Typically self-employed individuals aren’t eligible for unemployment under the “looks like a tough month, I think I’ll just file for unemployment” clause. However, under the Pandemic Unemployment Assistance program eligible individuals, including those self-employed, can receive benefits through as late as April 5th of 2021. This is a welcome extension for the many workers part of the “gig” economy.
Personal Income Taxes
If you’re looking for (really) last-minute tax strategies, you can skip this part. However, there are some notable changes and extensions to previous Acts.
- Permanent (to the extent that exists in Washington) reduction of the AGI hurdle for medical expense deductions to 7.5%. Medical expenses over this amount are now deductible. Those of you keeping track at home will recall that the Tax Cut and Jobs Act lowered the threshold needed to deduct medical expenses from 10% to 7.5%, though it stated this would revert back to 10% in 2019. The SECURE Act retroactively applied the 7.5% hurdle to 2019 and appplied it to 2020. The new Act will stop the games and set it at 7.5%…at least until Congress decides to change it.
- Removal of tuition deduction and increased phase-out for Lifetime Learning Credit to align it with the American Opportunity Tax Credit (a significant increase). While this may not sound great, the result is likely a larger benefit for almost anyone who previously would have claimed the Tuition deduction. Simplified tax code that actually benefits nearly everyone (who would have otherwise claimed the previous deduction)? Sounds good to me!
- Increase from $300 to $600 (married filing jointly) the amount that can be taken as a charitable deduction above the line, i.e., not requiring you to itemize your taxes. Note the $600 is only for 2021 and is only for filers who do not itemize.
- Mortgage insurance premiums remain deductible, subject to phaseout limits, through 2021.
Other Considerations for Business Owners
- Return of the 7 Martini lunches (if that’s not “a thing” it will be). In an effort to support restaurants, the Act allows for a 100% deduction for food and beverages “provided by a restaurant.” While some details around what qualifies as a restaurant will need to be worked out, it seems clear that both dine-in and takeout should qualify. Relatedly, deduction (and the 7 martini lunches) may also help the Uber and Lyft drivers!
- The CARES Act allowed for employers to provide up to $5,250 of annual tax-free education assistance for an employee’s qualified student debt. These payments can be made directly to a lender or to the employee (who would pay their own debt) but was slated to end in 2020; the act extends this benefit through 2025.
Batteries Not Included
It’s hard to imagine anything was left out of a 5500-page bill, but there were a number of items not renewed from previous acts (or indeed, just left out). Conspicuously absent was an extension of the required minimum distribution (RMD) waiver granted under the CARES act. This waiver allowed well heeled individuals 70.5 and better to skip their unwanted RMDs and related unwanted taxable income in 2020, but no extension was granted under this act. As such, RMDs will return to their regularly scheduled programming in 2021.
Also absent from the bill was additional student loan support granted under the CARES act that stopped collections on defaulted loans, suspended student loan repayments and set interest rates at 0% through September of 2020. President Trump extended this support in August, and recently Secretary of Education Betsy Devos pushed this extension through January of 2021. However, the act does not extend these benefits after January of 2021.
In the interest of getting this to you quickly and concisely, I’ve of course left some things out of the original 5500+ page bill. In short, this is not a comprehensive review, nor is this to be taken as tax, legal or financial advice. Please use it for informational purposes and share as you see fit. Want to discuss more? Book a call with me below.