Tax Breaks for Individuals Were Extended Under the Consolidated Appropriations Act, 2021

In late December of 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the Act), which included the long-anticipated pandemic-related Tax Relief Act of 2020. It also included the Taxpayer Certainty and Disaster Relief Act of 2020, which extends or makes permanent numerous tax provisions, including tax breaks for individuals. The following is an overview of these key tax-related provisions for individuals.

Medical Expense Deduction

The Tax Cuts and Jobs Act (TCJA) set the threshold for itemized medical expense deductions at 7.5% of Adjusted Gross Income (AGI), but this threshold was scheduled to return to 10% of AGI as set in the Affordable Care Act. However, the expense deduction had been extended perpetually by Congress, allowing a taxpayer to continue to deduct their total qualified unreimbursed medical expenses that exceed only 7.5% of their AGI. The Taxpayer Certainty and Disaster Relief Act of 2020 made this threshold permanent.

Charitable Contribution Deduction

Generally, charitable donations are tax-deductible only if you itemize your taxes, but the Coronavirus Aid, Relief, and Economic Security (CARES) Act incorporated a provision that authorized individuals who don’t itemize to deduct up to $300 ($600 for married couples filing jointly) in cash donations in 2020. The Taxpayer Certainty and Disaster Relief Act of 2020 extended this provision into 2021 and makes it more valuable for married couples filing jointly.

Taxpayers who do itemize their deductions are typically limited to a 60% cap (i.e., the amount of charitable donations you could deduct generally could not exceed 60% of your AGI). As in 2020, that limit has been suspended in 2021.

Mortgage Insurance Premium Deduction

The Taxpayer Certainty and Disaster Relief Act of 2020 includes a one-year extension of the mortgage insurance premium deduction, so premiums paid or accrued through December 31, 2021 can be deducted on tax returns by those who itemized deductions and otherwise qualify for the mortgage insurance premium deduction.

Exclusion for Canceled Mortgage Debt

Cancelled or forgiven debt by a commercial lender can be counted as income for tax purposes. However, the Mortgage Forgiveness Debt Relief Act of 2007 generally allowed for taxpayers to exclude canceled mortgage debt from their taxable income, but only for a finite number of years. The Taxpayer Certainty and Disaster Relief Act of 2020 extended the Mortgage Forgiveness Debt Relief Act of 2007 through 2025.

Residential Energy-Efficient Property Credit

Individuals who have implemented certain energy-efficient upgrades to their homes (i.e., solar electricity, solar water heaters, geothermal heat pumps, and small wind turbines) are eligible for the residential energy-efficient property credit. The credit had been set to phase out after 2021, but the Taxpayer Certainty and Disaster Relief Act of 2020 extended it as follows:

  • Continuing the rate applicable to 2020, eligible property that is put into service in 2022 will qualify for a credit worth up to 26% of the property cost
  • Eligible property that is put into service in 2023 will qualify for a credit worth up to 22% of the property cost.

 

How to Tackle Snowball Debt After a Year of Furloughs and Layoffs

For the greater part of 2020, millions of Americans have faced furloughs and layoffs, subsequently relying on credit cards to keep their heads above water. Here’s how to get out from under those ballooning balances.

The Coronavirus Effect on Debt

When the stimulus checks were dispersed last spring, millions of citizens used those relief funds to pay down debt. However, a number of Americans who’ve been laid off or have had hours cut this year don’t have a financial safety net, so they’ve had to fall back on credit cards. Add to this the number of Americans who lost jobs with employer-sponsored health insurance and are now dealing with unpaid medical bills because of the pandemic, and it’s no wonder why so many Americans are struggling under the weight of debt now more than ever.

Strategies to Pay Down Credit Card Debt

If you’ve had to rely on credit cards this year, steps you can take to diminish your balance include:

Communicate with Creditors

At the start of the pandemic many credit card companies began advertising COVID-related assistance programs. Some of these have since expired, but it’s still worth looking into with each credit card company. You will most likely have to prove that you’re experiencing hardship, but most companies are willing to provide at least some short-term measures of relief, such as flexible payments or a lower interest rate.

Request a Lower Interest Rate

Credit card companies are unlikely to reduce APRs by a lot, but every little bit helps. And if you’ve improved your credit score, you have a greater chance of securing a lower rate.

Transfer Balances

By transferring the balance on a high-interest credit card to one with a low or 0% introductory interest rate, you can slash the overall interest you’ll pay on your debt. Just be sure to pay down the balance during the duration of the rate decrease, or you risk landing right where you started—a high balance coupled with a high interest rate.

Pay Off High Interest Credit Cards

If you need to pay off debt on more than one credit card, there are two conventional approaches to do it effectively.

The first is called the debt snowball, which involves paying off the card with the smallest balance first. Once that card is paid off, apply that monthly payment to the monthly payment of the card with the next highest balance. Each payoff builds momentum until you work your way to paying off the card with the largest balance.

The second strategy for paying off credit cards is called the avalanche method, which aims to tackle debts on the cards with the highest interest rates first. While the debt snowball can provide bite-sized mental victories, this method helps to better curtail interest payments over the life of your credit card debt.

 

Is Social Security Headed for Bankruptcy?

Beginning next year, for the first time in 39 years, Social Security is projected to dispense more money than it takes in, which means that the money being collected by the program will soon not be enough to cover the benefits being paid out. Does this mean that Social Security is going bankrupt?

How the Program Came to Be and How it Works

In 1935, after decades of American workers advocated for a social insurance program that could help support retired workers, President Franklin D. Roosevelt signed the Social Security Act into law. Social Security taxes were first collected in 1937 with payments to retired workers beginning in 1940.

A dedicated tax on earnings funds the Social Security program, and the collected money is disbursed as retirement benefits for retirees in the form of a monthly check. How much money a retired worker gets from the program is measured in “work credits”, which are based on total income earned during their career. The program also supplies survivor benefits in many cases to widowed spouses.

What Went Wrong?

Social Security was signed into law over 80 years ago, and there have been significant shifts in demographics since then. The baby-boom generation is retiring, tipping the scale on the worker-to-beneficiary ratio, but other contributing factors include:

  • growing income inequality
  • sizable decline in birth rates
  • legal immigration, which has been cut in half over the last two decades
  • Longer life expectancy as a result of modern medicine, which means people are collecting checks for more years than earlier generations

Is Bankruptcy in the Future for Social Security?

Rumors of the program’s impending bankruptcy have been circulating for years, and some people believe that Social Security funds are going to run out, leaving the workers who are paying into the system now without benefits. This is unlikely to be the case, but lawmakers rightfully continue to discuss proposals to Social Security legislation that would protect the program in coming years. While GOP lawmakers have expressed a desire to raise the minimum age at which you can begin to receive payments, Democrat lawmakers have proposed increasing the payroll tax that pays for Social Security. Neither plan is perfect. The GOP proposal would take years before any savings are realized, and the democrats’ plan to tax the rich would only put the program on borrowed time until it’s back in the same position. A bipartisan plan is needed for the future of Social Security, but how long it will take lawmakers to get there remains to be seen.

How to Keep Your Credit Score in Check During the Pandemic

The COVID-19 virus has spread unease and fear in 2020, and not just from a health standpoint. With millions of Americans out of work and small businesses forced to close shop due to the pandemic, financial fears have pushed front and center over the past few months. This article will address a common financial fear as of late: How to ride out this storm while keeping your credit score as stable as possible.

Check Credit Score Regularly

You should already be regularly monitoring your credit report during the best of times, but it’s especially important to do so during this tumultuous season in order to spot possible mistakes before they have a chance to negatively affect your credit score. Contact the creditor immediately if you do catch a mistake. Recent mistakes can typically be rectified with minimal headache while ones that sit on your credit report longer can take longer to get resolved. With COVID scams happening and many Americans’ income in flux, it’s good practice for the time being to check your credit reports monthly. In fact, the three national credit reporting agencies—Equifax, Experian, and Transunion—are offering free weekly credit reports until April of next year. You can access your reports at AnnualCreditReport.com.

Make On-Time Payments or Contact the Creditor

When possible, continue to make on-time payments, even if it’s just the minimum amount due, through the pandemic. A positive payment history is a major step in ensuring that your credit score stays the course. However, if your income has been affected and emergency savings accounts have been drained, this might not be possible. If this is the case, the best course of action is to contact the lender or creditor as soon as possible as they may have workable payment options available to help you get through this time. Proactive and early communication is paramount. Be prepared to discuss how much you can afford to pay and when you expect to resume regular payments.

Consider a Balance Transfer

You may have found over the past few months that you’ve needed to rely more on credit cards while simultaneously being unable to pay them off each month. If so, now might be a good time to explore a balance transfer where your debt would be transferred to a card that offers a lower interest rate on that balance and may reduce your monthly payment. The low-interest rates are typically temporary, but the payment reduction from lower-interest rate cards can at least help to keep your credit card debt from escalating out of control until you can get back on your feet.
Budget and Make a Plan / Prioritize Payments / Revisit Budget
This crisis is affecting almost everyone, whether you’ve lost your job, you’ve experienced a reduction in work hours, or you’re anxious about the economic fallout of the pandemic, so there’s no better time to rework your budget following these steps:

  • Assessing any take-home income.
  • Examine your financial commitments and variable spending
  • Determine where you can cut back, even temporarily

Taking steps to free up more money in your budget helps to decrease financial stress, which allows you to focus on the most necessary financial commitments while better positioning yourself to protect your credit. If needed, that money can be used for essential expenses, like food and bills, but if you’re in a better position, you can sock away some of it in an emergency savings account for future use.

What Employers Need to Know About the Relaxed PPP Rules

Congress passed the Paycheck Protection Program Flexibility Act (PPPFA) on June 5, 2020, amending several provisions in the original PPP loan program. Along with granting business owners more flexibility and time to spend the PPP loan proceeds, the Act permits funds to be used on a wider-ranging variety of expenses while still allowing for loan forgiveness. Here is how this will affect businesses moving forward with a PPP loan.

Extended Covered Period

Originally, borrowers had 8 weeks from the receipt of loan proceeds to spend funds on forgivable expenditures. Now the covered period specifies 24 weeks after the origination of the loan, or December 31, 2020, whichever is sooner. To qualify for forgiveness, however, borrowers must maintain payroll levels for the full 24-week period. Borrowers do have the option to stick with the 8-week deadline, and they must likewise maintain payroll levels through the full 8 weeks to qualify for the full loan forgiveness amount.

Additional extensions include the timeline for eliminating reductions in workforce and wages, as well as restoring workforce levels and wages to pre-pandemic levels required for loan forgiveness (both extended to December 31, 2020).

Changes to Percentage of Payroll Costs

The PPPFA reduced the payroll expense requirement from 75% to 60%, which means that 40% of the PPP loan funds may now be put towards forgivable non-payroll expenses such as mortgage interest, rent, and utilities. Note that the expenses originally designated as forgivable have not changed.

Changes to Repayment Period

For borrowers whose loans are not forgiven, the PPPFA increases the repayment timeline from two years to five years. The 1% interest rate remains the same.

Changes to Rehiring Requirements

The PPPFA also extends the rehire date to December 31, 2020 and allows for a reduced headcount. Rather than basing loan forgiveness on a borrower’s ability to rehire the same number of employees on payroll as was used to calculate the loan, the PPPFA allows for loan forgiveness amount to be determined by documentation showing that the borrower was (1) not able to rehire former employees and unable to hire similarly qualified employees, or (2) not able to return to pre-pandemic levels of business activity in response to federal guidelines related to COVID-19.

Changes to Payroll Tax Deferment

The CARES Act originally prevented borrowers who received PPP loan funding from deferring additional payroll tax once the lender decided to forgive the loan, but the PPPFA eliminates this restriction, and borrowers can now defer the payroll tax for the period from March 27 to December 31, 2020.

Overall, the PPPFA will ease the burdens of businesses that received PPP loans, but it doesn’t fix everything or answer all the questions, so expect more regulations and changes to the PPP program in the near future.