Expanding on the CARES Act of 2020, numerous tax-related provisions are contained in the American Rescue Plan Act of 2021 (ARPA) passed March 11, 2021. This article will cover a number of those, provides a brief update on programs created in last year’s CARES Act, and concludes with a comment on the state of the US tax system.
To consider currently:
- May 17 is the new April 15 – IRS announced on March 17, 2021 that the April 15 filing and payment deadline for 2020 tax returns is automatically extended to Monday, May 17, 2021. No extension forms are required, but it is still advisable if you might file after May 17. Be careful – 2021 Q1 estimated tax payments are still due April 15. Based on similar events this time last year, it’s likely that states will conform to this change, but be monitoring your applicable state(s) for certainty. For those in LA, OK and TX, you still have until June 15 to remit 2020 tax returns + payments, as well as 2021 Q1 estimated tax payments, due to the February 2021 storms.
- Retroactive tax law changes:
- Up to $10,200 per recipient of 2020 unemployment benefits are excluded from taxable income if 2020 adjusted gross income (AGI) is under $150,000. The way the law was written, this $150,000 applies regardless of whether a tax return is filed Single, Head of Household, or Married Filing Jointly/Separately. As such, an analysis of Married Filing Jointly vs Married Filing Separately for those receiving unemployment benefits could yield a result in favor of filing separately when generally this is rarely the case.
- Repayment of the ACA premium tax credit for those obtaining their insurance through an exchange is waived for 2020. Did you receive an income-based reduction in your 2020 health insurance premiums through the marketplace only to find your actual 2020 income wasn’t low enough to claim the credit? For the 2020 tax year only, no repayment of such credit is due.
- If you haven’t already filed your 2020 tax returns and can take advantage of either of these two changes, absolutely do so. If you qualify for either/both, and have already filed your 2020 tax returns, the IRS says to pause on amending. My experience tells me that if you wait for the IRS to tell you when they are ready for your amended return to be submitted, you’ll be waiting forever. However, I do advise waiting at least long enough for your original tax return to be fully processed. For example, wait long enough for refunds to arrive.
- 2021 relief/stimulus payments to individuals are based on tax returns currently on file. Similar to last year’s relief payments, you do not have to repay the 2021 relief payments if your 2021 tax return reflects that you wouldn’t be entitled to all or part of them. Payments are $1,400 per taxpayer and dependent regardless of dependent’s age. (Children who file their own tax returns but are still dependents on their parents’ returns will not receive an additional payment based on their own tax filing.) The payment is subject to income limitations. It is phased out for Married Filing Jointly returns at $150,000 of Adjusted Gross Income (AGI) and completely lost at $160,000 of AGI. For those filing Head of Household, the numbers are $112,500-$120,000. For those filing Single or Married Filing Separately, the range is $75,000-$80,000. If you have not yet filed your 2020 tax return, compare your 2019 AGI to 2020 AGI to see if there would be a difference in the amount of relief payment you would receive by filing your 2020 tax return now. It may benefit you to wait to file so that your relief payment is calculated based on your 2019 filing. If you have already filed your 2020 tax return and your 2020 income is beyond the relief payment threshold, consider ways to keep your 2021 AGI under your applicable limit.
- 2021 child tax credit advance payments to individuals are based on tax returns currently on file. The Tax Cuts and Jobs Act of 2017 increased the child tax credit amounts and expanded the income range of taxpayers who could claim them. ARPA expands on this, for 2021 only, allowing for up to $3,000 in child tax credit per child from ages 6 through 17 and up to $3,600 per child under 6 years old. Advance payments of this credit are to be issued in installments starting July 1, 2021 and ending December 31, 2021. Be super careful with advance payments of this credit. While the AGI phaseout ranges are the same as the 2021 relief payments, the advances on the child tax credits ARE subject to repayment if your 2021 income levels are more than the phaseout range when you file your tax returns this time next year. To further complicate matters, just because your 2021 tax return reflects income too high to receive this one-time increase to the child tax credit, you may still qualify for the pre-2021 child tax credit amount. In summary, this is going to be a challenging credit to calculate for many taxpayers who may not fully know their 2021 AGI until 2022, yet there’s incentive to attempt the calculation sooner rather than later given the claw back of an over-advance. (The way things have gone this year, though, it could be that millions of Americans filing their 2021 tax returns in 2022 and finding they owe money they don’t have will alert Congress to yet again retroactively change tax law. smh)
The takeaway in all of this is to be careful and move slowly.
To consider over the next several months:
- ARPA changed the rule on the taxability of discharged student loans and now excludes that amount from gross income from 2021 through 2025. Note this isn’t forgiveness of any student loans themselves, but instead it’s the exclusion of such forgiveness from taxable income. This includes post-secondary educational loans that were insured by a governmental entity, private education loans, and loans secured through a charitable organization. As student loan forgiveness is such a confusing, specialized and expensive topic, I recommend working with a professional who focuses in this area before making any moves related to forgiveness.
- The child and dependent care credit – not to be confused with the child tax credit previously discussed – has been significantly expanded for 2021 only. This federal tax credit is now refundable for 2021 which means that you can receive a refund even if you have no tax liability for the year. The credit is now up to $4,000 for one qualifying individual and up to $8,000 for two or more. Additionally, the credit is now calculated as 50% of eligible expenses based on income levels. A reduction will apply to households with incomes of more than $125,000 and can be reduced below 20% for households with more than $400,000 in income. For taxpayers over $440,000 in AGI, no child and dependent care credit will be allowed. So, while there will be some folks who see a reduced credit from prior years, most taxpayers will see a meaningful increase in this credit.
- Also, for 2021 only, the exclusion for employer-provided dependent care assistance is increased to $10,500 for Married Filing Jointly/Head of Household returns and $5,250 for Married Filing Separately returns. If you are participating in a dependent care flexible spending account (FSA) and your employer chooses to adopt this optional, one-time increase, consider adjusting your 2021 contribution to maximize this tax benefit. Remember, you must use the amount you contribute before year-end to avoid tax on any unused amounts. Also remember that amounts contributed to an FSA cannot also be used to create a child and dependent care tax credit.
- For those obtaining health coverage either through a state exchange under the ACA or through COBRA after an involuntary separation of service from an employer, both programs have been updated. For 2021 and 2022, the premium tax credit is available to taxpayers with household income over the pre-2021 threshold of 400% of the federal poverty line (FPL). For households with income up to 150% of the FPL, the premiums will be covered entirely by credits. For 2021 only, individuals who receive at least one week’s worth of unemployment benefits will also have their premiums entirely covered by credits. The payment of COBRA premiums from April 2021 to September 2021 shifts from the (former) employee to the employer with the employer receiving a payroll tax credit to offset the cost. Depending on your situation, consider utilizing COBRA and then seeing if a move to an exchange after September makes sense.
- The various expanded unemployment benefit programs put into place under the CARES Act have been extended through September 6th, 2021. With this in mind, I wouldn’t be surprised to later see an exclusion from taxable income of some level of 2021 unemployment benefits, but I still advise having a reasonable amount of income taxes withheld from such payments to be on the safe side.
The takeaway in all of this is it’s literally going to pay to keep your 2021 income as low as possible.
CARES Act Programs
Paycheck Protection Program (PPP) – Created by the CARES Act, PPP forgivable loans have essentially provided partially-to-fully tax-free funding to businesses and tax-exempt organizations of varying sizes and sectors during the pandemic. This program includes so-called “first draw” loans with a “second draw” round for a narrower group of applicants, including those who have exhausted their first draw monies and meet certain criteria related to decreases in revenues.
Employee Retention Credit (ERC) – Also created by the CARES Act, the ERC provides a credit against federal payroll taxes for certain businesses and tax-exempt organizations who partially or fully shut down due to COVID-19 or meet certain criteria related to decreases in revenues. This program has been extended, expanded, and now is no longer mutually exclusive with the Paycheck Protection Program loans. Businesses who previously did not consider this program because of PPP funding may want to take a second look. The credit is claimed prospectively via federal payroll tax returns or retroactively by amending previously-filed returns.
Where is the IRS in all this? Where are WE in all this?
Congress makes the law, sets the IRS’ budget, and then pretty much turns its back on whatever happens next between the IRS and the American taxpayer.
The IRS continues to be underfunded, not technology-focused, and is still opening mail received in 2020. And now it is tasked with further payments and new tax law changes to understand and incorporate into our tax system.
Taxpayers continue to be confused and frustrated by ever-changing tax law, although at least it will arbitrarily benefit them from time to time. Those who can afford professional tax advice will do far better than those who cannot. Those who cannot are instead sucked into a Rube Goldberg machine of a federal tax system that punishes them simply for being sucked in.
Just in case you thought taxes were getting easier, let me be clear – they are not.