President Biden's Tax Proposals
Tax & AccountingMarch 17, 2021

The Tax Provisions of the American Rescue Plan Act of 2021

What Is New on 2021 Tax Returns?

The IRS has announced fairly normal dates for the 2022 tax filing season, starting January 24, 2022, and ending April 18, 2022. However, the IRS also predicted problems for the tax season: delayed processing of tax returns, delayed refunds, and limited phone support. The IRS encouraged taxpayers to file early and file electronically. There are also several new issues on the tax return this year.

Child Tax Credit. The Child Tax Credit is larger this year, up from $2,000 to $3,600 for children under age 6 and to $3,000 for children aged 6 through 17. Half of the credit may have been paid in advance payments from July through December 2021. Taxpayers should receive Letter 6419 from the IRS to document the amount of advance credit received. Aside from a safe harbor up to $2,000 per child for lower income taxpayers, taxpayers that received more advance payments than they are entitled to on the tax return, the difference must be repaid. This could result in some taxpayers being under withheld. There is a separate income phase-out for the increased amount of the credit from the phase-out for the original $2,000 credit. The credit is fully refundable.

Economic Impact Payments. The third round of Economic Impact Payments were also received in 2021, up to $1,400 for the taxpayer and dependents, including non-child dependents. Letter 6475 should be received by the taxpayer from the IRS documenting the amount of the third round of payments received in order to calculate the Recovery Rebate Credit on the tax return. As was the case on 2020 tax returns, taxpayers do not need to repay excess Economic Impact Payments received. Taxpayers should not include the second round of Economic Impact Payments which may have been received in early 2021, since those related to the 2020 tax return.

Earned Income Tax Credit. More childless taxpayers will be eligible for the Earned Income Tax Credit, with an expansion of the age limits, the income limits, and the dollar limits. The investment income limit has also been significantly raised. Separated individuals and individuals whose children do not have Social security numbers may now more easily qualify for the credit. As was the case in 2020, taxpayers may still elect to use 2019 income rather than 2021 income if 2019 earned income is larger.

Child and Dependent Care Credit. For 2021 tax returns, the percentage limit for the Child and Dependent Care Credit is increased from 35 percent to 50 percent, the allowable expenses are increased, the income phase-out range is increased, and it is fully refundable. However, there is now a full phase-out starting at incomes above $400,000, so some wealthier taxpayers who qualified in the past may no longer qualify. Taxpayers who now qualify for the credit for the first time may have to work to assemble taxpayer identification numbers from daycare providers.

Premium Tax Credit. The Premium Tax Credit should also be available to a larger number of taxpayers on 2021 tax returns and potentially in a larger amount. The credit may also be available based on unemployment compensation received.

Charitable Deductions. The enhanced charitable contribution deductions available in 2020 are also available on 2021 tax returns with a couple of modifications for non-itemizers. The non-itemizer deduction is a below-the-line deduction for 2021 and also the maximum deduction is doubled to $600 for married filing jointly taxpayers.

COVID Expenses. Tax law changes clarify that COVID expenses can be allowed for the above-line-deduction for educator classroom expenses; as medical, flexible spending account and health savings account expenses; and to support penalty-free distributions from retirement plans.

Business Meals Deduction. For 2021 and 2022, the business meals deduction for both food and beverages is increase to 100 percent in provided by a restaurant, which may be consumed on the premises or delivery or take-out.

Exclusions. Tax law changes have clarified a number of exclusions from tax, including for student loan forgiveness, financial aid grants to college students, Economic Injury Disaster Loans, and Restaurant Revitalization Grants.

SALT Deduction Limit. The limit on the state and local tax deduction remains currently as $10,000 for 2021. However, the House version of the Build Back Better bill had proposed a retroactive increase in the limit to $80,000. Also, many states have enacted statutes permitting an unlimited deduction if the tax is paid by a pass-through entity.

Education Tax Breaks. The tuition and fees deduction has been repealed for 2021 tax returns. However, the income phase-out limits for the Lifetime Learning Credit have been increased to match the phase-outs for the American Opportunity Tax Credit.

Cryptocurrency and Non-Fungible Tokens. A cryptocurrency question remains on the 2021 tax return but is somewhat modified from 2020: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Although there is no clear guidance at this point from the IRS on the tax treatment of Non-fungible Tokens. Many commentators feel, absent other guidance, NFTs should be treated in a similar way to cryptocurrencies.

Other Business Tax Changes. Many of the COVID relief provisions enacted in 2020 with respect to net operating loss carrybacks and deductions, the business interest deduction limitation, payroll tax changes and excess business losses of noncorporate taxpayers expired at the end of 2020 and are not available for 2021 tax returns.

Congress passed the American Rescue Plan Act of 2021 on March 10, 2021, and it was signed into law by President Joe Biden on March 11, 2021. In addition to the tax provisions, the American Rescue Plan includes many non-tax provisions to help address the continuing pandemic. These include support for unemployed workers, funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools to permit returning to the classroom safely.

The tax provisions primarily expand upon current provisions of the Tax Code with a few enhancements. Some of the tax provisions have implications for 2020 tax returns, even though it was enacted almost a month after the start of the tax filing season.

Stimulus Payments

The legislation calls for an additional $1,400 stimulus payment to individuals ($2,800 for joint filers) and including payments for child and adult dependents. Eligibility phaseout starts at $75,000 for individual filers and $150,000 for joint filers. The phase-out ends at $80,000 for individual filers and $160,000 for joint filers. The payments are to be based on 2019 return information unless the 2020 return has been filed at the time the IRS is making the payments. In a new feature in this provision, if the IRS has made an advance payment based on the 2019 tax return and, after the 2020 return is filed, the taxpayer is entitled to an additional amount, the IRS is to also send the additional amount. For this to apply, the 2020 return must be filed within the earlier of 90 days after the tax filing deadline or September 1, 2021. The IRS must make the payments by December 31, 2021.

Taxpayers could do some planning to determine whether it is better to file a 2020 tax return early to make sure that it is the basis for the advance payments.

Exclusion for Unemployment Benefits

The legislation adds an exclusion for 2020 of up to $10,200 of unemployment benefits. Taxpayers who have already filed 2020 tax returns should await IRS guidance on how to recoup those taxes.

Child Tax Credit

The legislation raises the Child Tax Credit from $2,000 (up to $1,400 refundable) to $3,000 ($3,600 for children under the age of six) for 2021 only. It is also fully refundable. The legislation calls for advance payments as frequently as monthly starting July 1, 2021 and ending December 31, 2021. Monthly payments are to equal one twelfth of the annual advance amount. The reference year for the payments is the prior year if a return was filed or the second preceding year if no return was filed in the prior year, again permitting the taxpayer to possibly influence the size of the advance payments through the timing of the filing of the 2020 tax return. The IRS is to project the ages of the children for the 2021 year. The amounts can be adjusted based on filed returns or other information obtained by the IRS. The IRS is given the option of reducing the frequency of the distributions if monthly distributions prove administratively unfeasible. The taxpayer can also elect out of the advance distributions though an online portal to be set up by the IRS. The excess amount of the credit over $2,000 phases out at the rate of $50 for each $1,000 over $75,000 of adjusted gross income for single filers and $150,000 for joint filers. The remaining $2,000 does not start to phaseout until adjusted gross incomes of $400,000 for joint filers and $200,000 for other filers are reached. There is also a recapture provision if payments exceed the credit, although there is also a safe harbor amount for certain adjusted gross income thresholds of $2,000 times the number of children.

Earned Income Tax Credit

The earned income tax credit was expanded by decreasing the minimum age for childless claimants from 25 to age 19 or for a student aged 24 or age 18 for a qualified former foster youth or a qualified homeless youth. The maximum age is eliminated. The maximum credit is increased for a childless claimant, the amount of the income at which the credit is maximized is increased, and the phaseout amount is increased. These changes are for 2021 only.

There are also several of changes that are permanent. If the children of the individual fail to qualify, the individual can qualify for the childless credit. The credit is also allowed for separated spouses. The investment income test is increased to $10,000 and is adjusted for inflation after 2021. Taxpayers can choose to use 2019 income rather than 2021 income if 2021 earned income was less than 2019 earned income.

Child and Dependent Care Credit

The legislation increases the expenses that can qualify for the child and dependent care credit to $8,000 for one qualifying child and to $16,000 for two or more qualifying children, and the maximum percentage would increase to 50 percent. The income limit increases $125,000.

The maximum exclusion for employer-provided dependent care assistance is also increased to $10,500.

These changes apply for 2021 only.

ACA Premium Tax Credits

The legislation enhances the premium tax credits under the Affordable Care Act for 2021 and 2022. They are available to more individuals and in larger amounts. For 2021, the advance premium tax credits are available for individuals receiving unemployment compensation. The legislation also eliminates the recapture provisions applicable to 2020 for taxpayers receiving excess premium tax credits.

Exclusion for Forgiven Student Loans

The legislation added an expanded exclusion of forgiven student loans that applies to loans discharged after 2020 and before 2026.

Paid Sick and Family Leave

The tax credits for paid sick and family leave are extended to September 30, 2021. There is also an expansion of what constitutes qualified leave, including for Coronavirus vaccinations, and expansion for self-employed persons. The number of qualifying days is also reset as of March 31, 2021.

Employee Retention Credit

The employee retention credit, originally enacted under the CARES Act, is extended to December 31, 2021.

COBRA Credit

An expanded COBRA credit provides a 100 percent reduction of COBRA premiums for eligible individuals for COBRA continuation coverage through September 31, 2021. The employer is entitled to a credit against certain payroll taxes for the premiums not received from the ex-employee.

Other Provisions

Also included in the legislation are provisions to repeal the election for multinational businesses to allocate interest on a worldwide basis. Other changes provide that Economic Injury Disaster Loan (EIDL) advances under the CARES Act and restaurant revitalization grants are not taxable.

Source: Wolters Kluwer CCH® AnswerConnect, 2022
Permission for use granted.

Mark Luscombe
Principal Federal Tax Analyst
Mark Luscombe, a CPA and attorney, is the principal federal tax analyst for Wolters Kluwer Tax & Accounting. He is the current chair of the Important Developments Subcommittee of the Partnership Committee of the American Bar Association Tax Section and speaks on a wide range of tax topics. He authors monthly columns in Accounting Today and TAXES magazine. Prior to joining Wolters Kluwer, he was in private practice with several Chicago-area law firms where he specialized in taxation.
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