COVID-19 Tax News & FAQ
American Rescue Plan Act of 2021
This bill includes many provisions that have major tax impacts for 2020 and 2021 tax returns.
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.
The IRS has provided continualguidance on their
New Exclusion of up to $10,200 of Unemployment Compensation page.
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.
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.
The Treasury is directed to issue this credit as an advance payment based on the information on 2019 or 2020 tax returns. This credit will be reconciled on the 2021 tax return. Taxpayers who are married to undocumented residents will be able to receive the stimulus payments. If your client has changes to income, dependencies, or filing status, it may be advantageous to file before/after these payments are issued.
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
Details regarding these provisions can be found in our
summary of the American Rescue Plan Act.
Consolidated Appropriations Act of 2021
The president signed the
Consolidated Appropriations Act of 2021, which includes additional COVID relief. Highlights include:
- Second round of payments to taxpayers (subject to income limits) of $600 per individual ($1,200 for married couples filing a joint return) plus $600 per qualifying child
- Business expenses paid for with the proceeds of PPP loans are tax deductible, consistent with Congressional intent in the CARES Act
- Loan forgiveness process is simplified for borrowers with PPP loans of $150,000 or less
- PPP second draw loan for targeted small businesses
- Economic Injury Disaster Loan advance will no longer be taxable
- Employee payroll tax deferral repayment extended to Dec. 31, 2021
- Families First Coronavirus Response Act (FFCRA) credit extended through March 31, 2021
- Allowance for taxpayer to claim employee retention credit (ERC) and receive a PPP loan
- Business meals 100% deductible for 2021 and 2022
- Increase from $300 to $600 for married couple filing jointly above-the-line charitable contribution for 2021
- Lookback to 2019 for eligibility of the earned income tax credit and portion of child tax credit for 2020
- Flexible savings account (FSA) balances can be rolled into 2021
- Permanent extension of the 7.5% floor for unreimbursed medical expenses
- Permanent extension of energy efficient improvements to nonresidential rental
- Increased income phaseout thresholds on the lifetime learning credit will replace the qualified tuition expenses deduction that expires at the end of 2020
- Work opportunity credit extended to 2025
Additional details on these provisions, as well as others, are in our
tax act summary (members only).
Second round of economic impact payments
As of Dec. 29, 2020, the IRS and the Treasury Department began delivering a second round of economic impact payments (EIP) via direct deposit. Paper checks started mailing on Wednesday, Dec. 30.
Some Americans may see the direct deposit payments as pending or as provisional payments in their accounts before the official payment date of Jan. 4, 2021. The EIP is generally $600 for singles and $1,200 for married couples filing a joint return. In addition, those with qualifying children will also receive $600 for each qualifying child. Dependents who are 17 and older are not eligible for the child payment.
Anyone who received the first round of payments earlier this year but doesn’t receive a payment via direct deposit will generally receive a check or, in some instances, a debit card. For those in this category, the payments will conclude in January.
Eligible individuals who did not receive an EIP this year – either the first or the second payment – will be able to claim it when they file their 2020 taxes using the recovery rebate credit (RRC) since the EIPs are an advance payment of the RRC.
Who is eligible for the second EIP?
Generally, U.S. citizens and resident aliens who are not eligible to be claimed as a dependent on someone else’s income tax return are eligible for this second payment. Eligible individuals will automatically receive an EIP of up to $600 for individuals or $1,200 for married couples and up to $600 for each qualifying child. Generally, if you have adjusted gross income for 2019 up to $75,000 for individuals and up to $150,000 for married couples filing joint returns and surviving spouses, you will receive the full amount of the second payment. For filers with income above those amounts, the payment amount is reduced.
Under the earlier CARES Act, joint returns of couples where only one member of the couple had a Social Security number (SSN) were generally ineligible for a payment – unless they were a member of the military. But this month’s new law changes and expands that provision, and more people are now eligible. In this situation, these families will now be eligible to receive payments for the taxpayers and qualifying children of the family who have work-eligible SSNs. People in this group who don’t receive an EIP can claim this when they file their 2020 taxes under the RRC.
The IRS provides additional details in
Tool for non-filers to register for payments — The IRS has a web tool allowing quick registration for economic impact payments for those who don’t normally file a tax return.
Get My Payment tool — This tool shows where and when the economic impact payment was delivered. An additional feature on Get My Payment allows eligible people a chance to provide their bank account information so they can receive their payment more quickly rather than waiting for a paper check. This feature will be unavailable if the economic impact payment has already been scheduled for delivery.
Submitting Forms 2848 and 8821 online
In January 2021, a new option for submitting Form 2848,
Power of Attorney, and Form 8821,
Tax Information Authorization, online with electronic signatures will be available as required by the
Taxpayer First Act. This new process gives tax professionals and taxpayers a safe option to electronically sign and upload these documents without an in-person meeting.
The IRS will launch a new secure submission platform and a new page, “Submit Forms 2848 and 8821 Online.” Tax professionals will enter their Secure Access username and password or complete a Secure Access registration to authenticate their identities. Taxpayers and tax professionals can sign the forms electronically or with ink, then upload the image of the form to the IRS.
The IRS has provided a
Submit Forms 2848 and 8821 Online FAQs, which includes more information on how to upload these forms, what forms of electronic signatures are acceptable and how to authenticate a taxpayer’s identity.
In July 2021, the IRS will launch a new Tax Pro Account, which is a secure self-service online portal giving tax professionals another way to allow clients to sign authorizations electronically.
New tax payment agreements available to taxpayers affected by COVID-19
IRS announced a number of changes designed to help struggling taxpayers impacted by COVID-19 more easily settle their tax debts with the IRS. The IRS assessed its collection activities to see how it could provide relief for taxpayers who owe but are struggling financially because of the pandemic, expanding taxpayer options for making payments and alternatives to resolve balances owed.
The relief initiatives include:
- The IRS is highlighting reasonable cause assistance available through IRS procedures for failure to file, failure to pay and failure to deposit penalties. First time abatement relief is also available for the first time a taxpayer is subject to one or more of these tax penalties.
- For individual taxpayers receiving notices (letters about a tax bill) with tax liabilities up to $250,000 for tax year 2019, the IRS can offer one installment agreement opportunity with no lien filed.
- The IRS is extending the short-term payment plan timeframe to 180 days (normally 120 days) for those who qualify.
- The IRS is easing paperwork requirements to allow individuals more flexibility to get non-streamlined installment agreements for those who owe less than $250,000 without financial verification, if their case is not yet assigned to a revenue officer.
- The IRS is providing extended guidance to automatically include new tax year balances accrued in existing installment agreements for individuals and out of business entities.
- The IRS will provide relief for taxpayers having difficulty meeting the terms of previously accepted offers.
More information is also available in
Coronavirus Tax Relief — The IRS has established a special section focused on steps to help taxpayers, businesses and others affected by the coronavirus.
State Tax Filing Guidance — AICPA chart that is tracking summaries of states filing relief.