If you already filed your 2020 tax return and had unemployment compensation, pay attention to this blog. Likewise, if you had advance premium tax credit, pay attention to this blog. You may need to take action right away.
The American Rescue Plan Act had a somewhat unexpected amendment when it when through the Senate. The House agreed and now we have a change to tax law, retroactive 1/1/2020.
I’m happy for the change, but in defense of tax preparers everywhere, this is the kind of stuff that drives us crazy. Retroactive changes during tax season means there is a good chance that tax returns have been filed incorrectly. They need to be amended.
Big Change in Unemployment Compensation Taxation
In the past, unemployment compensation was always subject to federal taxation taxpayers who have an adjusted gross income (AGI) of $150,000 or less for the 2020 tax year are able to exclude $10,200 of unemployment compensation from gross income. If a married, filing joint couple, both have unemployment comp, they can exclude up to $20,400 of unemployment comp. The AGI threshold of $150,000 still applies to married filing jointly taxpayers.
If you’re at a 22% threshold and can reduce your taxable income by $20,400, you’ll save almost $5,000 in taxes. But that’s just the beginning.
Once you file by excluding your unemployment compensation (either as an amendment or with your first filing), your taxable and adjusted gross income will be lower. That could mean you qualify for a higher econ stim payment. Economic stimulus payments are given to individuals earning less than $75,000 a year and married couples earning less than $150,000. The payments phase out faster than previous rounds, completely cutting off individuals who earn more than $80,000 a year and married couples earning more than $160,000. It doesn’t matter how many children or other dependents the taxpayer has.
Additionally, you are more likely to qualify for the increased child tax credits. 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.
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.
There are 3 reasons why you may want to pay attention to this new tax change for unemployment compensation:
Less federal tax,
More economic stimulus payment, and
More child tax credit.
Now let’s look at the Advanced Premium Tax Credit.
Advance Premium Tax Credit
The advance premium tax credit is a tax credit you can take in advance to lower your monthly health insurance payment (or “premium”). When you apply for coverage in the Health Insurance Marketplace, you estimate your expected income for the year. If you qualify for a premium tax credit based on your estimate, you can use any amount of the credit in advance to lower your premium.
The problem occurs at tax time when you calculate your actual income for the year. If it’s different from your estimate, the amount of credits you’re allowed for the premiums throughout the year will be different.
If you should have received more credit, you’ll get that when you calculate your tax return. In the past, if you received too many credits, you’d have to pay it back.
That changed with the American Rescue Plan Act. If you received too much in advance premium tax credits in 2020, you do not have to repay the excess amount.
What If You’ve Already Filed Your Tax Return?
If you have already filed your 2020 tax return and you had unemployment compensation or were paying back the advance premium tax credit, you’ll need to file a Form 1040X and recalculate your Form 1040 or 1040-SR to include with it.
The IRS will need to create new forms and instructions and the software companies will need to update the software, so, at the very best, it will take a few days to get that finished so you will be able to file your amended return.
However, as soon as you can, you’ll probably want to amend your return. That’s so you can get the correct amount for the econ stim payment that is coming soon. Plus the advance child tax credit may be impacted. That starts 7/31/2021.
If you haven’t filed yet, it won’t be as urgent to file. The IRS will use your 2019 tax return numbers to calculate the economic stimulus payment and the advance child tax credit.
Got a question on your tax filing? You can leave a question on this blog or contact us.