After keeping the nation on its toes for a week, President Trump signed a new stimulus bill into law on December 27, 2020. The stimulus bill was actually only a small part of the 5,000+ page Consolidated Appropriations Act of 2021 that funds the government until September. In addition to the stimulus bill, there were also some tax law changes tacked on to it as well. While you probably already know about the stimulus checks it authorized (and the political battle being waged over their amount), there are also other aspects of the bill that might affect you and you should be aware of. While none of it is pastor-specific (your housing allowance is still safe!), these are the parts that may impact you:
Stimulus Checks
Everyone’s favorite part is a new round of stimulus checks to be mailed out immediately. Though similar to the checks sent out this spring, there are still some important differences. First of all, the checks are worth $600 per eligible person. Eligible people are individual taxpayers and children that are eligible for the Child Tax Credit, namely those under age 17. This time kids and adults are worth the same amount of money, though some teenage dependents are still left out.
Again, there is a phaseout so that higher-earners don’t get anything. The phaseout starts at $75,000 for individual tax filers, $112,500 for heads of household, and $150,000 for married, joint filers. Once you hit that amount of adjusted gross income (AGI), you will lose $5 of stimulus money for each $100 of income you have. For example, a single person with an AGI of $80,000 is $5,000 over the limit. As such, their stimulus check is reduced by $250 ($5,000/$100 *$5) and they only get $350 ($600-$250). If that person had two qualifying children, their benefit would be $1,550 ($600*3 people – $250 reduction).
The federal government wants to get these checks into people’s hands as quickly as possible, so they are calculating them based on the 2019 tax return income information that they already have. Nevertheless, these are technically tax credits for 2020 taxes. Thus, even if you don’t receive one because your 2019 income is too high, if it is lower in 2020 you can get the credit when you file your taxes. If things are the other way around, where you are eligible based on 2019 income but not 2020, you’ll still get the check in the mail and not be expected to pay it back. And, as before, these checks are not considered taxable income so nothing will be withheld (whether you tithe on it is between you and God!).
Unemployment Benefits
What made this legislation so time-sensitive for many individuals is the fact that their unemployment benefits were set to run out this week. Under normal circumstances, you can only receive unemployment benefits for 26 weeks. The government wants to motivate you to find a job and get back into the workforce. However, that’s hard when the government itself has shut everything down and there are no jobs to be had. The CARES Act addressed that by extending unemployment benefits to 39 weeks. The current legislation tacks on another 11 weeks, pushing the expiration date out to mid-March for those whose benefits almost disappeared this week.
Another 11-week extension of the CARES Act benefits relates to the Pandemic Unemployment Assistance program. That program allows those who normally would not be eligible for unemployment benefits—contract workers, part-time workers, self-employed individuals, etc.—to receive benefits. If that’s you, you’ll be able to keep receiving benefits from that program through the end of March.
Extra unemployment payments are going to continue for another 11 weeks as well. These are the weekly payments above and beyond the normal unemployment amounts. Usually, unemployment only covers half of a person’s lost income. They want to incentivize people to get back into the workforce as quickly as possible. Since 2020 was anything but normal, the federal government augmented regular benefits first with $600 a week and then only $300 a week. That $300 a week extra payment will continue for 11 more weeks.
The last CARES Act unemployment enhancement that is being extended is the elimination of the one-week waiting period. Customarily, when you lose a job you have to wait a week before you can collect benefits. Now, if you get laid off today you will be able to start receiving benefits tomorrow. This, too, will last 11 more weeks.
Flexible Spending Accounts
If you don’t have a flexible spending account (FSA), go ahead and skip this section. If you do, you’re in luck. As you know, FSAs are use-it-or-lose-it accounts. All of the money in them needs to be spent by the end of the year (some offer a 2 ½ month grace period or allow a $500 rollover) or it is forfeited. You usually select a contribution amount at the beginning of the year based on your planned expenses for the year. But 2020 didn’t exactly go as planned, did it?
Many people planned for summer camps that never happened, non-urgent medical care that was postponed, or childcare that was no longer needed when one parent ended up unemployed at home. The money that was supposed to pay for those things is still sitting in FSAs. Congress thought it wouldn’t be fair for so many people to lose their money at year-end because the pandemic turned the world upside down.
The new bill permits employers to allow people to roll over 2020 funds into 2021 and 2021 funds into 2022. They can also adopt a grace period of up to 12 months for using the funds in 2021 and 2022. The key to all of this, though, is that these changes are not automatic. The employer has to choose to enact these changes. So, if you have an FSA, ask your church or HR department of your secular employer if they are going to give you some grace. If they haven’t already decided to do so, go ahead and nag them until they do. Within reason, of course.
Required Minimum Distributions
If you haven’t reached your 70s yet, go ahead and skip this section. If you have, you’re probably familiar with required minimum distributions (RMDs). They are the amount you are required to withdraw from your retirement accounts (except Roth IRAs) each year so the government doesn’t have to keep waiting on the related taxes. This spring’s CARES Act waived RMDs for 2020 so that no one was required to take withdrawals. That provision was NOT extended with this new bill, so you will have to take your RMD again in 2021.
Student Loan Relief
Another CARES Act benefit that is going away is the student loan relief. Federal student loan interest and payments and collections on defaulted student loans have been suspended since March. That is only going to last until the end of January 31, 2021. At that point, you will have to continue to make any student loan payments you owe. Interest will begin accruing again as well.
Charitable Contribution Deductions
Not all of the CARES Act benefits are going away. The above-the-line charitable deduction for those who take the standard deduction will continue into 2021 and even get better. For the 2020 tax year, up to $300 of charitable donations (such as your tithe) can be deducted per tax return, whether you file as a single or couple. For 2021, singles will still be able to deduct $300 and married couples will be able to deduct $600. It isn’t huge, since a $300 deduction when you’re in the 12% tax bracket only amounts to $36 saved. Every little bit counts, though.
Tax Credit Eligibility
There are some refundable tax credits that are based on earned income (Earned Income Tax Credit & Additional Child Tax Credit). Pastors always have to pay particular attention to these because of the way that the housing allowance decreases your earned income. There are situations where it’s actually more beneficial to limit your housing allowance in order to maximize these credits.
Because so many people were unable to earn income during 2020, the new stimulus bill allows taxpayers to use either 2019 or 2020 earned income numbers when calculating the tax credits on their 2020 tax return. This is a nice benefit. That way you can calculate it both ways and use whichever numbers maximize the tax credits for you.
This is only a small piece of the 5,593 pages of legislation that the President signed. It represents the provisions most likely to affect you as an individual. The bill also extended the Paycheck Protection Program, which you should look up if you think your church could benefit from it. For more information on the new stimulus bill from a financial planning perspective, this is a really good article to read.
