The new CoronaTax Bill is called the “American Rescue Plan” and it’s full of big changes. While others are focusing on the non-tax items, we need to talk about the tax changes that are now effective. Some are even retroactive to 1/1/2020. Yikes! What you don’t know can cost you.
Unemployment is Not Taxable
Taxpayers who have an adjusted gross income (AGI) of $150,000 or less for the 2020 tax year are able to exclude up to $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 joint taxpayers.
Recovery Rebate Credit/Economic Stimulus
The third economic stimulus payment is $1,400 per taxpayer ($2,800 for a married couple, filing jointly)
The recovery rebate credit phases out for taxpayers with adjusted gross income (AGI) over $75,000 ($150,000 for married filing jointly).
The bill uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
Under this latest program, additional payments could go to all dependents, not just children 16 and younger. As part of the third stimulus, all dependents, regardless of age, qualify for up to an extra $1,400. As a result, college students age 23 or younger could qualify as could elderly parents living with you.
COBRA Continuation Coverage
The new bill provides COBRA continuation coverage premium assistance for qualifying individuals between the date of enactment and Sept. 21, 2021. The credit is allowed against the Medicare tax. 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.
The continuation coverage premium assistance is not includible in the recipient’s gross income.
Child Tax Credit
The child tax credit has had a number of changes. It is fully refundable for 2021 and makes 17-year-olds eligible as qualifying children. The bill increases the amount of the credit 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.
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.
Earned Income Credit
The bill also makes several changes to the earned income tax credit (EITC). Individuals with no children will now be eligible for EITC. The minimum age is decreased to 19, except for students (24). The maximum age limit is eliminated.
The threshold for disqualifying investment income was 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. (This was also allowed for 2020 EITC)
Child and dependent care credit
The bill makes the child and dependent care tax credit refundable. The bill also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
Family and sick leave credits
The credits for sick and family leave will be extended to Sept. 30, 2021. Also, the limit on the credit for paid family leave 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.
Employee retention credit
The employee retention credit allows eligible employers to claim a credit for paying qualified wages to employees. The credit is used against the Medicare tax.
Premium Tax Credit
The premium tax credit is a refundable tax credit designed to help eligible individuals afford health insurance purchased through the Health Insurance Marketplace (aka the Exchange). The percentage amounts have been changed as part of the bill.
You do NOT need to pay back the Advance Premium Tax Credit. That’s new too.
Third Party Network Sellers
Third party network sellers like eBay, Etsy, PayPal, etc. previously have had to prepare a Form 1099-K for any seller who sold $20K or more in 2000 or more transactions in the year. Thanks to the American Rescue Plan Act, anyone who receives over $600 (no matter how many transactions) is going to get a Form 1099-K.
Suddenly a lot of people will have to report all of the sales price as income.
Miscellaneous Tax Changes
The bill repeals Sec. 864(f), which allowed affiliated groups to elect to allocate interest on a worldwide basis.
The bill also clarified that EIDL (Economy Injury Disaster Loans) would not be included in gross income. And that they would not result in a denial of deduction or reduction of tax attributions and would still be allowed as part of a basis increase.
These new changes are added to changes to how the PPP amount is calculated for Schedule C Sole Proprietorships and (my favorite) a 100% deduction for restaurant meals. Keep up to date on this fast-moving part of tax law by watching the blogs at USTaxAid.com. Register to receive email updates.