What changes are coming?
Last tax season was a doozy for those of us in the tax industry. Covid took the wind out of our sails and left us coasting in uncharted waters for months as we deciphered what the new federal programs and acronyms like EIDL and PPP and ERC meant. For the most part, it was a challenge that I actually enjoyed - but judging by many colleagues' comments on private Facebook groups, the season was enough to make even the toughest pros consider an early retirement.
Now, a year later, our world still feels topsy-turvy and the tax law changes just keep coming. We are being told to put stimulus payments that arrived in 2021 on 2020 returns and that, in certain situations, the stimulus payments can be granted to the same family twice. We've changed the advice we've given our clients based on IRS guidelines related to PPP forgiveness and deductions. We took enough continuing education courses to pass whole college classes.
And now, we will unpack what the American Rescue Plan - the newest Covid "Relief"* Plan means for our clients. Come along for the ride - if you read it here, you may have your questions answered and I will have one less email in my inbox <wink>!
And if you want to read my rant about the downsides (and there are significant ones!) of the American Rescue Plan, click here.
It seems to me that Congress loves to make laws without thinking about the actual implication or logistics of making their ideas work. Some parts of the American Rescue Plan that I am going to outline below are, in my mind, just ideas. That's because we don't have clear, definable action on how to implement them - this is something that will be left to various agencies to decide how to do and tax pros to learn the best ways to make things work for our clients.
Bear in mind: The following information is contingent on the bill being signed by the President - an action that is expected on Friday, March 12. A BILL IS NOT LAW (Yet.).
#1 - Stimulus - Show Me the Money!!!
The most popular and well-known part of the American Rescue Plan is the $1,400 stimulus payment that we have been told could be hitting our bank accounts before the month is out. Everyone likes to see their account balances go up, and for some, this will be a helpful boost to making ends meet during these turbulent economic times. The stimulus is $1,400 for adults and dependents and is estimated that it will be received by 85% of Americans. Of course, some people, like the higher income earners are excluded from these payments. Maybe they were all considered essential during the lockdowns and didn't experience any financial setbacks... but, I digress. As an individual filer, if your income is below $80K/year, you'll receive some, if not all, of the payment. As a married couple, you can be making up to $160,000 before losing out. The new stimulus will also be applicable to some other groups who didn't receive it last time - namely, certain people without social security numbers - provided some other conditions are met, as well as certain adult dependents. Bottom line is this - unless your income is what is considered "high" (who came up with that threshold anyway?!?!?), you will likely see a direct deposit to your account in the coming weeks.
#2 - Unemployment - No Tax on the first $10,200
If you received Unemployment benefits in 2020 due to being out of work, you should have received a 1099-G which I will use to add the income to your tax return. Before the enactment of the American Rescue Plan, you would have seen either a larger balance due or a smaller refund due to the additional taxes on your unemployment. Under the American Rescue Plan, the first $10,200 will no longer be subject to taxes. We've been holding onto our client's returns that have unemployment income on them (with their permission of course!). When those returns are updated with the new law, the balances will be smaller or the refunds larger. Many people received unemployment without thinking about the tax implications - only one return I've done so far this season had any federal withholding. This portion of the law shields unsuspecting taxpayers from substantial tax bills.
#3 - Unemployment #2 - More Benefits in the Pipeline
The American Rescue Plan continues the federal unemployment benefits (in addition to the State programs) at $300 per week. With the existing extra benefits ending on March 15th, this comes in the nick of time for those who are still using unemployment as their primary income.
#4 - Child Tax Credit - Show Me (Some More!) Money!!!
If you've gotten used to the new $2000 child tax credit that was enacted under the TCJA (Tax Cuts and Jobs Act), then get ready for some even bigger numbers! The new child tax credit is now $3000 for kids between 6 and 17 and $3,600 for kids under 6! That's a whole lotta' moola for families with many kids. Now this is the weird part - some of the child tax credit is going to be paid out as an advance credit. This means that you could have deposits showing up in your account as early as July of this year. We - and apparently no one else - really understands how this will work or how frequently the payments will be made, but something will happen. This is a temporary provision, but there are those who are pushing to make it permanent.
#5 - Dependent Care Credit
If you pay for care for your kids in order to work or look for work, you may have been accustomed to taking the Child and Dependent Care Credit on your tax return. With the American Rescue Plan, that credit is getting bigger. Now it can be up to $4,000 for one qualifying person and up to $8,000 for two or more. It's a phaseout threshold depending on your income, so some people won't be able to claim the full amount.
There's more, guys. It's a bill that is over 600 pages long. My guess is that we will be unpacking this bill for months to see what's really in it (after all, we have to pass the bill to know what's in it, right?!?!) and we as tax pros will have many, many more hours of continuing education coming our way! I'll keep you updated as we know more juicy details. In the meantime, if you're someone who has self-prepared your return and are hesitant about hiring a professional, this is the year to do it. There are so many changes - so many things to keep straight - and so many ways to get it wrong. You don' t want to rely on a computer software when you could have the benefit of an experienced pro!