The new stimulus deal includes 6 tax breaks that could help Americans
The $900 billion coronavirus relief deal that Congress passed on Monday night, which was attached to the $1.4 trillion omnibus spending legislation to fund the government, includes six tax breaks for Americans for 2020 and beyond.
“It’s an important piece of legislation that provides support for people and businesses through the winter as we await the end of the pandemic,” said Erica York, an economist at the Tax Foundation, a think tank focused on U.S. tax policy. “Also, the size of it is something we shouldn’t ignore. We’ve seen a tremendous amount of fiscal support through the pandemic and the downturn it caused.”
Here are the tax breaks included in the coronavirus stimulus part of the legislation:
The biggest tax benefit from the deal is the direct payments to Americans that are advanced tax credits, just like the first round of payments under the CARES Act. These payments of up to $600 per adult and $600 per child are available for individuals and married couples who meet certain income thresholds. (More information about that can be found here.)
If you were supposed to get a larger sum based on your 2020 income but got a reduced amount because of your 2019 income, then the government will pay you the difference when you file your taxes for 2020. If your payment is too high based on your 2020 income, you’re not responsible for paying back the difference.
While most people who are eligible will get their payments, those who don’t can get it when they file their taxes.
Earned Income Tax Credit and Child Tax Credit
The stimulus bill also adjusts how the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) will be calculated for the 2020 tax year. A taxpayer can choose either their 2019 or 2020 income to determine credit eligibility, whichever is most advantageous for them.
“This helps people whose income has fallen in 2020 because they lost a job or had their wages cut,” York said. “Both credits have phase-ins based on amount of income, so if income shrinks, the amount of the credit can shrink.”
Without the change, millions of families were at risk of receiving tax refunds that were up to 80% less than the ones they received for the previous year, according to an analysis by Commonwealth, a nonprofit that supports financial security.
Payroll tax deferral
As part of a flurry of executive actions to address the pandemic, President Trump signed a memorandum in August allowing employers to defer the employee portion of the Social Security tax in their paychecks for the rest of the year. By doing so, workers saw higher paychecks for the remainder of 2020.
But these deferred amounts had to be paid back by the end of April 2021, meaning employers would withhold more in taxes in the first paychecks of the year. The stimulus bill extends the repayment deadline to December 31, 2021.
“That lengthens the repayment period across the entire year, so the deferral amount is paid in smaller chunks at a time,” York said.
Under the CARES Act, taxpayers could deduct up to $300 for charitable donations in 2020 and still take the standard deduction. Typically, charitable donations can only be deducted if you itemize your taxes.
The new stimulus deal extends that above-the-line deduction and improves it. For 2021, individuals can deduct up to $300 and joint filers can deduct up to $600 in charitable contributions.
Flexible spending accounts
Any leftover balances in health care or dependent care flexible spending accounts, or FSAs, can be rolled over to 2021 from 2020 under the new bill. Additionally, any unused funds at the end of 2021 can also be rolled over into 2022. Typically, these are use-it-or-lose-it funds.
3 more tax benefits in the overall bill
The other part of the overall $2.4 trillion legislation, the $1.4 trillion omnibus bill to fund the government, included three more tax changes that help could Americans.
Medical expense deduction: Medical expenses typically have to exceed 10% of adjusted gross income to take this itemized deduction. That threshold is now 7.5% permanently.
Student loans: Under the CARES Act, employer payments for an employee’s student loans — up to $5,250 — would not be counted as the employee’s taxable income. That exclusion has been extended through 2025.
Education benefits: The deduction for qualified tuition and related expenses was eliminated, but the income threshold for the lifetime learning credit was increased. Often, these two tax breaks confused taxpayers because they didn’t know which one to take, York said. This simplifies the calculation.
Janna is an editor for Yahoo Money and Cashay. Follow her on Twitter @JannaHerron.
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