On March 11, 2021, President Biden signed the American Rescue Plan Act into law. The bill includes many provisions that have major tax impacts for 2020 and 2021 tax returns. As a taxpayer be aware and understand which ones affect your 2020 tax returns and plan for 2021. Here are some major provisions:
As an extension of the CARES Act, weekly unemployment benefits have been extended through September 6, 2021, with a weekly benefit amount at $300. The first $10,200 ($20,400 if MFJ) 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.
Reduces premiums payable by providing premium assistance from April 1, 2021, through September 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.
2021 recovery rebates for individuals
A 2021 advance recovery rebate or a third economic impact payment (EIP3) of $1,400 ($2,800 Married Filing Joint) will be issued to each eligible individual plus $1,400 to each dependent (including adult dependents).
The payment will fully phase out when income reaches $80,000 for single filers, $120,000 for heads of household with one child, and $160,000 for joint filers or surviving spouse.
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.
Child tax credit
Special rules for 2021 include an expansion of the credit from $2,000 to $3,000 per eligible child under age 18 ($3,600 per child under age 6). The fully refundable credit, with 50% of the credit issued as advance periodic payments starting in July, will be reconciled on the 2021 tax return. For 2021, the increased credit amount (additional $1,000 or $1,600 per-child in excess of the present-law $2,000 per-child) begins to be phased-out at $75,000 ($150,000 for Married Filing Jointly and $112,500 for head of household). Once the increased credit amount is reduced, the credit plateaus at $2,000, and the phaseout begins at $200,000 ($400,000 for Married Filing Joint).
Earned Income Credit (EIC)
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 Adjusted Gross Income (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 Married Filing Separate).
Paid Sick and Family Leave Credits
Extends the paid leave credits from April 1, 2021, through September 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, such as: allowing 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.
Premium Tax Credit (PTC)
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.
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 September 30, 2021, for those who have defaulted on federal student loan debt.
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.
Tax Modifications 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.
April 15 filing deadline extended to May 17 but not for everyone
The IRS announced that it is moving the April 15, 2021, filing deadline to May 17, 2021, for individual taxpayers (including Schedule C filers) only. However, the extension does not apply to estimated tax payments for the first quarter of 2021. These payments are still due April 15, 2021. California conforms to the IRS filing and payment extension date of May 17, 2021.
Even with the new tax filing deadline, the IRS urges taxpayers to consider filing as soon as possible, especially those who are owed refunds. Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers to quickly receive any remaining stimulus payments they may be entitled to.
Esther Phahla is a Certified Public Accountant and Certified Tax Strategist in Temecula. She is the Author of tax planning books: “Why Didn’t My CPA Tell Me That” and “10 Most Expensive Tax Mistakes That Cost Business Owners THOUSANDS”. She also holds a Master’s of Science in Taxation. She can be reached at (951) 514-2652 or visit www.estherphahlacpa.com