Key Provisions in the New Tax Law
On March 10, 2021, the House of Representatives passed the American Rescue Plan Act of 2021, which had previously been passed by the Senate on March 6, 2021. The President is expected to sign it into law.
Retroactive Exclusion of Certain Unemployment Benefits: As discussed in our post on March 9, 2021, the Act contains a provision that retroactively excludes up to $10,200 of unemployment benefits for the 2020 tax year for taxpayers with adjusted gross income of less than $150,000. This threshold is the same for all filing statuses, and, on a joint return, each spouse can exclude up to $10,200, to the extent that each spouse separately received unemployment benefits. (Correction: An earlier version of this post said that the exclusion threshold was up to $150,000 instead of less than $150,000.)
Practitioners should put affected clients on extension until the IRS updates its systems to reflect this retroactive law change and until states announce whether or not they will conform with the federal treatment. Practitioners should also plan to amend returns for affected clients who already filed their 2020 income tax returns.
Third Round of Stimulus Payments: As discussed in our post on March 2, 2021, the Act provides for a new round of stimulus payments. The IRS is expected to begin sending these payments over the next few weeks. The payments represent an advanced payment of a credit for the 2021 tax year, so these payments do not affect the computations or reporting for 2020 income tax returns.
The amount of the stimulus payments will be $1,400 for each taxpayer ($2,800 for married couples) plus an additional $1,400 for each dependent of the taxpayer, including children age 17 or older. (As a comparison: The first two rounds of stimulus payments included lower amounts for children under age 17, had no payments for children age 17 or older, and had no payments for dependents who are not a child of the taxpayer).
While the phaseout threshold begins at the same level as for the prior rounds of stimulus payments, full phaseout occurs at much lower levels of income. The phaseout thresholds begin for taxpayers with adjusted gross income of $75,000 for single, $112,500 for heads of households and $150,000 for married joint returns. Full phaseout occurs at $80,000 for single, $120,000 for heads of households and $160,000 for married joint. For taxpayers with adjusted gross income within the phaseout range, the phaseout is based on a ratio of the excess of the taxpayer’s adjusted gross income above the threshold divided by $5,000 for single, $7,500 for heads of households and $10,000 for married joint.
As discussed in our prior post, the timing of when 2020 returns are filed can be an important consideration for taxpayers who have lower income in either 2019 or 2020. The Act indicates that, for taxpayers who did not file their 2020 returns prior to the IRS sending the third round of stimulus payments, the IRS is supposed to go back and look at the 2020 tax returns of such taxpayer later in the year and send the stimulus payment to taxpayers with lower income in 2020, if such lower income makes them eligible to receive the payments. (The Act provides that such additional determination must occur 90 days after the due date for filing 2020 tax returns and not later than September 1, 2021.)
Since the third round of stimulus payments represent an advanced payment of a 2021 credit, and since the IRS is using prior-year returns to estimate each taxpayer’s eligibility, the advanced payments may end up being higher or lower than the amount for which taxpayers are eligible, once their 2021 income is computed. In this case, and similar to the procedures that applied for the earlier rounds of stimulus payments, taxpayers who did not receive the full amount for which they are eligible will claim the difference as a credit on their 2021 tax returns. However, taxpayers who received too much will not be required to repay the difference.
Child Credit Expanded for 2021: Beginning in 2021, for taxpayers with modified adjusted gross income below $75,000 for single, $112,500 for heads of households and $150,000 for married joint, the child credit will be increased from $2,000 to $3,000 per child (and will be $3,600 for children under age six). The age of the children eligible will also increase to include children under the age of 18 (instead of children under age 17 under prior law). In addition, the refundable portion of the child credit will increase from $1,000 to the full amount of the credit.
Modified adjusted gross income is defined in the same way as for the current phaseout of the child credit.
Taxpayers with income above these thresholds will have the higher credit phased out. Once the higher portion of the credit is phased out, taxpayers will continue to receive the current child credit of $2,000 per child, subject to the same phaseout threshold as in recent years, which begins at modified adjusted gross income of $200,000 for all filing statuses except married joint and $400,000 for married joint.
Beginning in July 2021, the IRS is supposed to begin making advanced payments of up to half of the credit, and such advanced payments will be reconciled with the child credit for which taxpayers are eligible when taxpayers file their income tax returns. Overpayments of advanced payments will be required to be repaid by taxpayers, and underpayments will be treated as an additional credit on taxpayers’ income tax returns. To facilitate this reconciliation, the Act requires the IRS to report all advanced payments of the child credit made to each taxpayer on a summary to be sent to taxpayers by January 31 of the following tax year.
Other Notable Provisions: Some of the other notable provisions contained in the Act include the following.
Beginning in 2021, the credit for child and dependent care will be increased and made refundable for certain taxpayers.
Beginning in 2021, the earned income tax credit will also be increased and expanded.
Beginning in 2021 and scheduled to expire after 2025, the Act provides that any discharge of federal student loans will be excluded from gross income.
The Act creates a new refundable credit for employer payroll tax to offset the requirement that employers reduce the cost of COBRA continuation coverage for former employees from April 1, 2021 through September 30, 2021.
The Act extends the expiration date of the employee retention credit from June 30, 2021 to December 31, 2021.
The Act extends the expiration date of the paid sick and family leave credit from March 31, 2021 to September 30, 2021 and it expands the amount of applicable wages used for the credit from $10,000 to $12,000, effective on April 1, 2021.
The Act lowers the threshold for filing Form 1099-K, Payment Card and Third Party Transactions, to apply when processed transactions exceed $600 for the year. (The current threshold for filing the form is when processed transactions are more than 200 and the amount of such transactions exceeds $20,000.) This change is effective for tax years beginning after December 31, 2021.