Hello, Tim Maurer back with another episode of Ask Buckingham, a video podcast designed to bring clarity and calm in the midst of confusion and chaos by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today, we’re talking with Buckingham’s Director of Advanced Planning, Jeffrey Levine, who also happens to be one of the financial and tax minds that the entire country turns to in order to better understand the impact that the new national stimulus package will have on you personally. And Jeffrey, this new stimulus package is called The Appropriations Act of 2021 and it is indeed breaking news with President Trump just signing the bill yesterday. What do we need to know high-level about this most recent stimulus package and how could it impact us?
Well, it’s a great question, Tim. And unfortunately there’s 5,593 pages, I think, of information. So a high level even just… We could spend the next hour going through a high level. But in short, what individuals should know is that this bill really combines a variety of pieces of legislation together. First off, it funds the government for fiscal year 2021, which is why, even though we’re still in 2020, it’s called The Appropriations Act of 2021. Second, it provides some further stimulus relief due to the ongoing COVID-19 crisis.
And then finally it also brought, it incorporated the so-called extenders or an ability for us to push out some of the tax benefits and deadlines that we’ve had as part of the tax code now for many years, but things that aren’t permanent, this just reinstated a number of them. Some for another year, some for two more years, some for five more years and in some cases made some of those provisions permanent even. So truly a combination of all of those things make up The Appropriations Act of 2021.
Fantastic. All right. So, let’s isolate one factor right now. What does it actually mean for me as an individual, for the collective me, what’s coming? Is there a check coming?
Sure. So, the first thing people are going to want to know is, “Am I going to be getting another stimulus check?” That is perhaps the most common question. The first time around was, “Hey, am I getting one of those checks in the mail?” Or some of them came on debit cards, some people got them direct deposited, but essentially is the government going to give me “free money?” And the answer last time was maybe, and the answer this time around is maybe as well.
More specifically individuals who have, when I say individuals, single filers who have more than $75,000 of income, they can begin to see that recovery rebate check, what they call the additional recovery rebate, phased out. Married couples with more than $150,000 of income, they will also see their recovery rebate phased out.
But for individuals who have income lower than that, they will receive a “full” additional recovery rebate, which, as we stand here and record today, is equal to $600 for each taxpayer. So a single filer, that would be $600 for you. A married couple, that would be $1,200. And then, an additional $600 amount for each qualifying child. Qualifying child here being someone who would be able to qualify for the child tax credit. So a child under the age of 17. So, for instance, a married couple with three small children, they would get two plus three, two adults, three children, for a total of five times $600 or $3,000 of recovery rebate credit. Again, provided that they’re below those income levels. Once you exceed that, that additional recovery rebate begins to be phased out and in some cases will be eliminated entirely.
Sure. And it can certainly make a difference, especially this time of year. I’m curious, when you talk about these phase outs, upon what is that income limit based? Was that your tax return last year? How is that going to be determined? Especially for people who might be struggling right now that may not have struggled last year.
Yeah. And so, unfortunately for those individuals, there’s kind of a good and a bad. The good news is that, if in fact, in 2020, your income is below those amounts, you will receive the full credit. The problem is if your old income, old here meaning 2019, if your 2019 income was above those thresholds, then it won’t come to you right away. More specifically what I mean is the IRS will begin to pay these recovery rebate checks in advance, if you will, now based on your 2019 income.
But as you mentioned, some individuals had fine 2019s, but this year, due to the pandemic or other reasons, their income is substantially less. Unfortunately, those individuals, even though they will get the credit eventually, they’ll have to wait until they file their 2020 income tax returns. And once they do, that credit will be applied at that point, either increasing the refund that they’re entitled to or decreasing the amount that they owe, depending upon their particular situation.
So once again, individuals right now will receive payment in advance based on what their 2019 income was. But if 2020 was much lower and you’d qualify for a bigger credit based on 2020’s income, then, once you file your tax return, that will be trued up, if you will, and it will impact either your refund or the amount that you owe accordingly.
Jeffrey, something tells me that we might see people filing their taxes a little bit earlier this year. What do you think?
Indeed. Yeah, yeah. Certainly if that applies to you, it’s one of the primary reasons you might want to file a tax return as early as possible. Unfortunately, I do actually expect tax season to be at least somewhat delayed this year. Now that we have a bill that changes at least a significant number of things for 2020. I think that the IRS may need some time to revise certain forms, et cetera. And so, that may push back the start of filing a little bit. But certainly by beginning, hopefully, to mid-February at latest, individuals are able to file their tax returns.
And certainly if you’re working with a paid preparer, those paid preparers are much more likely to be ready for the virtual environment that many of us find themselves or ourselves in this year than they were last year, where it was out of nowhere, they immediately had to transition their practices with no warning in the middle of the busy season from in-office to being virtual. So hopefully this will be a less painful tax season for everyone, regardless of whether you’re able to see your tax professional in person or not.
Yeah, hopefully so. Well, one of the other ways that the government helped with the last stimulus bill in order to give people access to money more easily was by making it easier to get into those, say, 401(k), IRA or other retirement accounts without some of the penalties or tax consequences that they typically have. Should we expect that to also be the case in The Appropriations Act of 2021?
Not only should we not expect it, but it isn’t, it doesn’t exist. So the so-called coronavirus-related distributions were not extended for 2021 nor were the ability to delay RMDs, that was another question that a lot of people asked. And look, it doesn’t mean that it won’t happen in future legislation, but the fact that it wasn’t included in this bill is a significant indicator that Congress does not see such relief as being necessary going forward.
Now, I will caveat that somewhat by saying the extenders part of the bill did extend the so-called disaster distributions from IRAs, which are largely the same as those coronavirus-related distributions. So, no penalty, three years to repay the amounts if you want, the ability to spread the payments over or the income over three years.
However, in order to qualify for that distribution, you need to be in a federally declared disaster area for a reason other than COVID-19. So, a hurricane, a fire, something like that, where there was a federally declared disaster area for something other than COVID-19. So, the overall spirit of that provision exists, but it won’t apply to nearly as many people as it did in 2020 thanks to the coronavirus-related distribution that impacted far, far more individuals.
Got it. Now, and having covered individuals to a great degree, let’s talk about one of the ways that individuals are most impacted and that is those individuals who are small business owners. Of course, we had the legendary PPP last time around. What benefits will small business owners have, or maybe medium-sized business owners in the new act?
Sure. So, the new bill, The Appropriations Act of 2021 does a number of things for small business owners. But the one piece that I would say is the most significant is that it brings back the Paycheck Protection Program, it enhances certain elements of the Paycheck Protection Program, and it creates what are called second draft loans under the program. So, let me break that down, each of those three things in a little bit more detail.
Again, it brings back PPP, it expands PPP, makes it better and then it creates a second round of PPP loans for some firms. We’ll begin with the first part, it just brings back the program. So notably earlier this year, I believe it was August 8th, the Paycheck Protection Program closed down for the year. It took its final application or funded its final loan and that was it. The program was officially closed. In fact, even though it didn’t exhaust all its funds, it was closed.
This new bill, The Appropriations Act of 2021, reopens the Paycheck Protection Program. So businesses that perhaps didn’t take loans initially, but now need one, they will be able to go and apply using the PPP one, or the original PPP funding requirements. So, 500 employees or less, and a need to take that loan based on a uncertainty due to the current COVID crisis.
Now, the law also significantly expanded the benefit of the Paycheck Protection Program as a whole, both for old PPP one loans that were already taken, businesses that are now going to take PPP one old version loans, and then also for the businesses that will qualify for a second draft loans, which we’ll talk about momentarily. There were a number of advantages built into this law.
For instance, there are new expenses that can be used, things like covered operating expenses or covered expenses to help make the business safer. For instance, you’ve seen probably a lot of businesses with Plexiglas, et cetera, up. The cost of installing those is now a qualified expense for the Paycheck Protection Program. It also, in big news, changed the rules, the IRS had taken the interpretation that if a business paid expenses with forgiven PPP funds, that the expenses that were paid with those forgiven PPP funds would not be eligible for a deduction on the business return. This bill statutorily overrides that IRS interpretation and says that a business that receive funds in a loan that had the loan forgiven and paid expenses with those dollars can in fact deduct those expenses.
There were some other additional benefits in there as well, such as the ability for all borrowers to choose either an eight-week or a 24-week covered period. So, bottom line is there’s a lot more flexibility, and good news for those who borrowed in the past as well as for those who are going to be borrowing going forward.
And then, finally, I mentioned that PPP two, or the second draft loans, under the program and what this is, it’s an ability for certain hard hit businesses to receive additional funding under the Paycheck Protection Program, a second loan. So this would be for businesses that already received and spent through those first loans and, under the program, what it says is that these businesses could get another, in general, two and a half times your average monthly payroll as a maximum loan up to $2 million as a max, which more than covers most businesses. Very few would have more than $2 million as, if we multiply their average monthly payroll times two and a half, that just very few businesses are going to be impacted by that. But that is one change.
The other thing to keep in mind here is that the businesses, in order to qualify for that loan, need to be below 300 employees where the original loan was 500 or fewer, this is 300 or fewer employees. And finally, the business has to have had a quarter of revenue that is more than 25% lower than the prior year same quarter. So, for instance, look at Q3 2020, look at Q3 2019. If Q3’s 2020 revenues were less than 75%, so more than 25% down compared to last year, that business would qualify.
So, the good news is that still includes a ton of businesses, because a lot of businesses had at least one quarter this year, you only need one, had at least one quarter where their revenues were depressed enough, that they would be able to now qualify for this second draft loan. And just like the first loans, you spend it on the appropriate expenses, things like payroll, operating expenses, rent, et cetera, those amounts are eligible for forgiveness.
And just as a final note, if you’re in the food or accommodation services, there are some special rules just for you. For instance, larger loan amounts may be available, your business size can be a little bit larger. So for anyone who owns a restaurant or another type of food or accommodation service entity, if you’re not sure if that’s you, look at your tax return and the NAICS code that’s on there, if it begins with 72, this is you. If it doesn’t, this is not you. That would be those businesses have some additional flexibility under the program.
Okay. So, Jeffrey, opportunities for small business owners, check, it sounds like there are a lot of them. If you are especially in one of those areas where you’ve been hurt, opportunities to access money easily through retirement accounts, no, those opportunities are not available in the new act. Opportunities for getting a check in the mail, yes, as long as you meet the minimum requirements for income. I know we could talk about this thing all day long with the 5,000 or so pages that you’ve reviewed, but are there any other major provisions that individuals and households should be aware of in this new act upcoming?
Ultimately major depends upon the person’s situation. Because if it impacts me, it’s major, if it impacts you, it’s minor.
Thanks so much.
Yeah. So, I mean, the other things that I would say are certainly in there is the above the line deduction for charity, about 90% of taxpayers today don’t itemize their contribution. So, they generally get no tax break for giving to charity. Under the new law, that break that was included this year, which allowed cash contributions of up to $300 to be deducted as an above the line deduction, meaning it reduced not only taxable income, but also AGI, that is extended through 2021. And for married couples, next year, 2021, only it will be enhanced and those individuals will be able to take up to $600 as an above the line deduction for those cash contributions.
Other than that, other things that individuals should be aware of are, for instance, the health and medical expense deduction, where normally you need to exceed a certain level of your AGI in expenses and it’s kind of bounced back and forth for the last few years, between seven and a half and then 10% and then seven and a half, and then 10%, oscillating back and forth each year. Congress has now made this a permanent seven and a half percent of AGI. So it’s nice to know we’ve got some permanency there.
And then, a variety of other benefits as part of the tax code that existed in the past. Things like rebates rather, excuse me, credits for certain electrical or energy efficient appliances or improvements to the home, et cetera. Those have been extended out further as well. So there are a variety of bits of information within this law that certainly apply to individuals. I will say that other than that, the one absolutely critical thing that individuals should be aware of, prior to year-end even, for 2020, if anybody happens to see this soon enough, is that you’re not forced to spend your FSA dollars anymore, at least not by law.
Under The Appropriations Act of 2021, you are allowed or a plan is allowed to give you the opportunity to carry over any dependent care or healthcare flex spending account dollars you had left at the end of the year into 2021. And in fact, they even go so far as to say, “Prospectively, whatever you have left over at the end of next year, in 2021, can be carried forward to 2022.” Similarly, if a plan has a grace period where they just say, “Hey, we’re not letting you carry forward money, but we’ll let you spend the money in the next year for last year.” Those can instead of being two and a half months, so normally people have to spend money for, let’s say, 2020 in the first two and a half months of 2021, that’s extended to up to 12 months.
But most importantly, this is employer specific. The law just says, “A plan will not fail to qualify as a qualified plan here because an employer allows this.” It doesn’t say, “An employer must allow this.” Hopefully your employer does. There’s really candidly no reason why they shouldn’t or wouldn’t. But you want to verify that this is going to be the case with your employer. But you don’t have to rush out. For instance, I could tell you I was getting ready to spend some money on some very, very fancy prescription glasses here before the end of the year, because I had unused money in my healthcare FSA. Thank goodness, I didn’t need it, but I didn’t want to see it go to waste. I won’t be buying those expensive prescription glasses anymore because I now know I can carry them forward to next year.
Darn it, I wanted to see those glasses, Jeffrey. I’m a little disappointed to hear that. Well, thank you so much for this extensive update on the high points of The Appropriations Act of 2021. This is breaking news, we wanted to make sure that we got this information in your hands so that you really know what’s going on. And thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website askbuckingham.com or by emailing your question to email@example.com or just clicking the corner of the screen, it’ll take you directly to the website.
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