On Thursday, March 11 – nearly one year after the Coronavirus was declared a global pandemic by the World Health Organization (WHO) – President Biden signed into law the American Rescue Plan, a bold piece of legislation that is set to create 7 million jobs and ensure our nation’s road to recovery both physically and economically. According to the White House, the $1.9 trillion plan is “ambitious, but achievable, and will rescue the American economy and start beating the virus.”In addition to getting vaccines into Americans’ arms and extending lifelines to many hard-hit communities – the bill will also provide aid to struggling businesses of all shapes and sizes.
Here are a few of the tax-related provisions that could affect TAC clients like you:
Unemployment benefits – The act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year.
Recovery rebates – The act creates a new round of economic impact payments to be sent to qualifying individuals. The same as last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit.This will provide:
* 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. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.
* 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. And for heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.
* The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
COBRA continuation coverage – The act provides COBRA continuation coverage premium assistance for individuals who are eligible for it between the date of enactment and Sept. 30, 2021. Additionally:
*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.
* Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.
* Additionally, taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.
* Continuation coverage premium assistance is not includible in the recipient’s gross income.
Child tax credit – The act expands the child tax credit in the following ways:
* Taxpayers can receive the credit in advance of filing a return.
* The credit is now fully refundable for 2021.
* 17-year-olds are now eligible as qualifying children.
* The amount of the credit has increased 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 will estimate a taxpayer’s child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount.
* Via a new online portal, payments will run from July through December 2021, and will allow taxpayers to opt out of advance payments or provide information that would be relevant to the modifying the amount.
* The taxpayer 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, taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.
Earned income tax credit – Several changes have been made to the earned income tax credit. This includes special rules for individuals without children.
* For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.
* 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.
Child and dependent care credit – Many changes have been made to the child and dependent care credit – effective for 2021 only:
* The credit is now refundable.
* It 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. Credit reduction 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 credit – The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA) and promises the following:
* The credits are 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 limit on the credit for paid family leave is increased 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 credits are expanded to allow 501(c)(1) governmental organizations to take them.
Employee retention credit – The act codifies the employee retention credit and extends it through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and 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.Premium tax credit – 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 during 2021 as an applicable taxpayer.
Miscellaneous tax provisions – They are as follows:
* For the years after 2026, the act will add a corporation’s five highest-compensated employees to the list of individuals subject to the $1 million cap on deductible compensation.
* The limitation on excess business losses of noncorporate taxpayers will be extended for one year, through 2027.
* 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis, will be repealed.
* Grants made by the Economic Injury Disaster Loan (EIDL) program from the U.S. Small Business Administration (SBA) are not included in gross income. This exclusion will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase.
* The act temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.
Additionally, the following are important non-tax provisions that could positively affect TAC clients:
Extension of emergency unemployment insurance programs – This will continue through September 6, 2021 and will ensure that Americans who lost their jobs through no fault of their own are able to make ends meet while the economy rebuilds.
Relief checks – The bill includes an additional round of $1,400 economic impact payments for individuals making less than $75,000 and joint filers making less than $150,000 – plus an additional $1,400 per dependent.
Keeping small businesses open –
The American Rescue Plan will provide billions to help small businesses keep their doors open, including:
* $7.25 billion for the Paycheck Protection Program(PPP)
* $15 billion for the Targeted Economic Injury Disaster Loan(EIDL) Advance Program
* $28.6 billion for a new Restaurant Revitalization Fund to provide grants to help small local restaurants, bars, and craft breweries stay in business and keep their workers employed
* $10 billion in new funding for the State Small Business Credit Initiative to help small businesses grow and create jobs
Keeping Americans in their homes – The legislation includes more than $21 billion in emergency rental assistance to help renters and small landlords make ends meet as well as $9.9 billion to aid homeowners struggling to afford their mortgage payments, utility bills, and other housing costs. Maintaining government services & preventing layoffs – The bill provides $350 billion in aid for state, local, and tribal governments so they can continue to provide critical community services, limit long-term harm caused by the pandemic, and address longstanding inequities exacerbated by COVID-19. Child care and help for families – In addition to cutting taxes for working families by expanding the Earned Income Tax Credit and Child Tax Credit mentioned above, the bill also includes $39 billion in dedicated relief for child care, to make sure that child care providers can continue supporting working families.You may have many questions about how these new tax or non-tax related provisions in the new stimulus bill will affect your business. Because we are in the midst of tax season, we ask for your patience as we endeavor to answer all of your questions. Hold tight! We promise to return your emails and phone calls as quickly as we can.