The world has experienced many changes in the past two years. The ongoing pandemic has affected a multitude of lives and numerous laws. To create relief for individuals and businesses alike, multiple government assistance acts were put into place. The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Coronavirus Response and Consolidated Appropriations Act were both signed into law in 2020, and the American Rescue Plan was signed into law in 2021.  Each of these introduced major changes into the tax law.  As 2021 tax filing and 2022 tax planning begin, it is important to consider the effects of these relief efforts.

Assistance Not Renewed for 2021

Last year, taxpayers aged 72 or older were allowed to skip their required minimum distributions (RMD) without penalty. This suspension was not renewed for 2021. Therefore, all taxpayers that were at least 72 years of age at the end of 2021 were required to take a distribution from their retirement accounts. If you turned 72 during tax year 2021, you have until April 1, 2022 to take your first RMD.  Those that were 72 or older prior to 2021 must have made their distributions by Dec. 31, 2020. Retirement and IRA contribution caps remained consistent in 2021 with no changes to limits.

2020 also saw a change to the taxability of unemployment benefits. In 2020, up to $10,200 of unemployment compensation was exempt from employment taxes for single filers ($20,400 for married filing jointly) with phase-outs starting at $150,000. However, for the 2021 tax year all unemployment compensation received will be included as taxable income.

Assistance for 2021 Tax Year Only

For 2021 only, the child tax credit will be increased from $2,000 per qualifying child to $3,000 with a $600 increase for children under the age of six. The “qualifying child” age limit has increased to include all children that have not yet reached the age of 18, as opposed to the previous age of 17. Only for tax year 2021 will this credit be fully refundable with half of the credit being paid to taxpayers as an advanced payment. The increase in credit will come with a phaseout beginning at $150,000/$75,000 for married filing jointly/single taxpayers.

There is an increased refundable credit for the child and dependent care tax credit. The maximum credit rate is increased to 50% of Adjusted Gross Income (AGI) with a phaseout beginning at $125,000.

In 2020, we saw the introduction of an “above the line” (regardless of standard or itemized deduction election) charitable gift deduction of $300 for all taxpayers. This change will carry into 2021 with an increase of $300 for Married Filing Jointly taxpayers for a total available deduction of $600. Along with this, an election may be made to increase the limit on cash donations allowed for itemizing taxpayers. This election will allow cash donations up to 100% of Adjusted Gross Income (AGI) to be included in the calculation of the itemized deduction. This is up from the 60% limit in 2020 for cash donations.

Various other itemized deductions and credits were extended through the 2021 tax year including: the mortgage insurance premiums deduction, credit for energy-saving home improvements, and fuel cell motor vehicle credit.

Extended Assistance for 2022

The pause on required student loan payments and interest previously meant to expire in 2021 has been extended through May 1, 2022. This pause includes compete suspension of payments, a 0% interest rate, and stopped collections on default loans for all eligible loans. Eligible loans include loans held by the U.S. Department of Education; however, loans held by commercial lenders or schools attended are not. To determine if your loan is eligible, contact your loan service provider.

The residential energy efficient property credit was extended through 2022 (applying to the cost of solar electric property, solar water heaters, geothermal heat pumps, small wind turbines, fuel cell property, and qualified biomass fuel property) at the previous 26% rate. This rate is now expected to be reduced in 2023 and will expire in the following year.

Business can temporarily claim 100% of food and beverage expenses as a deduction from taxable income for expenses incurred between Jan. 1, 2021 and Dec. 31, 2022. These expenses must be provided by a restaurant with either the business owner or employee of the business present and cannot be considered lavish or extravagant under the circumstances. All other meal expenses will be subject to the former 50% limitation.

Assistance Extended Past 2020

The CARES Act previously made all employer student loan repayments, whether on principal or interest, a nontaxable benefit to the employee until the end of 2020, with the Consolidated Appropriations Act extending this tax-free benefit until Dec. 2025. Qualifying loans are defined as loans taken to pay for qualified educational expenses for the employee, their spouse, or their dependent. This benefit is limited to $5,250 per year per employee and applies to both educational assistance and loan repayment. All amounts over this limit will be included in the employee’s Form W-2 as taxable wages.

For itemizing taxpayers, a favorable change in qualified medical expenses and allowed expenses for Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) was introduced. It allows for more over-the-counter medications as a qualified reimbursement including, but not limited to, cold medications, antihistamines, aspirin, and other pain medications. Even better—this change is a permanent relief effort. Additionally for itemizing taxpayers, the qualified medical deduction floor has been lowered from 10% to 7.5% of AGI. This means that you may now deduct all qualified medical expenses over 7.5% of your AGI if choosing to itemize deductions.

Conclusion

As the uncertainty of the pandemic continues, with it comes many changes to tax planning and tax law. The expirations, changes, and extensions mentioned above are just a few of the recent tax changes introduced in the recent COVID-19 Acts. It is important to continue to monitor relief and adjust tax planning as needed. Always contact your tax advisor with any questions.