Ed Zurndorfer discusses these changes, as well as presenting automatic inflation adjustments to individual income tax brackets and other employee benefits thresholds and limits taking effect in 2021.
During 2020, Congress passed two important pieces of tax-oriented legislation in response to the COVID-19 pandemic. The more recent legislation, the Consolidated Appropriations Act of 2020, was signed into law by President Trump on Dec. 27, 2020. Some of the tax law changes apply to 2020, some changes affect more than one year, and other changes took effect starting Jan. 1, 2021. This column discusses these changes, as well as presenting automatic inflation adjustments to individual income tax brackets and other employee benefits thresholds and limits taking effect in 2021.
The following are the most important tax changes resulting from the Consolidated Appropriations Act of 2020, including which year(s) the changes take effect:
Stimulus payments. A second of stimulus checks are currently being sent out by the US Treasury to eligible individuals. The payment is up to $600 per individual, and $1,200 for a married couple filing jointly plus $600 per qualifying child under age 17. The payments will “phase out” when a single tax filer’s 2019 adjusted gross income (AGI) exceeds $75,000 and when a married couple’s (filing jointly) 2019 AGI exceeds $150,000. For single filers without children, payments go to $0 when 2019 AGI reaches $87,000; for married couples filing jointly, payments go to $0 when their 2019 AGI reaches $174,000. Payments are sent by the US Treasury via direct deposit into the same bank accounts used by individuals to file their 2019 Federal income tax returns. Individuals whose AGI was too large in 2019 to qualify for the first round of stimulus checks earlier in 2020 but whose income dropped enough during 2020 to qualify for the second round of stimulus checks can claim their payments when they file their 2020 federal tax returns this spring.
Unemployment compensation. The new law extends unemployment benefits. Although few federal employees lost their jobs during the COIVD-19 pandemic, some federal employees have spouses who may have lost their jobs during the pandemic and as a result, applied for and received unemployment benefits. Unemployment compensation is in fact considered taxable income and must be included as such on the 2020 Federal and in most states, state income tax returns. Any individual who received unemployment compensation during 2020 should receive a 2020 1099-G from their State Department of Unemployment Compensation. A copy of the 2020 1099-G will be sent to the IRS.
Flexible spending accounts. Many federal employees contribute to health care flexible spending accounts (HCFSA) that reimburse employees for out-of-pocket medical expenses, such as deductibles, co-payments, and coinsurance. Some employees also own dependent care flexible spending accounts (DCFSA) that reimburse employees for dependent care expenses, such as day-care center, nursery school and summer day camp expenses. Both the HCFSA and the DCFSA are run through FSAFEDS. During 2020, many HCFSA and DCFSA participants did not use up all of their allocated contributions to their HSCFSA and DCFSA accounts because of the COVID-19 pandemic.* The IRS has limited ability to ease FSA rules, particularly the “use or lose rule” with respect to HCFSA and DCFSA allocated funds. But Congress did modify the FSA rules. In particular, participants in HCFSAs and DCFSAs can carry over unused funds from 2020 to 2021 and 2021 to 2022. For DCFSAs, the law extends the age limit for utilizing an DCFSA from age 12 to age 13 for some carried over funds. The FSAFEDS program is currently reviewing and will be shortly issuing the modification of rules to its program.
Medical-expense deductions. The Consolidated Appropriations Act enacted a permanent threshold of 7.5 percent of adjusted gross income (AGI) for deducting medical expenses. Without this law change, the AGI threshold would have risen to 10 percent.
Retirement plan withdrawals. The new law has a permanent provision allowing victims of officially declared natural disasters (such as hurricanes, tornadoes, forest fires) to make withdrawals of up to $100,000 from IRA and defined contribution plan assets, such as the Thrift Savings Plan. Any IRA owner or retirement plan participant who makes such withdrawals has the choice of including the withdrawn assets in taxable income or repaying the assets to the IRA or to the retirement plan over a period of as long as three years. Also, for individuals younger than age 59.5 who make IRA and/or qualified retirement plan withdrawals, the IRS’ 10 percent early withdrawal penalty does not apply.
Charitable contribution deductions. The Consolidated Appropriations Act extended and expanded charitable contribution deductions for individuals who take the standard deduction instead of itemizing their deductions on Schedule A of their Federal income tax return. The expansion applies to charitable contributions made during 2021. The expansion allows single individuals to deduct up to $300 in eligible contributions and allows married individuals filing jointly to deduct up to $600. For 2021, the deduction reduces 2021 Federal taxable income whereas during 2020 the deduction reduces 2020 Federal adjusted gross income.
The following charts present important key-inflation-adjusted tax numbers, Social Security benefits related numbers, and retirement-oriented benefits for 2021:
2021 Federal Tax Bracket Thresholds
Tax Rate
Single Taxable Income
Married Filing JointlyTaxable Income
Head of HouseholdTaxable Income
10%
$0 – $9,950
$0 – $19,900
$0 – $14,200
12%
$9,951 – $40,525
$19,901 – $81,050
$14,201 – $54,200
22%
$40,526 – $86,375
$81,051 – $172,750
$54,201 – $86,350
24%
$86,376 – $164,925
$172,751 – $329,850
$86,351 – $164,900
32%
$164,926 – $209,425
$329,851 – $418,850
$164,901 – $209,400
35%
$209,426 – $523,600
$418,851 – $628,300
$209,401 – $523,600
37%
$523,601 and more
$628,301 and more
$523,601 and more
Long-Term Capital Gains, Qualified Dividends
Taxable Income
Tax Rate
Single
Married Filing Jointly
0%
Up to $40,400
Up to $80,800
15%
$40,401 to $445,850
$80,801 to $501,600
20%
More than $445,850
More than $501,600
2021 Estate and Gift Tax Exemptions
Exemptions
Estate and gift tax
$11.7 million per individual
Annual gift tax exemption
$15,000 per recipient
2021 Social Security Changes
Maximum Taxable Earnings
2020
2021
Social Security (OADSI only)
$137,700
$142,800
Medicare (Hospital Insurance only)
No Limit
No Limit
Quarter of Coverage
2020
2021
$1,410
$1,470
Social Security “Earnings Test” Exempt Amount
2020
2021
Under Full Retirement Age (FRA)*
$18,240/year ($1,520/ month)
$18,960/year ($1,580/month)
*One dollar in benefits will be withheld for every $2 in earnings above the exempt amount
2020
2021
The year an individual becomes Full Retirement Age (FRA)**
$48,600/year ($4,050/ month)
$50,520/year ($4,210/month)
**Applies only to earnings for months prior to attaining full retirement age. One dollar in benefits will be withheld for every $3 in earnings above the exempt amount
2021 IRA and Retirement Plan Contribution Limits
Retirement Plan Contributions Limits
Traditional and Roth IRA
Up to $6,000 (plus $1,000 for individuals over age 49)
Thrift Savings Plan (TSP) (includes traditional TSP and/or Roth TSP)
Up to $19,500 (plus $6,500 for employees over age 49)
The FedLife Podcast is your in-depth, biweekly deep dive into the world of federal benefits and retirement planning. Hosted by federal benefits expert Ed Zurndorfer and Dan Sipe of Serving Those Who Serve, each 30-minute episode unpacks the complexities of FERS and CSRS retirement, FEHB and Medicare, survivor benefits, tax planning, and more. Designed for federal employees and retirees who want more than just the basics, FedLife goes beyond the headlines to explore the rules, nuances, and strategies that can make a meaningful difference in your retirement. Remember: it’s your Fed life, make it a great one.
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