The House and Senate have just passed the American Rescue Plan Act (ARP) and shortly the president is expected to sign it into law. This bill includes many provisions that have major tax impacts for 2020 and 2021 tax returns. These changes will impact taxpayers that have or have not filed their 2020 tax returns. We are asking our clients to bring in all of your tax information ASAP to determine if you impacted or not and make a recommendation of what you should do. Courtney and Cory are in the office all year. However, Wade, our third tax preparer, is available on a very limited basis after April 15th. Our front desk staff is only available through the end of April. Through April 15, we are going to continue to offer extended hours of 900-900 Monday – Thursday from 900-900 and Friday and Saturday from 900-400. Effective April 16th our hours will change to our offseason hours of Monday – Friday from 900 – 400.
It is expected that after April 15th our turnaround times will be longer than normal and we are hoping to avoid such an extended workload like in 2020 with the season being extended last year so we can concentrate on our year round work also Courtney will be tied up processing quarterly payroll reports for our payroll clients from April 15th – April 30 and likely will not be preparing any tax returns during this time so they can all be filed by April 30th. After April 15th our staff will not be available to meet on weekends. Cory and Courtney will also be tied up with completing our monthly charitable gambling reports from the 15th – 20th that need to be filed by April 20th. Cory is expected to be out of the office April 24-29, May 14-16, May 28 – 31, and June 9-12. Cory also generally takes off Thursdays OR Mondays depending on the week after April 15th. Courtney will be out of the office from May 15th – May 23, and generally takes Friday’s off after April 15th. These are for events or vacations that are already scheduled and reserved and cannot be changed. We are pointing these dates out to you so you can be aware of why the turnaround times may be longer after April 15th, and why it is imperative that you plan accordingly and that you get your information into our office by our cutoff date of April 3, earlier is preferred, to get your return completed by April 15, even if the deadline is extended beyond this date.
A majority of our clients are not impacted by these changes and can still file as normal. For those clients that are affected, we would rather have your information to us so we can enter it all in and determine if you should file your return now since you are not affected, file the return and amend it later down the road when we can, or just hold off on filing.
While this change only affects federal returns we are uncertain if some of these changes will carry over to the state returns. Some states like MN aren’t even in session yet to make a decision on this. The following is some information for you to review.
2020 tax-free unemployment benefits
Initially the bill didn’t include retroactive tax provisions, but during the Senate’s voting session, a compromise was made on unemployment benefits that will affect 2020 tax returns. The bill provides a $300 weekly federal unemployment benefit through Sept. 6 and also makes the first $10,200 of unemployment payments nontaxable ($20,400 in the case of a joint return, but only $10,200 per spouse) in 2020 for households earning less than $150,000.
WHAT DOES THIS MEAN FOR OUR CLIENTS? SINCE THE IRS HAS NOT PROVIDED ANY GUIDANCE YET AS TO HOW THIS WILL BE HANDLED, ANY RETURNS THAT HAVE ALREADY BEEN FILED WILL LIKELY BE AMENDED BY OUR STAFF AFTER APRIL 15TH FOR A $75.00 FEE IF THE IRS WILL NOT BE AUTOMATICALLY ADJUSTING THESE TAX RETURNS. WE HAVE NOT BEEN PROVIDED ANY GUIDANCE YET AS TO WHEN AND HOW TO REPORT THIS ON THE 2020 INCOME TAX RETURN. AT THIS TIME ANY CLIENTS THAT HAVE NOT FILED, IT WILL BE DETERMINED IN COOPERATION OF THE TAX PROFESSIONAL AND THE TAXPAYER WHAT IS THE BEST ROUTE TO GO. YOU CAN FILE THE RETURN NOW AND AMEND LATER, IF YOU ARE CONCERNED ABOUT YOUR INCOME AND STIMULUS ELIGIBILITY. WE CAN HOLD OFF ON FILING THE INCOME TAX RETURN TO A LATER DATE OR FILE THE RETURN NOW TO EXPEDITE THE TAX RETURN BASED ON THE INFORMATION WE HAVE, ESPECIALLY IF YOU ARE CURRENTLY GETTING A REFUND. THE DELAYS AT THE IRS ARE ONLY EXPECTED TO GET WORSE, SO IT SEEMS IMMINENT THAT THE DEADLINE WILL GET EXTENDED.
Retroactive advanced premium tax credit
An individual can receive an advanced premium tax credit (APTC) to lower their monthly health insurance payment (premium). If at the end of the year they have received more APTC than the credit allowed based on final household income, the taxpayer does not have to pay back the excess when filing their 2020 federal tax return. For those who have already filed their 2020 return, we are waiting for guidance as to how to get the refund.
Recovery rebates to individuals
Single taxpayers with AGI under $75,000 will receive a $1,400 refundable tax credit, while joint filers with AGI under $150,000 will receive $2,800. In addition, taxpayers will receive $1,400 for each qualifying dependent (including adult dependents). The credit will completely phase out at an income threshold of $80,000 for single filers and $160,000 for joint.
Child tax credit
Special rules for 2021 include an expansion of the credit from $2,000 to $3,000 per eligible child under age 18 ($3,600 per child under age 6). The fully refundable credit, with 50% of the credit issued as advance periodic payments starting in July, will be reconciled on the 2021 tax return. For 2021, the increased credit amount (additional $1,000 or $1,600 per-child in excess of the present-law $2,000 per-child) begins to be phased-out at $75,000 ($150,000 for MFJ and surviving spouse and $112,500 for head of household). Once the increased credit amount is reduced, the credit plateaus at $2,000, and the phaseout begins at $200,000 ($400,000 for MFJ).
Starting in July, the Treasury will issue advance payments of the child tax credit based on 2019 or 2020 tax return information. The Treasury is tasked with establishing an online portal to allow taxpayers to opt out of receiving advanced payments and provide information regarding changes in income, marital status and the number of qualifying children for purposes of determining each taxpayer’s maximum eligible credit.
Earned income credit
For 2021 only, the bill expands the eligibility and the amount of the earned income credit (EIC) for taxpayers with no qualifying children. The maximum credit amount for childless people will increase from $543 to $1,502. For 2021, taxpayers can use their 2019 income if it was higher than 2021.
The bill also includes permanent changes, allowing a married but separated individual to be treated as not married for purposes of the EIC if a joint return is not filed and the individual lives with a qualifying child for more than half the year. Individuals who otherwise would be eligible for EIC, but whose children do not have Social Security numbers, are now permitted to claim the childless credit. The disqualified investment income limit has increased from $3,650 (2020) to $10,000 and will be adjusted for inflation.
The act includes other tax changes, such as:
- Refundability and enhancement of child and dependent care tax credit
- Increase in exclusion for employer-provided dependent care assistance
- Extension and expansion of the Families First Coronavirus Response Act (FFCRA) paid sick leave and paid family leave credits
- Extension of employee retention credit
- Modification of the premium tax credit
- Change to the tax treatment of targeted economic injury disaster loan (EIDL) advances
- Exemption of student loan forgiveness from federal taxation through 2026
- Expanded COBRA continuation coverage premium assistance credit