On March 11, 2021, the president signed into law the American Rescue Plan Act of 2021. This is another massive COVID relief legislation that has significant tax changes to both 2020 (retroactively) and 2021.
Below are the highlights that are most likely to affect many of our clients. This is not comprehensive coverage of the bill, or even the tax aspects of the bill, but the most important items (from my point of view) to bring your attention to at this time.
2020 Retroactive Tax Law Changes
There are two significant changes that are retroactive to 2020:
- Up to $10,200 in unemployment compensation per person is non-taxable on tax returns with Adjusted Gross Income less than $150,000. (This $150,000 limit applies whether your return is Single or Married Filing Joint – there is no increase/doubling for Joint returns.)
- There is no repayment of medical insurance subsidy if you purchased your medical insurance on the state exchange (Affordable Care Act plan on Healthplanfinder.org) and received more subsidy than your income allowed for.
If either of these apply to you, you fall into one of three categories:
If we already filed your return – The IRS says “do not file an amended return YET.” We have you on our list of returns that will need to be fixed as soon as the IRS gives us guidance as to how they want us to fix it (and we receive the appropriate software updates from our tax preparation software vendor).
If we completed your return but have not yet filed it – We will hold off on finalizing / filing your return until the IRS has given us guidance on how to report these items (and we receive the corresponding software updates). We will let you know if this applies to you, so you know your return is done, except for this issue.
If we have your return in process but not yet completed – We are screening every return for these two items until the IRS and our software vendor have issued updates. If they do not apply to you, we will finalize & file your return as normal. If they do apply to you, we will notify you that your return is done but on hold for these updates.
2021 New Tax Law Highlights
These changes affect the 2021 tax year ONLY – these are not permanent changes and do not affect future years.
3rd Relief/Stimulus Payment – This is similar to the two prior payments (currently being reported on your 2020 tax return) but with a few critical differences:
- You should receive $1,400 per person listed (claimed) on your tax return (taxpayer, spouse, and all dependents including adult dependents).
- If your Adjusted Gross Income (AGI) is $75,000 – $80,000 (single filers) or $150,000 – $160,000 (married joint filers), you will receive a partial payment. If your AGI is over these ranges, you will receive no payment.
- The IRS will reference your last filed return for your income & eligibility (2019 or 2020).
- If the IRS overpays you, you will not have to pay it back. If the IRS underpays you, you will get the rest when you file your 2021 tax return.
- If you owe the IRS taxes on prior years, you should still receive this payment.
- Please keep documentation of the amount you received – we will ask for it for preparing your tax return next year!
Child Tax Credit:
- Tax credit amount increased from $2,000 per child to $3,600 per child under age 6 or $3,000 per child ages 6-17.
- This credit starts getting reduced when your AGI is over $75,000 (single filers) or $150,000 (married joint filers).
- The IRS has been instructed to pre-pay 50% of this tax credit in monthly payments July-December 2021 based on your last filing (2019 or 2020). Further, the IRS has been instructed to set up an online portal where taxpayers can opt-out of these monthly payments (or report other changes such as new children, marriage, divorce, etc). The IRS has said that this is (nearly) impossible to do with their outdated technology, so expect delays and glitches.
- Then your 2021 tax return will report a reconciliation of the tax credit based on your actual income in 2021. If you received too much in pre-payments, you will not have to pay back the extra, but you will have to pay tax on it as additional taxable income. If you received too little, you will get the extra credited on your 2021 tax return.
- Beware! The tax withholding calculation for your paycheck may already take into consideration the old child tax credit amount ($2,000). Add to that the pre-payments (for example $250 per month Jul-Dec to give you $1,500 or half of the $3,000 credit), and you could easily receive an over-payment of the tax credit and have surprise taxable income on your 2021 tax return.
Childcare Tax Credit
- The amount of childcare expenses that qualify is increased from $3,000 to $8,000 per child.
- The tax credit has increased from 35% to 50% (subject to reductions at higher incomes)
- Employers have the option to offer dependent care benefits up to $10,500 per family (increased from $5,000).
Medical Insurance Subsidy (& Unemployment Income) – These changes affect both 2021 and 2022:
- The income qualification for receiving the subsidy on medical insurance purchased on the state exchange has changed. Previously, you qualified for subsidy if your income was less than 400% of the poverty level. Now your premium cost is limited to 8.5% of your income (with no comparison to the federal poverty level), anything more is covered by subsidy.
- If you have any unemployment income at all, you will receive the maximum subsidy, regardless of your overall income. (Please note, this is how the tax law is currently written. This seems to be an area where the details may have been overlooked and corrective legislation could be passed later in the year.)
Extended items from 2020 legislation – There were several provisions from prior relief laws that have been extended or had additional funding:
- The Sick Pay and Family Medical Leave Pay from the very first Families First Coronavirus Response Act in March 2020 has been extended to 9/30/21. In addition, there is a second 10 days of Sick Pay allowed for 4/1/21 – 9/30/21 if 10 days were already used in the prior 12 months. (For a refresher on this – see our original blog post about the FFCRA Act here: http://cpabellingham.com/blog/tax-extensions-new-employer-rules/ )
- PPP / EIDL – There are no new EIDL Grant applications allowed and there is no new (3rd) PPP loan program. However, both the PPP program and EIDL programs have received additional funding.
- Employee Retention Credit has been extended for the full 2021 year. It is still a 70% credit, up to $10,000 in wages per quarter for businesses with a 20% decrease in cash receipts (compared to the same quarter in 2019).
- Unemployment compensation supplements of $300 per week have been extended through 9/6/21. There is no provision for this to be nontaxable in 2021 (so far).