As more information emerges on the American Rescue Plan Act (ARPA) of 2021 and the benefits it will provide to millions of Americans, it’s important to make sure you are equipped to walk your clients through the ins and outs of the plan.
This Act includes some changes that are retroactive for tax year 2020, as well as many important tax changes that will impact your clients in 2021. The most important action is to plan ahead, and advise and guide your clients on how these changes will impact individuals and families with children.
The Act includes a third stimulus payment, tax relief for recipients of unemployment compensation, an increased Child Tax Credit (CTC) for 2021, increased amounts and refundability of the Dependent Care Credit (DCC), and changes to the Earned Income Tax Credit (EITC). Several measures are temporary and others are permanent. Some of these new provisions will provide opportunities for tax planning with your clients. The most important action is to plan ahead.
Determine when your clients should file their taxes
The third Economic Impact Payment (EIP) includes direct payments of:
- $1,400 single/head of household/married filing separately single.
- $2,800 married filing jointly.
- $1,400 dependents (Code Sec. 151), which includes a qualifying child and a qualifying relative.
This round of EIPs are completely eliminated when adjusted gross income (AGI) is more than $160,000 (married filing jointly), $120,000 (head of household), and $80,000 (single/married filing separately), with a look back to the most recently filed tax return in either 2019 or 2020.
What does the timing of filing the 2020 return have to do with the EIP? Your clients may want to consider waiting to file their 2020 return until their EIP is received, if the AGI for 2020 would disqualify them from this advanced payment. Remember, this third EIP payment is to be reconciled on the 2021 tax return. I would be remiss if I didn’t mention that separate from the American Rescue Plan Act, the IRS has delayed the tax year 2020 filing date to May 17, 2021. Not every state has extended their deadline; our awareness of this fact provides more value to our clients.
Pay attention to dependents and children
Additional provisions have been made for parents and children, including a large expansion to the CTC for tax year 2021. This expansion will do several things:
- It Increases the maximum credit to $3,000 a year per child, ages 6-17, and $3,600 per child under the age of 6.
- The CTC is now fully refundable.
- It allows families to receive up to 50 percent of the CTC as an advance during the last half of 2021.
However, clients need to be aware that they could end up repaying some of the advanced CTC payment on their 2021 tax return – and need to plan accordingly. The IRS will provide a website to allow those who prefer to receive all their CTC with their 2021 filing to opt-out of this advanced payment option.
There are several other provisions, including an expansion of the DCC. ARPA has expanded the expense limit to $8,000 for one child, and $16,000 for two or more, making up to 50% of the credit refundable. In addition, this Act has increased the Employer Provided Dependent Care Assistance to $10,500 ($5,250 married filing separately). And, let’s not forget about the expansion of the EITC, and the ability for individuals with children without a Social Security number to qualify for the childless EITC.
Tax professionals should sit down with their clients and determine if they want to take advantage of the new rules surrounding the DCC. And, remember that due to relaxed requirements, it is likely you will see an increase in claims for childless EITC in tax year 2021. Other specifics of the childless EITC have also been made more generous for tax year 2021, in terms of increasing the amount that may be received, as well expanding the age range for eligibility.
Account for the exclusion of some unemployment income
With many Americans still facing unemployment or uncertain employment a year into COVID-19, tax professionals can help clients exclude unemployment income. If AGI is under $150,000 (excluding unemployment), the first $10,200 may be exempt from federal income tax in tax year 2020. However, the states may not all conform to this part of this legislation. Check your state website for more information.
COBRA subsidy for the unemployed
Individuals who elected COBRA coverage after a job loss can extend the insurance without having to pay the premiums, as the American Rescue Plan Act contains a provision for a 100% subsidy for April 1, 2021, through Sept. 30, 2021, enabling millions to stay insured through uncertain times. Individuals who did not elect or discontinued COBRA coverage prior to April 1, but would otherwise have been eligible during the above period, are granted a 60-day extended election period to commence coverage. These individuals will likely want to elect now to continue coverage due to the subsidy in place.
While these provisions are key tax planning issues to keep in mind when helping your clients file in the 2020 tax season, and planning for 2021 and future years, it’s critical to keep up to date with IRS resources and continue to keep an eye out for guidance, especially on the Advanced CTC.