Tax Time in Scrabble Letters



Permanent reduction in threshold for medical expenses – 7.5% of AGI threshold for deducting medical and dental expenses has been made permanent (threshold was 10% prior to 2020). Qualified medical and dental expenses for yourself and qualified spouses or dependents that exceed 7.5% of AGI can be deducted.

More information here.


Charitable contributions deduction for taxpayers who do not itemize The CARES act of 2020 allowed taxpayers who use the standard deduction to claim an "above-the-line" deduction of up to $300 ($600 for couples) for cash donations made to qualifying public charities, as defined by IRC section 170(b)(1)(A). The CAA 2021 extends this rule to 2021. Taxpayers who itemize, take advantage of donor-advised funds, and donate to certain organizations cannot use this deduction.

More information here.

Charitable contributions deduction for taxpayers who itemize  For taxpayers who itemize, the CARES act of 2020 increased the limit for cash donations that can be deducted from 60% to 100% of AGI for 2020. Donations must be made to qualifying public charities, as defined by IRC section 170(b)(1)(A). The CAA 2021 extends this rule to 2021. Taxpayers who take advantage of donor-advised funds and donate to certain organizations cannot use this deduction.

Note: Previous to the changes above, while itemizers could only deduct charitable contributions up to 60% of AGI in a year, they could carry over and deduct excess contributions for up to five years.

More information here and here.


Exclusion from income for forgiveness of qualified principal residence indebtedness – The CAA 2021 extends the provision that allows the exclusion from taxable income of forgiven debt from the principal amount of a mortgage on a homeowner’s principal residence. Initially set to expire on Jan 1, 2021, the CAA 2021 extends the provision until Jan 1, 2026, data by which debt must be forgiven.

More information here and here.

Mortgage insurance premiums – The deduction for qualified mortgage insurance had initially expired in 2017. It was brought back for 2020 and applies retroactively for 2018 and 2019. The CAA extends the PMI premium deduction through 2021.

Note: Mortgage insurance contract must be issued after 2006

More information here and an IRS tool to determine eligibility.


Retirement plan distributions – Following the CARES Act of 2020 and CAA 2021, taxpayers can take “qualified disaster distributions” of up to $100,000 in the aggregate from a retirement plan without the 10% early withdrawal penalty from IRAs and 401(k)s. The distribution will be subject to income tax over a three year period, unless the taxpayer repays the distribution to a qualified retirement plan or Individual Retirement Account (IRA).

The COVID-Related Tax Relief Act of 2020 (COVIDTRA) sets the following requirements to qualify for this penalty-free distribution: 1) primarily reside in a qualified disaster area and 2) have sustained an economic loss from the qualified disaster.

More information here and here.

Payroll Provisions


Flexible Spending Account (FSA) Plans – Under the CAA 2021, employers can temporarily allow employees to carryover unused FSA funds from 2020 to 2021 and from 2021 to 2022 or to extend the grace period for spending unused FSA funds to 12 months after the plan year. Prior to these temporary changes, carry overs were restricted or not permitted and plans were not permitted to have both a grace period and a carryover. 

More information here.

Extension of Families First Coronavirus Response Act (“FFCRA”) credits for paid sick and family leave – Under the FFCRA act covered employers were required to provide eligible employees with paid sick leave and expanded family and medical leave for specified reasons related to COVID-19. Employers can claim a refundable tax credit for qualified leave wages. Some of its provisions, originally set to expire on Dec 31, 2020, were extended by the CAA 2021 until March 31, 2021. Enforcement agency: U.S. Department of Labor’s Wage and Hour Division (WHD)

More information on employers’ refundable tax credits for qualified leave wages on IRA site. Additional information here and here.

Work opportunity credit – The work opportunity credit is available to employers who hire individuals from specified groups.  The credit was based on first-year wages paid for a qualified employee who started work prior to Jan 1, 2021. The CAA 2021 extends the credit for employees who begin work prior to Jan 1, 2026.

Expansion of Employee Retention Credit (“ERC”) – The CARES Act provided a 50% credit for companies who continued to pay their employees during a COVID-19 imposed lockdown.  The CAA expands eligibility for the ERC, increases the credit to 70%, and extends the credit through June 30, 2021.

Extension of deferred payroll taxes – President Trump signed an executive memorandum in August 2020 allowing employers to defer the employee’s share of social security taxes between September 1, 2020 and December 31, 2020.  The taxes were required to be repaid through a reduction in the employee’s pay between January 1, 2021 and April 30, 2021.  The CAA extends the required repayment period to December 31, 2021.

More information here and here.


Employer payment of student loans – The CAA 2021 extends the provisions of the CARES act that allows employers to provide student loan relief to employees. Now employers can make tax-free loan repayments of up to a maximum of $5,250 per employee until December 31, 2025. Employees and employers save on federal taxes on qualifying loan payments.

More information here.

Business Tax Provisions

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Deductions for expenses paid using Paycheck Protection Program (PPP) loan – The CAA 2021 allows expenses paid with a PPP loan to be deducted in full if the PPP loans are forgiven. Previously these expenses could not be deducted.

More information here.

Business tax deduction for business lunches  – The CAA created a provision that allows businesses a 100% deduction for meals or beverages provided by restaurants. These restaurant expenses must be incurred in 2021 or 2022.

More information here.

Qualified disaster relief contributions – The CAA 2021 allows corporations to make “qualified disaster relief contributions” of up to 100% of their taxable income for 2020. The contributions can be made until late February 2021.