The pandemic caused the introduction of new provisions to help taxpayers stay afloat. Which ones were extended and which expired at the end of 2020?
- FFCRA and employer paid leave
- Qualified tuition deduction
- Payment Protection Program changes
- Standard deduction increases
- Provisions extended under the COVID-19 relief bill
Each year can bring a new set of tax rules to learn and factor into your strategy. 2020 was monumental in many ways, and the government introduced many new tax provisions to help Americans get through the COVID-19 pandemic. Many of these items, however, were set to end on December 31, 2020.
Another COVID-19 relief package was passed in late December and extended many of the tax provisions, however. For instance, the 7.5% medical expense deduction was extended, as were energy-efficiency deductions and the New Markets Tax Credit (NMTC).
However, several provisions did expire on December 31. Others were kept but changed drastically. Here’s a look at these tax provisions and what they could mean for your returns.
FFCRA and employer paid leave
The Families First Coronavirus Response Act (FFCRA) stipulated that employers with under 500 employees must provide employees with paid sick leave or expanded family and medical leave if employees could not work because of quarantine restrictions or the need to care for an individual in quarantine.
The FFCRA also stated that employers must offer an extra 10 weeks of paid family and medical leave at two-thirds of the worker’s regular pay rate when they need to care for a child because of the pandemic.
The FFCRA was not extended by Congress, and it expired at the end of 2020. However, Congress is still encouraging employers to provide this type of leave by extending the tax credit to those eligible until March 31, 2021.
Qualified tuition deduction
A deduction of up to $4,000 in tuition and higher-education costs was previously available to parents of college students. The tax break was repealed in the latest COVID relief act in an attempt to help taxpayers make the transition to the lifetime learning credit, which we’ll discuss later.
Payment Protection Program changes
The late-2020 relief bill also extended and expanded the Payment Protection Program (PPP), but there are a few significant changes for the new year. Let’s walk through the key revisions to be aware of if you are considering a PPP loan:
- Forgiven PPP loans are not included in gross income.
- The tax basis will not be reduced because of loan forgiveness.
- Tax deductions are allowed for deductible expenses paid with forgiven PPP loan funds.
First-time PPP loans are now available for:
- Businesses with 500 or fewer employees
- Sole proprietors, independent contractors, and self-employed individuals
- Accommodation and food services operations with fewer than 500 employees per location
- Business leagues
- Some news organizations
Second-time PPP loans are only available to borrowers with 300 or fewer employees who will use their full first PPP loan before the second loan is dispersed. And they must have experienced a reduction in revenue of 25% or more in all or part of 2020 compared to all or part of 2019.
Publicly traded companies are no longer eligible for PPP loans. This is a significant change from 2020, likely sparked after huge companies obtaining the loans caused public outrage.
Standard deduction increases
The standard deduction will increase for 2021 taxes, with an additional $150 for single filers, heads of household, and married filing separately, and an extra $300 for joint-married filers. The new rates will be as follows:
- Single: $12,550
- Married filing jointly: $25,100
- Head of household: $18,800
- Married filing separately: $12,550
These are fairly normal annual increases to the standard deduction—after it was increased significantly in 2018 by the Tax Cuts and Jobs Act (from $6,500 to $12,000 for individual filers, and $13,000 to $24,000 for joint filers).
Provisions extended under the latest COVID-19 relief bill
Many tax provisions set to expire at the end of 2020 were extended until 2025 or permanently with the second COVID-19 relief bill in late December.
Here are a few credits and deductions to be aware of that were extended, plus any changes starting in 2021:
- The 7.5% medical expense deduction: This deduction is now a permanent provision.
- The lifetime learning credit is expanded and available to higher-income taxpayers and worth up to $2,000 per return to offset undergraduate, graduate, and professional degree programs.
- The tax break for homeowners with a forgiven mortgage balance due to a foreclosure or short sale: The amount of forgiven debt that taxpayers can exclude from gross income was reduced (up to $750,000 for joint filers and $350,000 for single filers). It is in effect through 2025.
- The private mortgage insurance premiums deduction: For taxpayers who itemize, this deduction is available through 2021. Deductions on mortgage and home equity loans or lines of credit may apply to up to $750,000 in total qualified loans.
- Employer student loan payments: The CARES Act provided a tax incentive for employers to help employees with student loan debt. Employers could deduct up to $5,250 and have that amount excluded from workers’ taxable income. This provision has been extended through 2025.
It’s nothing new for tax provisions to change in a given year. But because 2020 was so unprecedented, make sure you keep a close eye on revisions that may still be introduced by new legislation and additional relief bills in 2021.
Work with tax experts to understand the new rules
If you still have questions about which tax credits or deductions you qualify for or how your 2021 taxes will be impacted by recent legislation, talk to the experts at Provident CPA and Business Advisors. Our team will review your situation and help you meet your goals.
Contact Provident to learn more about our services.