Before I get into the specific provisions of the bill a few notes about our service delivery this filing season. All of these changes so late in the filing season, coupled with the scope of work our staff has done with clients on PPP applications and forgiveness, state grant applications, reconciliation of previous stimulus payments and on and on, has left our staff stretched quite thin. This is impacting the turnaround time on our return delivery. Maryland has already pushed back the filing date until July 15, 2021 but as of this writing the IRS has not. If the IRS does not push back the deadline as they did last year, we will be placing far more returns on extension this year. Frankly, I suspect my tax colleagues and competitors will be doing the same. I know some clients hate the word extension but we simply can’t respond to a bill passed less than 35 days before the filing deadline that retroactively impacts 2020 returns and manage our traditional workload. It will take time for our software provider to get the necessary form approval from the IRS and we simply don’t know when that approval will be granted. We will certainly be in communication about the process and provide guidance but it will be an unfortunate reality for far more clients this year.
Anyway on to the meat of the bill…
We are a bit more than 30 days out from the ending of tax filing season and this week Congress dropped the third Corona-Virus inspired stimulus bill…The American Rescue Plan Act of 2021 (ARP). Here are some of the salient items and how they will impact clients:
These are the items receiving most of the press. $1,400 per taxpayer/spouse and dependents. The dependent qualification is a bit different this round of stimulus as it includes college aged dependents and other adult dependents. One additional difference is that there is a VERY narrow qualification window. Basically single taxpayers qualify for full payments on adjusted gross income (AGI) below $75k but are FULLY phased out at AGI above $80k (amounts are doubled for married filing joint taxpayers). That is only a $5k phaseout! IRS will use your most recently filed return for this income qualification. So there may be situations where delaying filing and using your 2019 AGI is more beneficial than filing and using 2020.
Important: If you don’t get the stimulus payment now but qualify based on your 2021 AGI you WILL receive the stimulus amount as a credit on your 2021 tax filing.
Unemployment Income (UI)
A last minute push added in a provision that makes up to $10,200 in 2020 UI non-taxable for taxpayers with AGI below $150k. For joint filers, each spouse is entitled to the $10,200 exclusion (though the exemption can not be aggregated between them). The bill also provides for longer unemployment periods and extends the federal supplement to UI through September 6, 2021.
Child Tax Credit
This valuable tax credit has been increased from $2k per child to up to $3,600 per child depending on the child’s age. This increased tax credit is specific to taxpayers with AGI below $150k in 2021.
Child & Dependent Care Tax Credit
Credit for child care expenses have been increased dramatically for 2021. In addition, the phase outs will begin at a higher income threshold than they traditionally have.
Health Insurance Premium Tax Credits
Taxpayers that received too much premium tax credits in 2020 will NOT have to repay those excess amount. This is a potentially huge tax saver for certain taxpayers.
There are other items in the bill that target low income taxpayers and businesses as well.
If you want to better understand the bill and how it impacts your tax situation, feel free to reach out to us. Email is probably the quickest way to get in touch with us this time of year. Thank you and I hope you and your families remain safe and healthy.