President Biden signed the American Rescue Plan Act of 2021 on March 11. I tend to label this as “Stimulus 3.0” as the most notable item is the direct payments of $1,400 to most citizens. In fact, one of my clients already received their payment as early as Saturday, March 13.
However, there are many more provisions in this law than just the direct payments.
This article is not meant to be a full explanation of the act. Rather, it is meant to be an attempt to share the highlights of key provisions for individuals I encounter at the college’s VITA (Volunteer Income Tax Assistance) program, or in my own small practice and other similar taxpayers in the community.
Some of these provisions for individuals I found quite astonishing. Of course, the timing of the tax law in the middle of the tax season couldn’t have come at worse time because some of these changes apply to the 2020 returns — including ones already filed.
Single taxpayers will receive $1,400 payments for AGI (Adjusted Gross Income) of $75,000 or less with a hard phaseout (zero being received) at $80,000.
Married Filing Joint taxpayers receive $2,800 with AGI of $150,000 or less with a hard phase out at $160,000, and Head of Household of $112,500 or less with a hard phaseout of $120,000.
However, each taxpayer will also receive $1,400 for each “dependent” on the last known filed return.
In the past stimulus, the dependent had to be defined as a child, which according to the current Internal Revenue Code is under the age of 17. In essence, each qualifying household will receive $1,400 for each person in that household.
Just like “Stimulus 1.0”, the payments are made based on your latest return filed (2020, or 2019 if you have not filed your 2020 return). The payments are not taxable, nor do they reduce your refund for 2020 or 2021 returns. As with “Stimulus 1.0 and 2.0” you will need these figures for next year’s return preparation.
Earned Income Credit
and Additional Child
What has not made the news, but certainly will soon, are the changes to the Earned Income Credit and Child Tax Credit.
Although both credits are enhanced, the Child Tax Credit is the real winner here.
Currently, the Child Tax Credit is $2,000 per child under the age of 17. For 2021, the age is increased to under the age of 18 with a credit of $3,000 per child! Furthermore, there is a “super credit” of an extra $600 for children under the age of 6.
As exciting as this may be, here is where things even take an added turn.
The law gives the power to the secretary of the U.S. Treasury to send out monthly payments between July 1, 2020 and Dec. 31, 2020. Yes, you read correctly: Families will start receiving monthly payments this summer as an advanced payment for these enhanced credits.
It is not clear from what I have read exactly how much of this payment will be released. It is implied that is the additional amount of $1,000 (or $1,600 for children under the age of 6) spread out over six months.
Furthermore, there will be a portal established on the IRS website for taxpayers to opt out of these payments or to report changes in marital status, changes in family household etc.
I anticipate this to create more confusion in 2021.
As you have probably heard, extra unemployment payments will continue. However, what you may have not heard is that the first $10,200 of unemployment received for AGI below $150,000 is not taxable for 2020.
What does this mean? This means that you may not want to prepare your 2020 return yet until the forms or software has been updated.
What does this mean if you have already filed a return? This means you may have to amend (re-file) your return.
However, the IRS is currently urging taxpayers to not amend returns. I suspect, and certainly hope, that they can pull electronic data and refund any differences.
Thus, if you have already filed with unemployment and you receive an extra “mystery payment” from the IRS, it may just be that.
The next problem is what about Ohio or any state returns? State returns start with federal AGI. It is not clear that the states will allow this exclusion.
What is a taxpayer to do? Perhaps file a form 4868 extension is the best policy. This extends the tax filing until Oct. 15.
The extension is a federal form and is accepted by the state and cities. Once the federal software is updated for the unemployment issue you can file the federal return to have it out of the way but file the state return later when we know if they will conform to the federal rules.
However, keep in mind an extension only gives time to extend the time to file the forms. You should do your best to estimate your tax and pay it by April 15 and reconcile when you file the state return.
Dependent day care
For 2021, employers can boost daycare assistance to employees from $5,000 to $10,500, giving those families extra help with the ever-increasing cost of daycare.
Premium Tax Credit/Obamacare
You may recall a few years ago when the Affordable Care Act (Obamacare) was passed, people were given the chance to purchase health insurance through “the exchange” at www.healthcare.gov. While purchasing insurance this way could be expensive, the government provided advanced credits for this purchase.
The problem was that these credits were based on prior year income. Thus, when you prepared your return you could possibly have to pay back a portion or all the credit on the tax return. This “payback” provision of the ACA has been suspended for the 2020 return.
Thus, once again if you have received a 1095-A from the marketplace you probably don’t want to file your return yet. If you have filed, you may need to amend just as with those who filed with unemployment.
Of course, the IRS for now is telling us to hold off on amending. They dislike processing amended returns just like we dislike filing them.
Several years ago a law was created — COBRA (Consolidated Omnibus Budget Reconciliation Act) that allowed you to purchase your health insurance from your employer for up to 18 months and sometimes 36 months at group rates plus an administrative fee of 2% after departure from your employer.
I have used COBRA in the past. It can be expensive, but it is a way to retain your group plan individually.
The American Rescue Plan Act provides some financial assistance for these premiums although it is not clear to me exactly how much at this time.
You should consult your tax professional for how these provisions apply directly to your situation.
Allen “Al” Beatty, EA, CPA, MT is an assistant professor of accounting at Wilmington College.