simple guide + tips on the new bill
Here is your guide to the recent tax updates and the American Rescue Plan Act 2021.
Updates related to the 2020 tax season
Extension of the tax deadline
The due date moved from April 15th to May 17th. An extra month to file and PAY your taxes.
Things to still think about:
You need to check if your state also extended - if not then you may still need to file state by 4/15. For each state you have to check with their revenue website, check here.
Q1 2021 estimated tax due date did NOT extend and are still due on 4/15/2021.
Unemployment income tax break for 2020
Up to $10,200 is exempt from income on your 2020 tax return if you make less than $150,000.
How is this claimed?
If you haven’t yet filed, this will be entered by your tax preparer as a reduction to your taxable income.
What if you’ve already filed?
The IRS is saying to wait to amend. There could be some sort of tool or form that can make getting your funds easy.
Premium Tax Credit - relief for underpaying in 2020
If you received health care through the exchange, this is how the Premium Tax Credit (PTC) works:
When you apply for health insurance you report how much you expect to make for the following year
Using that information they let you know how much of a credit you are qualified for
Throughout the year they give you a “credit advance” in the form of a discounted premium
If you ended up making more than you estimated, you will have to pay back these credits
For only 2020, taxpayers are exempt from paying this back. Especially with unemployment, many taxpayers were way off in their estimates.
What if you’ve already filed?
The IRS is saying to wait to amend. There could be some sort of tool or form that can make getting your funds easy.
PPP application due date extended
Recently they announced the due date to apply was extended from 3/31 to 5/31. If you haven’t yet applied, you now have 2 more months!
PPP now open for schedule c filers with losses
The SBA is allowing schedule c filers to be able to apply based on gross receipts only, if you didn’t qualify for either round because of the net income limitation - you are now eligible (assuming other qualifications met)!
American Rescue Plan Act Updates for 2021
Employee Retention Credit (ERC) extended
The enormous credit that gets business owners $7k PER quarter PER employee is now extended to Q3 and Q4 for 2021 - this will total $28k in credits per employee for 2021!
You can read all about how to qualify on our blog here.
Things to think about:
One surprise for some taxpayers was that the credit amount that you receive cannot be written off.
So if you receive $50k in credits, your net income will be $50k higher. Still worth the credit, but make sure to set funds aside for this taxable income increase.
PPP2 usage - if you received a PPP loan and have to use it for payroll, you cannot use the same funds for both ERC and PPP. This wasn’t as much of a concern before but now that you can get credits all year - it is likely a choice will need to be made between using the ERC or PPP based on the covered period.
ERC now includes newer businesses
The new act introduced a “recovery start-up business” program that includes businesses that opened after February 15, 2020 that have less than $1MIL in gross receipts annually.
Based on our understanding - the business would qualify based on comparing an eligible quarter in 2021 with the corresponding quarter in 2020 (rather than 2019). The total ERC credit is limited to $50,000.
For example: You open in March of 2020 for business. Q2 2020 you earn $100,000 in gross sales, and then in Q2 2021 you earn $75,000 in gross sales. Because you had a decline of more than 20% from Q2 2020, you are eligible to apply for the employee retention credit.
ERC increases for “severely financially distressed employers”
A severely financially distressed employer is considered a business that had a decrease in sales of 90% over the corresponding quarter for 2019. If this is the case, all wages paid to employees in these quarters are considered eligible for the credit - without the limitation of $10k per employee.
Family and sick leave credits
If you aren’t familiar with these credits, they are for self employed/business owners in both 2020 and 2021. If an employee or self employed individual had to take time off for covid related reasons then you can claim a credit.
In the new Act the credit has been expanded:
Employers are now entitled to $12k per employee instead of only $10k for the Extended Family Leave.
Self employed individuals who file on a Schedule C can take up to 60 days rather than the prior 50.
Paid leave is allowed for employees and self employed individuals to receive the Covid-Vaccination. This includes getting the immunization and time to recover form any side effects.
Previously you could only claim these credits through 3/31/2021 and now this could be extended through 9/30/2021.
Days eligible to be taken will reset on March 31,2021 - and an additional 10 days will be allowed after that.
How to claim these?
Schedule C Filers (no employees) - claim on your personal return on form 7202
Tip: Qualified days should be documented with reasonings for sick leave - keep a record of this internally and let your tax pro know how many days are eligible for 2020 and 2021 if applicable.
Businesses with employees - claim when filing payroll
Tip: Educate your employees to let you know when they are utilizing sick time for covid related reasons that qualify. This should be recorded as hours are entered into your payroll system.
Recovery Rebate aka the stimmy
The third stimulus check was sent out to qualifying taxpayers over the last couple weeks. You’ll get the full $1,400 if:
You’re an individual with an AGI of up to $75,000
You’re a head of household with an AGI of up to $112,500
You’re a couple filing jointly with an AGI up to $150,000
However if you exceed the following limits, you will not receive any funds for yourself OR YOUR DEPENDENTS:
Individuals earning $80,000
Head of households earning $120,000
Married households filing jointly earning $160,000
Having that said, the income they are basing it on is your most recent tax return. For many it was based on 2019.
If you end up qualifying on your 2021 (not 2020) return, you’ll be able to receive the rebate when you file your return next year in 2022 (yes you read those years right).
Unemployment 2021 extension
Unemployment was set to end on March 14, 2021, its now extended to September 6, 2021. It also includes an additional amount of $300 per week.
Tax-free student loan debt forgiveness
Any student loan debt forgiven between December 31, 2020, and January 1, 2026, will receive tax-free treatment. Ordinarily this is included in taxable income.
Child tax credit increase and advance
The child tax credit could increase from $2,000 per child to $3,600 (kids under 6) and $3,000 (kids 6-17) per child. In addition, the phase out thresholds will be lifted higher so that more taxpayers will qualify for the tax credits.
The new thresholds would be:
Individuals $75,000
Head of Household $112,500
Married Filing Joint $150,000
And you can now get funds in advance!
The IRS will estimate taxpayers’ child tax credit amounts (I assume based on the most recent tax return) and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.
The IRS will set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.
These payments will be trued up on your tax return in 2021, if you’re overpaid then you’ll have to pay the advances back.
Dependent care credit increase
This credit is worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000.
Lastly…
Be kind to your tax pro :) This season is unlike any other (and we thought last year was bad). The changes, the delay with the IRS, the deadlines, the slow software and the general state of the world is A LOT right now.
Want to thank us?
Please thank us by donating funds stop AAPI hate and/or to the victims of the recent murders of Korean Americans in Atlanta.
Accountants of Color stands in solidarity with the AAPI community, please use links below to donate.
#StopAsianHate
DISCLAIMER: The information contained within this website is provided for informational purposes only and is not intended to substitute obtaining accounting, tax, or financial advice from a professional accountant. As always, consult with your professional.
For your convenience, this website may contain hyperlinks to websites and servers maintained by third parties. We do not control, evaluate, endorse or guarantee content found in those sites. We do not assume any responsibility or liability for the actions, products, services and content of these sites or the parties that operate them. Your use of such sites is entirely at your own risk.