Eight Stimulus Tax Breaks for your 2020 Individual Tax Return

Congress recently passed a massive new stimulus bill that was enacted into law on December 27, 2020. Most of the public’s attention has been focused on the bill’s authorization of additional stimulus checks and new PPP loans and other aid targeted to struggling businesses.

Did you know there are 8 Tax Breaks that are included in the stimulus that could save you taxes on your individual 2020 Tax Return?

Here are eight new tax breaks that you should know:

1. deduct cash contributions to charity if you don’t itemize,
2. deduct up to 100 percent of your adjusted gross income (AGI) as a charitable deduction,
3. lengthen to one year the time you have to repay your 2020 employee Social Security taxes if you had them deferred by your employer,
4. deduct medical expenses in 2021 using the now-extended 7.5 percent of AGI floor for this deduction,
5. carry over unused flexible savings account (FSA) funds to next year,
6. use your 2019 income to qualify for the earned income tax credit and/or child tax credit if you’re a lower-income taxpayer,
7. deduct out-of-pocket expenses for personal protective equipment (PPE) if you’re a teacher, and
8. take advantage of the lifetime learning credit in 2021 if you’re a higher income taxpayer.

Details of a few of the Tax Breaks 

Charitable Contributions

The CARES Act made three major changes to charitable contribution deductions for tax year 2020:

• For individuals, there is no adjusted gross income (AGI) limit for contributions normally subject to the 50 percent and 60 percent limitations. The 2020 no-limit rule does not apply to donor-advised funds.
• For corporations, the 10 percent limitation goes up to 25 percent of taxable income.
• If you are a non-itemizer, you may now deduct above-the-line up to $300 of cash charitable contributions for tax year 2020 only.

The new law enacted on December 27, 2020, extends the increased charitable contribution deduction limits for individuals and corporations to tax year 2021. In addition, in tax year 2021, non-itemizers can deduct cash charitable contributions up to $600 on a married-filing-joint return ($300 for singles), but it’s below-the-line.

INCREASE TO THE HEALTH FSA CARRYOVER LIMIT 

Flexible spending accounts are subject to a “use it or lose it” rule:  The use if or loss it rules require balances to be utilized for eligible expenses incurred during the plan year and unused balances are subject to forfeiture. 

There are two exceptions to this rule for health FSAs:

1. A health FSA may cover eligible expenses that are incurred during a limited “grace period” (up to two months and 15 days after the end of the plan year).
2. A health FSA may allow employees to “carry over” up to $500 to be used for expenses incurred in the next plan year.

A health FSA may allow a grace period or a carryover, but not both.

Carryover Limit is Increased.  

Effective for plan years starting on and after January 1, 2020, The limit is increasing to $550 for 2020 (20% of the $2,750 limit on salary reduction contributions).