On March 11, the $1.9 trillion ARP Act (American Rescue Plan Act) of 2021 was signed into law to help facilitate the United States’ recovery from the economic and health impacts of the COVID-19 pandemic. The ARP Act extends some aspects of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) of 2020, and other 2020 legislation, but also provides new recovery strategies for combating the economic impact of the pandemic.
In addition to a new round of direct payments (with more restrictive phaseouts applying this time), there are several other key provisions that provide planning opportunities in 2021 and beyond:
- Required Minimum Distributions (RMDs): The ability IRA owners had in 2020 to waive RMDs, thereby avoiding the taxable distribution and keeping the money to grow tax-deferred, has not been extended into 2021.
- Charitable Contributions: For taxpayers who do not itemize, the deduction of up to $300 in cash contributions to public charities has been extended and increases the deduction for joint filers in 2021 to $600. And for taxpayers that do itemize, the ability to deduct up to 100% of adjusted gross income (AGI) for all cash contributions to public charities has also been extended. (Note: Contributions to private foundations, supporting organizations and donor-advised funds, or DAFs, do not qualify for these benefits.)
- Child Tax Credit: The child tax credit has been increased for 2021 (with income phase outs) and the age for a qualifying child has been extended to age 17. Taxpayers can also receive advance payments for a portion of their benefits during the year.
- Student Loan Breaks: The act extends the provision allowing for employers to make loan payments up to a specified amount that are tax-free to the employee through 2025. Typically, loan payments made by an employer are considered taxable to the employee.
- Medical Expense Deduction: The medical expense deduction was set to increase to 10% in 2021, however, recent legislation has permanently restored the 7.5% hurdle rate.
- Flexible Spending Accounts (FSAs): Employees can roll over unused amounts in health and dependent care FSAs (2020 to 2021, and 2021 to 2022), something typically not permitted, and employers are also now allowed to let employees make a mid-year change to contributions.
In addition to the above planning items, the IRS provided an extension for filing 2020 taxes to May 17, 2021, allowing additional time for taxpayers to gather tax forms (K-1s) as well as to determine and fund individual retirement plan contributions (e.g., IRAs, Roth IRAs, SEP IRAs).
Please contact your Litman Gregory Advisor for more information and to review your situation.