On March 11,2021, the president signed into law the American Rescue Plan Act. This bill includes provisions that have major tax impacts for the 2020 and 2021 tax returns.
2021 recovery rebates for individuals
A 2021 advance recovery rebate or a third economic impact payment (EIP3) of $1,400 ($2,800 MFJ) will be issued to each eligible individual plus $1,400 to each dependent (including adult dependents). Children born in 2021 will receive the additional economic impact payment as a recovery rebate credit on the 2021 return as long as the taxpayers were eligible to receive the EIP!
Also new is payments for a deceased spouse. Unlike previous payments, if your spouse was alive on January 1, 2021, but then died before the new law was passed you will receive their portion of the stimulus payment as well and do not have to give it back.
Stimulus payments will be either direct deposited into the account you have on file with the IRS, will be issued to you as a paper check, or will be sent to you as a Debit Card. Make sure you keep records of your received payment for next year’s tax return. We’ll need to know what you were paid. *** Stimulus payments have already started being distributed and may already be in your bank accounts as a deposit! ***
If your filing status is:
- Single and your AGI is $75,000 or less you’ll receive the full stimulus payment. If your AGI is between $75,001 and $80,000 you’ll receive smaller amounts the higher your AGI goes. If your AGI is over $80,000 you will not receive a stimulus payment.
- Married Filing Joint and your AGI is $150,000 or less you’ll receive the full stimulus payment. If your AGI is between $150,001 and $160,000 you’ll receive smaller amounts the higher your AGI goes. If your AGI is over $160,000 you will not receive a stimulus payment.
- Head of Household and your AGI is $112,500 or less you’ll receive the full stimulus payment. If your AGI is between $112,501 and $120,000 you’ll receive smaller amounts the higher your AGI goes. If your AGI is over $120,000 you will not receive a stimulus payment.
An eligible individual is anyone except:
- Any nonresident alien individual
- Any individual who is a dependent of another taxpayer at the beginning of the calendar year
- An estate or trust
The recovery rebate credit is based on the 2019 or 2020 tax return and will be reconciled on the 2021 tax return.
For payments based on the 2019 return, the bill contains a provision that allows for an additional payment if the advance of the recovery rebate is greater based on the taxpayer’s 2020 return.
Unemployment
As an extension of the CARES Act, weekly unemployment benefits have been extended through Sept. 6, 2021, with a weekly benefit amount at $300. The first $10,200 ($20,400 if MFJ but only up to $10,200 per spouse) of unemployment benefits for 2020 will be nontaxable for taxpayers with adjusted gross income of less than $150,000. If adjusted gross income is $150,000 or greater, the full $10,200 or $20,400 of unemployment compensation becomes taxable.
Example 1: Mr and Mrs Smith both received unemployment benefits of $7,345 and $6,980 respectively. Their AGI is below the $150,000 threshold and they file a joint tax return. Their entire unemployment is not taxable on the 2020 return.
Example 2: Mr and Mrs Smith both received unemployment benefits of $13,275 and $7,650 respectively. Their AGI is below the $150,000 threshold and they file a joint tax return. Even though $20,400 is the non-taxable limit it is still only $10,200 per taxpayer so only $10,200 of Mr Smith’s unemployment is not taxable and all of Mrs Smith’s is tax free. They will pay taxes on the remaining $3,075 from Mr Smith’s unemployment.
Child Tax Credit
The act expands the Sec. 24 child tax credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.
The act increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.
The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.
The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.
The taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase taxable income by the excess of the advance payment amount over the actual credit allowed. But taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.
Earned Income Credit
For 2021, the minimum age to claim the EIC for taxpayers without children (childless EIC) generally is reduced from age 25 to age 19 (except full-time students). The maximum age limit of 65 for claiming the childless EIC has been eliminated. The credit and phaseout percentage increases from 7.65% to 15.3% for an individual with no qualifying children. Taxpayers may use their earned income from the 2019 tax year to determine their EIC for the 2021 tax year if the 2021 earned income was less than the 2019 earned income.
The disqualified investment income limit also increases from $3,650 (2020) to $10,000.
Dependent Care Assistance
For 2021, the credit is fully refundable and the dollar limit for eligible expenses increases from $3,000 to $8,000 for one eligible child, and from $6,000 to $16,000 for two or more eligible children. The maximum credit rate increased from 35% to 50% and the AGI limitation increases from $15,000 to $125,000. Taxpayers with an AGI of $125,000 to $400,000 will receive a partial credit.
The exclusion for employer-provided dependent care assistance increases from $5,000 to $10,500 ($5,250 for MFS). This means you can put more money into your Flex Spending Account (FSA) if you want to.
Premium Tax Credit
Reduces health care premiums for low- and middle-income families by increasing the Affordable Care Act’s (ACA) premium tax credit (PTC) for 2021 and 2022.
For 2020, no repayment is required for taxpayers receiving excess advance PTCs.
The bill also provides that if a taxpayer receives unemployment compensation (UC), they can use the rates as if their household income tier is 133% of the federal poverty line.
Cobra
Reduces premiums payable by providing premium assistance from April 1, 2021, through Sept. 30, 2021. Federal subsidy coverage for COBRA premiums increases to 100%. If required to notify a group health plan, failure to do so may result in $250 penalty for each failure.
Modification of treatment of student loan forgiveness
Provides special rule for discharges in 2021 through 2025 that the discharge of student loans as cancellation of debt is not included in gross income. Student loan borrowers who made qualified student loan payments after March 13 could have those payments refunded if they notify their loan servicer. Tax refund and/or wage garnishment has been suspended through Sept. 30, 2021, for those who have defaulted on federal student loan debt.
Paid Sick Leave and Family Leave Credits
Extends the paid leave credits from April 1, 2021, through Sept. 30, 2021, for eligible employers providing sick or family leave that otherwise would be required if the Families First Coronavirus Response Act applied after March 31, 2021. Several new provisions also take effect after March 31, 2021. For example: allows paid leave credits to obtain COVID-19 vaccine, restarts the 10-day limit for qualified sick leave wages and increases the qualified family leave wages limit from $10,000 to $12,000 in total.
Employee Retention Credit
Extends the employee retention credit (ERC) through Dec. 31, 2021, for wages paid after June 30, 2021, and before Jan. 1, 2022. After June 30, 2021, the ERC offsets the employer’s share of Medicare tax.
Tax treatment of targeted Economic Injury Disaster Loan (EIDL) advances
Excludes amounts received under §331 of the Economic Aid to Hard-Hit Small Business, Non-profits, and Venues Act from gross income and treats them as tax exempt income for partnerships and S corporations. Allows deductions for expenses paid with targeted EIDL advances, does not reduce tax attributes and allows basis increases.
Tax treatment of restaurant revitalization grants
Excludes amounts received from the Small Business Administration (SBA) under §5003 from gross income and treats them as tax exempt income for partnerships and S corporations. Allows deductions for expenses paid with such amounts, does not reduce tax attributes and allows basis increases.
Modification of exceptions for reporting of third party network transactions (1099-K Reporting)
After 2021, the de minimis exception for reporting a transaction changes from $20,000 to $600. Clarifies that reportable transactions only include those for goods and services, which will apply to transactions after the enactment of this bill.