On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA)[1] into law. The CAA incorporates several pieces of legislation and is focused on both funding the government through its fiscal year and providing various forms of relief to individuals and businesses in response to economic hardship caused by the on-going coronavirus pandemic. Below is a summary of some of those provisions that could impact individuals and their families.

Stimulus payments

The CAA includes payments in the amount of $600 per eligible family member, including qualifying children; however, those amounts start to phase out for individuals with adjusted gross income (AGI) in 2019 in excess of $75,000 ($150,000 for married couples filing jointly).

Unemployment benefits

The CAA provides an additional $300 per week in federal unemployment benefits for 11 weeks. It also extends the Pandemic Unemployment Assistance program, which makes unemployment benefits available to many workers who typically don’t qualify, such as self-employed individuals and gig economy workers.

Charitable contributions

Charity-related provisions from the CARES Act were extended into 2021:

• Individual taxpayers who do not itemize their deductions are permitted a $300 charitable income tax deduction ($600 for married couples filing jointly) for cash gifts made to certain charities in 2021.
• For taxpayers that do itemize, the limitation on charitable deductions is increased in 2021 to 100% of AGI for cash gifts to certain charities.
• As was the case under the CARES Act, gifts to donor-advised funds and supporting organizations do not qualify for these provisions.

Medical expense deduction

The floor for deducting medical expenses is fixed at 7.5% of AGI going forward, allowing taxpayers to deduct medical expenses that exceed this floor.

Major disaster distributions from retirement plans

The CAA provides tax relief for “qualified disaster distributions” from eligible retirement plans (including IRAs) up to $100,000 taken by individuals on or after the date the disaster was declared but before June 25, 2021. If the withdrawal is a “qualified disaster distribution,” the taxpayer may avoid the 10% early distribution penalty, repay the qualified distributions and spread the income tax liability from the distribution over a three-year period. A distribution is a “qualified disaster distribution” if it is related to certain federally declared major disasters (excluding COVID-19) occurring from January 1, 2020 through February 25, 2021.

Employer student loan payments

Employers can provide up to $5,250 annually toward an employee’s student loan payments on a tax-free basis through the end of 2025.

Discharged mortgage debt

The CAA excludes from gross income the discharge of qualified debt on a principal residence through 2025, but only up to $750,000 of qualified acquisition indebtedness ($375,000 for a married individual filing separately)

Flexible spending and dependent care accounts

The CAA allows unused amounts from a health flexible spending account (FSA) or a dependent care FSA to be carried over into the next plan year. Alternatively, for plans offering a grace period rather than a carry-over, the grace period has been extended to 12 months. These changes are applicable for 2020 and 2021 plan years. 

Theresa Marx is a senior wealth strategist for CIBC Private Wealth Management in Chicago, with more than 15 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.