Impact of Key Provisions of COVID-19 Relief on Individual Taxpayers

In the two years since the onset of the COVID-19 outbreak, lawmakers have overhauled the tax landscape due to the economic relief issued to individuals and businesses impacted by the pandemic. While the relief was much needed, it will potentially impact individual and business-related tax planning.

As we dive into the 2022 tax filing season, let’s look at the provisions in the various stimulus and relief packages that could impact returns for individual taxpayers.

CARES Act

The Coronavirus, Aid, Relief, and Economic Security (CARES) Act piggy-backed off the Families First Coronavirus Response Act (FFCRA) and ultimately became the most noteworthy COVID-19-related bill of 2020. Signed into law by President Trump on March 27, 2020, the CARES Act was far-reaching; it was over 300 pages long and addressed concerns of both individual and corporate taxpayers. In addition, individuals took note of the following legislative changes:

• Stimulus Checks – Round One – The CARES Act approved the first round of stimulus check payments, giving eligible adults checks of up to $1,200 and eligible dependents under 16 years of age checks of up to $500. Payments were disbursed beginning in April 2020.
• $600 Additional Unemployment Benefit – The CARES Act temporarily boosted workers’ weekly unemployment benefits by $600.
• Temporary Suspension of RMDs – Required Minimum Distributions (RMDs) from qualified retirement plans were temporarily suspended for the 2020 tax year. Taxpayers who had already taken RMDs were allowed to repay those distributions to their retirement accounts if they wanted to waive their RMDs.
• $300 Charitable Deduction “Freebie” in 2020 – Typically, taxpayers can only deduct charitable contributions if they itemize their deductions. Still, the CARES Act permitted taxpayers to deduct up to $300 of cash donations made to charity even if they took the standard deduction. However, this allowance was per tax unit, so married taxpayers could only deduct up to $300 on their joint return.
• Penalty-Free Retirement Plan Distributions in 2020 – In 2020, the CARES Act allowed individuals to withdraw up to $100,000 of “coronavirus-related distributions” from their retirement plans without incurring a 10% early withdrawal penalty. Instead, taxpayers could treat those withdrawals as loans and repay them to their account within three years, or they could keep those distributions and pay income tax on their withdrawal.
• Student Loan Payment Freeze – Federally backed student loans were placed on administrative forbearance at a 0% interest rate, effectively freezing student loan payments until September 30, 2020. This payment freeze has been extended multiple times, and student loan payments are now frozen through May 31, 2022.

Potential Impact

If you took a retirement plan distribution in 2020 and make payments in 2021 or 2022 to return the distribution, your 2020 tax return should be amended to reflect a reduction in taxable income.

The Consolidated Appropriations Act, 2021

The Consolidated Appropriations Act (CAA) 2021, signed into law by President Trump on December 27, 2020, was an omnibus bill that extended and expanded a few key provisions from the CARES Act.

• Stimulus Checks – Round Two – The CAA approved the second round of stimulus checks. This time, adults and dependents were eligible for checks worth up to $600 each. Payments were disbursed beginning in December 2020.
• $300 Additional Unemployment Benefit – The CAA revived the CARES Act’s boosted unemployment benefits but gave workers an additional $300 weekly benefit (rather than $600) through March 2021.
• FSA Flexibility – Flexible spending accounts (FSAs) are typically a “use it or lose it” savings account for out-of-pocket healthcare costs, but the CAA allowed taxpayers to roll over unused FSA funds from 2020 to 2021 and 2021 to 2022. The CAA also allowed employees to change their FSA contributions mid-year in 2021 even if they did not have a qualifying event like a child’s birth or a change in marital status.
• $600 Charitable Deduction “Freebie” in 2021 – This tax law extended the $300 charitable deduction for all taxpayers (even those who take the standard deduction) into 2021. It also expanded the deduction so that married taxpayers could take a $600 deduction on their joint return.
• Adjusted Gross Income (AGI) Limit for Charitable Contributions – Typically, deductions for cash contributions made to charity are limited to 60% of a taxpayer’s AGI. Still, in 2021, taxpayers can deduct cash contributions valued at up to 100% of their AGI.
• Penalty-Free Retirement Plan Distributions in 2021 – Like the penalty-free coronavirus-related retirement plan distributions that were granted under the CARES Act, the CAA allowed taxpayers to take a qualified disaster distribution of up to $100,000 from their retirement accounts through June 25, 2021, without paying the 10% early withdrawal penalty.

Potential Impact

With the passing of this legislation, taxpayers will be able to deduct $600 (married filing joint) of charitable contributions from taxable income on their 2021 tax returns. Additionally, if taxpayers did not use all of their FSA account balance, they can carry over the balance for 12 months for 2021 and 2022.

American Rescue Plan Act of 2021

The American Rescue Plan Act (ARPA) of 2021 was the first COVID-19 legislation passed under the Biden Administration. Signed into law on March 11, 2021, by President Biden, the ARPA focused heavily on helping lower-income individual taxpayers’ financial and tax burdens.

• Stimulus Checks – Round Three – The ARPA approved the final round of stimulus payments. Taxpayers and an unlimited number of dependents — of any age — received checks of up to $1,400. Payments went out in March 2021.
• Extension of Additional Unemployment Benefits – The ARPA extended the CAA’s additional $300 weekly unemployment benefit payment through September 2021.
• Student Loan Debt Forgiveness – Most student loan debt forgiveness is taxable to the borrower as income, but the ARPA made student loan debt forgiveness nontaxable between 2021 and 2025.
• Child and Dependent Care Credit – In 2021, you may be eligible for up to 50% of child and dependent care costs. Before the ARPA was passed, the maximum credit was $1,050 for families with one qualifying dependent or $2,100 for families with two or more. In 2021, the credit increased to $4,000 and $8,000, respectively.
• Earned Income Tax Credit Increase – The ARPA nearly tripled the EITC in 2021 for workers without qualifying children and removed the age limit on the credit, allowing both young workers and retirees to qualify. It also permitted individuals to calculate their 2021 credit using their 2019 earned income to be eligible for the largest credit possible.
• Dependent Care FSA – In 2021, taxpayers could contribute more than double to their dependent care flexible spending accounts than in prior years. Maximum contributions increased from $2,500 to $5,250 for single taxpayers and from $5,000 to $10,500 for married taxpayers. These funds allow taxpayers to use pre-tax dollars to pay for childcare, in-home senior care, or other eligible dependent care costs.
• Child Tax Credit Changes – The ARPA did four things to the Child Tax Credit:

1. Made it fully refundable for 2021.
2. Expanded it to include 17-year-old dependent children.
3. Allowed for half the credit to be paid in advance.
4. Boosted the benefit from $2,000 per child to either $3,000 or $3,600 per child depending on their age and the family’s AGI.

Potential Impact

At the beginning of 2021, the final economic stimulus payment was issued. This was based on your most recent filed return, so if you did not receive the payment but are eligible based on your 2021 return, you will be entitled to that credit on your 2021 tax return. Also, in 2021 the child tax credit was expanded, and one-half of the credit was advanced to eligible taxpayers. You should receive a 6419 letter from the IRS indicating the amount of advance you received, which will be reconciled on your tax returns.

New Jersey Specific Legislation

The Federal government wasn’t the only institution passing COVID-19 legislation. The state of New Jersey also helped individuals navigate the post-pandemic world, specifically via:

• The New Jersey Child and Dependent Care Credit – The New Jersey Child and Dependent Care Credit is calculated as a percentage of the Federal credit, ranging from 0% (for high-income taxpayers) to 50% (for low-income taxpayers). Beginning in 2021, the credit was made available to more New Jerseyans by raising the taxable income threshold for credit eligibility from $60,000 to $150,000.
• The New Jersey Earned Income Tax Credit – The New Jersey Earned Income Tax Credit (EITC) is calculated as 40% of the Federal credit. When Congress boosted the Federal EITC and made it available to more individuals, the New Jersey tax credit became more potent as a result.
• The Retirement Income Exclusion – New Jersey allows taxpayers to exclude retirement income from their state taxable income if their taxable income is below a certain amount. Beginning in the tax year 2021, the income limit for this exclusion increased from $100,000 to $150,000 for joint filers, allowing more taxpayers to exclude retirement income in 2021 than in years past.

The past two years have seen many tax-related issues that have added a layer of complexity to this year’s tax filing season that could affect your return. Now more than ever, it is important to work with your accountant to ensure you are properly prepared to file your return.

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©2022 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.