Dear Clients and Friends,
President Biden has signed into law the new economic relief package. This $1.9 trillion American Rescue Plan (ARP) provides a wide-array of tax-related benefits for individuals.
Here is a look at the final version of the key tax provisions:
Recovery rebates (Cash “stimulus payments”)
The new maximum payment is $1,400 per qualified individual or $2,400 for a couple. Previous payment amounts were for $1,200 and $600 per qualified individual respectively. In addition, payments are now available for all dependents, including children in college and elderly relatives.
As before, the stimulus payments are phased out, based on adjusted gross income (AGI). However, the upper threshold is reduced from $100,000 of AGI to $80,000 for single filers and from $200,000 down to $160,000 for joint filers. The payments being to phase out at an AGI of $75,000 for single filers, and $150,000 for joint filers. Payments for dependents are also phased out under these thresholds. The IRS expects to begin sending out payments quickly in March, as soon as next week.
The new law uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
Unemployment benefits
After much haggling, Congress extended unemployment benefits for out-of-work individuals and threw in a retroactive tax break. First, weekly unemployment benefits of $300, which were scheduled to begin to run out in mid-March, are extended through September 6. But Congress didn’t approve the increase to $400 per week that was included in the House bill.
Second, the new law exempts from federal income tax up to $10,200 of unemployment benefits received in 2020 by a family with an AGI under $150,000. Normally, those benefits would be fully taxable. This tax break is intended to help taxpayers who might be blindsided by an unexpected tax bill on their 2020 returns.
Qualifying taxpayers who have already filed 2020 income tax returns reporting unemployment benefits as income will need to amend their tax returns to take advantage of this benefit.
Child tax credit
The new law significantly enhances the Child Tax Credit (CTC) and expands it to include substantially more taxpayers. But these changes are only effective for the 2021 tax year.
For starters, the maximum credit is increased from $2,000 for each qualified child under age 17 to $3,600 for children under age six and $3,000 for those who are least 17 year old at the end of the year. Furthermore, the credit for 2021 is fully refundable. Only $1,400 of the $2,000 credit is refundable in 2020.
One drawback: The higher credit begins to phase out at lower income levels. On 2020 returns, the CTC begins to phase out at $200,000 for single filers and $400,000 for joint filers. For 2021, the phase out begins at $75,000 for single filers and $150,000 for joint filers. However, families affected by the new phase-out ranges can elect to claim the $2,000 credit under the prior rules.
Finally, taxpayers won’t have to wait long to realize the benefits of the increased CTC. The IRS will begin sending advance monthly payments of up half of the allowable 2021 CTC in July through December. Details coming soon.
Child and Dependent care credits:
Perhaps the changes for the dependent care credit are being overshadowed by the CTC, but the new law substantially increases the benefits for many moderate-to-high income taxpayers.
Presently, the dependent care credit is available for qualified expenses of caring for children under age 13 to allow you (and your spouse, if married) to be gainfully employed. The credit is generally equal to 20% of the first $3,000 of qualified expenses for one child; $6,000 for two or more children. Thus, the maximum credits are $600 and $1,200, respectively.
The new law enhances the dependent care credit for 2021. Notably, it boosts the maximum credit to $4,000 for one child and $8,000 for two or more children for households with an AGI of up to $125,000. But the credit will be reduced below 20% for those with an AGI of more than $400,000. Finally, the credit for 2021 is refundable.
Note also that the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 for 2021.
Student loan forgiveness:
If a debt is forgiven or cancelled, it generally results in taxable income to the debtor. However, in limited cases, debts of student loans that are forgiven may be exempt from tax,
The new law effectively creates a tax exemption for cancellation of student loans made, insured, or guaranteed by the federal or state governments, as well as loans from private lenders and educational institutions. This doesn’t apply, however, to loans that are discharged in exchange for services rendered. The provision is effective for 2021 through 2025, but it could be extended or made permanent.
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 act creates a new tax credit, which allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount. The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30. The continuation coverage premium assistance is not includible in the recipient’s gross income.
These are just some of the highlights of the latest tax changes for individual taxpayers. The ARP Act includes a slew of other provisions that may help individuals, including rent and mortgage relief, healthcare credits and assistance and higher education support, as well as benefits for small businesses including extensions of the Paycheck Protection Program (PPP) loans and employer tax credits. I will feature more updates on the key new law provisions in upcoming emails as they roll out over the coming months.
Please feel free to contact me with questions or to review your specific tax and financial situation. ~ Eric
Eric Johnson, CPA
Tel. (702) 941-7787
Eric Johnson CPA LLC
2850 W Horizon Ridge Pkwy #200
Henderson, NV 89052
Near I-215/Eastern Ave. exit; only 2 miles south on Eastern to Coronado Center at W. Horizon Ridge. The “Regus” building.