On March 11, 2021, President Biden signed into law the American Rescue Plan Act, or ARPA. This article explores some of the key tax-related provisions that are part of the act to help you better understand the implications of ARPA for tax filing purposes. Explore some of the key sections below.
Tax provisions from ARPA
Unemployment compensation: For 2020, up to $10,200 is not taxable for taxpayers with adjusted gross income (AGI) below $150,000. There is no phase out. The $150,000 is a steep cliff. The IRS has indicated that it will provide guidance on how to correct previously filed returns where the unemployment compensation was included in income.
Individual Recovery Rebate: The government is providing $1,400 in rebates to taxpayers and each of their dependents. Dependents for this rebate means those defined under section 152 (c), a qualifying child and a qualifying relative. This is the third individual recovery rebate implemented by COVID-19 related legislation. The phase outs for all three rebate credits are different. There could be situations where married filing separately may secure a larger overall rebate for a married couple.
Child Tax Credit (CTC): The CTC is expanded for 2021. The qualifying age is increased by one year to include 17-year-olds. In addition to the existing $2,000 CTC that is phased out for taxpayers with AGI over $400,000 MFJ and $200,000 for others there is the following:
- An additional $1,000 credit ($1,600 if the child is under age 6). This additional credit is phased out at AGI of $150,000 MFJ, $112,500 HOH and $75,000 for others. For 2021, practitioners will be dealing with both phaseouts.
- An advance rebate of the CTC will be made by the IRS starting in July. These monthly payments will equal one-twelfth of the expected credit. Eligibility will be based on the 2019 return or the 2020 return if it has been filed. The advance payment will be trued up against the actual credit on the 2021 return. There is a safe harbor for repayment for low income taxpayers.
The IRS is developing an online tool where a taxpayer can update their filing status, number of qualifying children, change their income and elect out of the advance payments.
Child and Dependent Care Tax Credit: The credit is enhanced and expanded. The taxpayer can use 2019 income instead of 2021. The maximum percentage is increased to 50% for those with an AGI of $125,000 or below. The 20% rate begins phasing out at AGI of $400,000.
Premium Tax Credit: The tables have been increased which will allow for a larger credit. For 2020, taxpayers will not have to repay any excess advance payments. For 2021, the credit is increased for those who receive unemployment.
Student Loan Discharge: For 2021-2025, certain student loan discharges are not included in gross income.
COBRA Continuation Coverage: An eligible individual (employee, former employee, spouse or dependent) may receive a 100% subsidy for COBRA premiums from April 1, 2021 through September 30, 2021. Employers are allowed a refundable credit for the premiums not paid by the individuals.
Employer-Provided Dependent Care: For 2021, the exclusion is increased from $5,000 to $10,500 and from $2,500 to $5,250 for MFS.
1099-K Reporting: Starting for the 2022 tax year, the threshold for reporting is dropped from $20,000 and 200 transactions to $600.
EIDL Advances: $15 billion in new funding is made available. The amounts received are excluded from gross income. The excluded amounts are treated as tax-exempt income. Monies spent from the grant are allowed as deductions.
Restaurant Revitalization Grants: SBA grants are made available for eligible businesses, which includes a restaurant, food truck, food cart, caterer, saloon, tavern, bar, lounge and other eateries. The grants are treated as tax-exempt income.
Deduction of Compensation for Publicly Held Corporations: A publicly held corporation is limited to deducting $1M per year in compensation paid to covered employees. One category of covered employees includes the three highest paid individuals. For tax years beginning after 2026, the three highest will be increased to five.
Extension of limitation on excess business losses: The section 461(l) limit ($500,000 MFJ and $250,000 others) is extended for one more year through 2026.
Election to allocate interest on a worldwide basis: Section 864(f) is repealed for tax years beginning after December 31, 2020.
Paid Sick and Family Leave Credit: With several modifications, the credit is extended through September 30, 2021.
Paycheck Protection Program: More funding has been made available and additional nonprofits are eligible.
Employee Retention Credit: The credit is extended through December 31, 2021 with modifications. A Recovery Startup business is eligible even though they did not experience a significant decline in gross receipts nor were they subject to a government ordered shutdown.
Whether you’re filing taxes for your client, yourself or both, it’s important to understand the key tax provisions that come with new pandemic legislation, especially at the peak of busy season.
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