The latest COVID-19 relief bill has become law. The American Rescue Plan Act, was signed by President Joe Biden on Thursday and it contains several tax provisions which may impact your taxes. Below is a summary of the key tax implications to be aware of:
2020 unemployment benefits are tax-free. The first $10,200 in unemployment benefits are tax-free in 2020 for individual taxpayers in households making less than $150,000 per year. For married couples, this amount would be $20,400. Stay tuned for updated guidance on this particular tax provision as it may be subject to change.
Another round of stimulus benefits are on the way. The new COVID-19 relief act includes economic impact payments to be sent to qualifying individuals in the very near future. The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
Similar to previous economic impact payments, these are set up as advance payments of a recovery rebate credit. The act provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021, including college students and qualifying relatives who are claimed as dependents.
For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. For heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.
The Act provides COBRA continuation coverage. The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The credit is allowed against the Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.
Keep in mind that a penalty may be imposed for failure to notify a health plan of your cessation of eligibility for the continuation coverage premium assistance. If you receive
the COBRA continuation coverage premium assistance credit, you will not be eligible for the health coverage tax credit. This continuation coverage premium assistance will not be included in your recipient’s gross income.
An expanded child tax credit is available. The American Rescue Plan Act expands the child tax credit and provides that taxpayers can receive the credit in advance of filing a return. Here are some key points about this tax credit:
- The credit is 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. Under the new Act, you 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.
However, if your modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) you may have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.
Changes to the earned income tax credit. The act makes several changes to the earned income tax credit (EITC), introducing rules for individuals with no children. In addition, for 2021, the applicable minimum age is decreased to 19, except for students where the age is 24 and qualified former foster youth or homeless youth, applicable minimum age is now 18. The maximum age is eliminated. In addition:
- The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.
- The credit would be allowed for certain separated spouses.
- The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
- Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.
The child and dependent care credit is also changed. The American Rescue Plan Act makes various changes to the child and dependent care credit, effective for 2021 only, including making it refundable.
The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more.
A reduction of the credit will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
Family and sick leave credits are extended. The credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA) including the FFCRA credit for paid sick leave, credit for paid family leave, and special rule related to tax on employers are now extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.
The act increases the limit on the credit for paid family leave to $12,000. The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.
The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
The employee retention credit is also extended. The act creates an extension of the employee retention credit and extends it through the end of 2021. This credit allows eligible employers to claim a credit for paying qualified wages to employees.
Under the act, the employee retention credit would be allowed against the Medicare tax.
Applicable percentage amounts for the premium tax credit are changed.
The act expands the premium tax credit for 2021 and 2022 by changing the applicable percentage amounts). Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.
Student loans are excluded from gross income for a specified period. Under the American Rescue Plan Act gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.
Targeted Economic Injury Disaster Loan (EIDL) grants excluded from gross income. EIDL grants already received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded to the SBA’s restaurant revitalization grants.
If you have already filed your 2020 tax return, you may need to file an amended return given the changes above. If you have not already files your taxes you may wish to consult with a tax professional for help understanding how the COVID-19 changes impact you. In addition, watch for updates in the IRS rules regarding The American Rescue Plan Act.