President Biden recently signed into law the latest installment of COVID stimulus, dubbed the American Rescue Plan Act of 2021 (Act). As with previous stimulus legislation, tax changes abound. Below is a summary of the most notable changes.
Up to $10,200 (per individual) of unemployment benefits received in 2020 may be excluded from 2020 taxable income. The exclusion applies to taxpayers with modified adjusted gross income of less than $150,000. Note that the income threshold is the same regardless of tax filing status.
IRS is still developing procedures for those who have already filed returns without the exclusion. At this time, IRS has instructed taxpayers to not file amended returns to claim the exclusion.
Keep in mind that many states tax unemployment benefits. Each state will independently determine taxability of unemployment income in light of the new legislation.
Stimulus Checks – Round 3
The Act authorizes a third round of stimulus payments which are already hitting bank accounts. The payments are actually an advance of a 2021 recovery rebate credit. Payment amounts are $1,400 per individual, including dependents. The definition of a qualifying dependent is expanded to include college students and qualifying relatives.
Payment amounts will begin to phase out based on adjusted gross income (AGI) levels. Taxpayers will receive the full amount if AGI is under $75,000 (single), $150,000 (married filing joint) and $112,500 (head of household). Payments will completely phase out at AGI levels over $80,000 (single), $160,000 (married filing joint), and $120,000 (head of household).
IRS will use information from the most recently processed tax return (2019 or 2020) to determine advance payment eligibility.
Premium Tax Credit
Premium tax credits are available through the Health Insurance Marketplace and reduce monthly health insurance premiums. The credit amount is based on projected annual income. These advance credits are reconciled to actual income on the annual income tax return. Some or all of the advanced credit must be recaptured (paid back) if income is higher than projected. For 2020, the requirement to recapture excess premium tax credits is waived.
For 2021, those receiving unemployment compensation will be eligible for the premium tax credit. For both 2021 and 2022, premium tax credit affordability percentages will be modified to allow increased eligibility.
Child Tax Credit
For 2021, the child tax credit will be enhanced. The amount is increased to $3,000 per child ($3,600 for children under 6). However, the ability to claim the increased amount phases out at income levels over $150,000 (married filing joint), $112,500 (head of household) and $75,000 for all other filers. For 2021, the credit will be fully refundable, and a qualifying child will include those who are 17 years old.
IRS has been directed to issue advance payments of the credit from July through December 2021. Advance payment eligibility will likely be based on the most recent tax return on file. IRS is required to establish an online portal that will allow taxpayers to opt out of the advance payments. The advanced payments will be reconciled on 2021 tax returns and any excess advances will need to be repaid unless an income based safe harbor is satisfied, which will limit the amount of excess advance that is required to be repaid.
Child/Dependent Care Credit
For 2021, the child and dependent care credit will equal 50% of eligible child/dependent care expenses, capped at $4,000 for one qualifying individual and $8,000 for two or more qualifying individuals.
Credits will be reduced beginning at household incomes above $125,000. Households with income exceeding $400,000 will see further reductions.
Employer provided dependent care assistance is increased to $10,500 for 2021. Employees may request a mid-year change to increase their dependent care spending account contribution election.
Family/Sick Leave Credits
These credits, first established under the Families First Coronavirus Response Act (FFCRA), have been extended through September 30, 2021. Leave due to COVID-19 vaccination or vaccine-related illness is now allowed.
The amount of qualified wages eligible for the credit has been increased to $200 per day and $12,000 total for each individual. The number of days a self-employed individual can use to calculate the credit is increased from 50 to 60 and the overall limit on days will reset after March 31, 2021.
Employee Retention Credits
The Employee Retention Tax Credit (ERTC) has been extended through the end of 2021. After June 30, 2021, the credit will be allowed to offset Medicare tax.
The Act contains several other tax provisions, including:
For tax years 2021-2025, student loan debt forgiveness is excluded from income.
Earned income tax credit enhancements.
The limitation on noncorporate excess business losses is extended through 2026.
Targeted EIDL grants and SBA restaurant revitalization grants are excluded from income, and associated expenses fully deductible.
A new COBRA premium assistance credit is available for employers to fully offset an individual’s COBRA premiums. The assistance is available through September 31, 2021.
COVID tax relief is complex. Let BMM guide you through the challenges. Please give us a call.