The American Rescue Plan was enacted in 2021 in efforts to facilitate the US's recovery from the devasting economic and health effects of the COVID-19 pandemic. Among the act's many provisions are tax items that will influence and affect the 2020 tax return filings. Some changes that the act has brought upon are:

• An exemption of up to $10,200 of unemployment compensation from tax for those whose gross income is below $150,000.
• The suspension of the requirement to repay 2020 excess advance payments of the premium tax credit (APTC). This means that individuals with excess APTC do not need to report the excess APTC to the IRS and the payment will be automatically reduced to zero.

Additionally, the act will bring along changes that will affect the 2021 tax filings. These changes consist of:

• An Increase of child and dependent care credit. The top credit percentage of qualifying expenses has increased from 35% to 50%, meaning families with young children can get a bigger tax credit for childcare expenses and more families will be able to qualify for the credit. Furthermore, for the first time, the credit is fully refundable.
• An increase of amount employers can let workers set aside in their dependent-care flexible spending accounts. Workers can now set aside up to $10,500 instead of the normal $5,000 in a dependent care FSA. However, not all workers are entitled to do so; workers can only do this if their employers adopts this change.
• An expansion of qualifications for EITC. For instance, childless workers and couples can now qualify for the Earned Income Tax Credit, which is a fully refundable tax benefit that aims to help low and moderate income workers/families. Individuals, 19 years and older, also now qualify for EITC, expanding the range of workers who can take advantage of this benefit.

This year for the first time, the Form 1040 and Form 1040-SR are available in Spanish. There are also some other changes and some special circumstances related to COVID-19 that the IRS wants taxpayers to think about before filing.

The pandemic year of 2020 was a doozy. People facing financial difficulties may find that there's a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. For example, if your income decreased, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit.

Taxpayers with income of less than $75,000 are projected to have, on average, no tax liability after deductions and credits when they file their 2021 returns next spring.

For taxpayers earning $75,000 to $100,000, the average income tax rate paid this year is expected to be just 1.8%.

‍

They will also will get money back from the IRS, according to recent estimates from the nonpartisan Joint Committee on Taxation. In tax year 2020, the IRS is also rising the standard deduction to $12,400 for individuals (from $12,200) and to $24,800 for married joint filers (from $24,400). The standard deduction has become more important than ever since 2018, when it rose to a high enough level that many taxpayers chose to stop itemizing.

Some requirements affect the 2020 tax return people are filling out this filing season, including one exempting up to $10,200 in unemployment compensation from tax and another benefiting many people who purchased subsidized health coverage through either federal or state Health Insurance Marketplaces. In addition, the law also includes a third round of Economic Impact Payments, now going out to eligible Americans, that are generally equal to $1,400 per person for most people, as well as several other key changes for tax-year 2021..

The change affecting the most taxpayers was the postponement of the April 15 filing and payment deadline for affected taxpayers — who were defined as any "individual, a trust, estate, partnership, association, company or corporation" with a federal income tax return or income tax payment due on April 15 (Notice 2020-18). Any affected taxpayer received an automatic postponement of the April 15 deadline until July 15 without having to file Form 4868.

Because of the economic hardships brought on by Covid-19, the tax credits will bring some tax relief to small businesses and employers. In addition to the PPP (Paycheck Protection Program) extending eligibility to more small businesses as well as larger non-profit, 501c(3), the Internal Revenue Service released guidance on the paid leave tax credit. Employers who are eligible also get the benefit of being reimbursed with Covid-19 related paid sick and family leave credits. The refundable tax credit will offset costs related to employers voluntarily provided this paid sick or family leave to their employees. Key points include the ability for employers to claim tax credits employees taking time off due to being exposed to Covid-19, seeking a diagnosis, experiencing symptoms, caring for a child whose school was closed due to Covid-19, getting or recovering from a vaccine, or caring for someone under quarantine or isolation orders.  

This affects businesses with fewer than 500 employees. The tax credit amounts received will be up to $17,100 and can be applied through September 30, 2021. In addition, eligible self-employed individuals are allowed a credit against their federal income taxes for any taxable year equal to their "qualified sick leave equivalent amount" or "qualified family leave equivalent amount."  On top of the dependent care FSA benefits, The American Rescue Plan, the ARP also extended two additional credits:

• Employee Retention Tax credit - Also a refundable tax credit, (if credit exceeds taxes owed, the tax payer gets the difference) companies partially or fully shut down or experienced revenue decline of more than 20 percent in any quarter of 2021 or 50 percent of any quarter of 2020 in comparison to 2019 will receive up to a $7,000 credit against payroll taxes owed
• COBRA premium subsidy - ARP creates a new 100 percent subsidy for COBRA coverage premiums  through September 30, 2021. Additionally, ARPA opens up the ability to enroll in COBRA coverage even if a person declined coverage earlier or if their enrollment window closed.

The American Rescue Plan Act of 2021 is a historic and unprecedented relief effort. With the challenges that families and small businesses face despite the brighter outlook and recovery of 2021, the aim is to provide some much needed relief through the year. In addition to these grants, companies can also look to their individual states and cities for grant and loan programs.

Sources:

https://www.irs.gov/newsroom/irs-offers-overview-of-tax-provisions-in-american-rescue-plan-retroactive-tax-benefits-help-many-people-now-preparing-2020-returns

https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs

https://www.cnbc.com/2021/04/27/many-lower-and-middle-income-households-could-pay-zero-in-taxes.html

https://www.transit.dot.gov/sites/fta.dot.gov/files/images/AmericanRescuePlan_Graphic_700px.jpg

HTH & Accounting Associates help organizations and business owners with accounting and/or financial consulting services.  

For Help with The American Rescue Plan Act of 2021 contact us at accounting@thaddeus.org or call us at 909-599-2111.  

Thanks for reading

Harshal Choudhari

John Velasco

Sharon Ma

‍