The American Rescue Plan Act & Tax Deadline Updates
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The third batch of stimulus checks are out and on their way. The American Rescue Plan, the third Coronavirus relief and recovery package, was signed into law. And, the tax deadline has been extended again.
What does this mean for you? Let's dig in.
Let's start with the recovery rebates, better known as the stimulus check payments.
This set of recovery rebates is $1,400 per person. In addition to the larger payment amount this time around, there are a number of other important eligibility changes:
This set of recovery rebates is now inclusive of all dependents. Adult dependents, who have been excluded from eligibility for the last two recovery rebates, are now eligible. This is a win for parents with dependent children in college or adults caring for elderly parents who qualify as dependents. These eligibility changes make it easier to calculate the total eligible payment amount.
The formula is Payment = Number of People in Household x $1,400. This calculator can help you quickly calculate your expected stimulus payment.
The income limitations, see below, have been narrowed substantially. This means that your eligible payment amount decreases sharply with any additional income over the beginning of the phaseout limit. Single taxpayers are phased completely out of receiving any recovery rebate if income is $5k over the $75k AGI limit. Married taxpayers are phased completely out of receiving any recovery rebate if income is $10k over the $150k AGI limit.
This begs the question: Which tax year's income is being used for this recovery rebate calculation? This is where things get dicey. This rebate will be a tax credit on your 2021 tax return. If you are not eligible for this rebate based on your most recently-filed tax return, you will have the opportunity to claim it when you file your 2021 tax return next year based on 2021 income. This means that we have the chance to tax plan around this tax credit! We can consider eligibility for this rebate while preparing and analyzing our clients' tax projections this summer and fall and make potential income adjustments in order to qualify for this tax credit. Let's look at a few scenarios:
If you have not yet filed your 2020 tax return, your payment will be based on your 2019 income.
What if you do not qualify based on your 2019 income but you would qualify based on your 2020 income? The IRS plans to send checks to true up the difference, once 2020 tax returns have been filed, so that these taxpayers do not need to wait until they file 2021 tax returns to receive a payment. These true-up payments are expected to be sent July 15th, provided that the tax deadline does not get further extended.
If your 2020 tax return has been filed, the payment that you will receive will be based on your 2020 tax return.
What if you are eligible based on your 2019 or 2020 income and so you receive the third stimulus payment - but your 2021 income is too high? Not to worry. The IRS will not clawback any payments already received. If you received it, you keep it.
NorthAvenue is reviewing all client tax returns prior to filing to determine whether it would be to our clients' benefit to hold off on filing the 2020 tax return, in order to qualify for the stimulus payment under 2019 income. We will be in touch with you if this strategy applies to you.
If you have kids age 17 or under, it's time to get familiar with the expanded child tax credits.
Child tax credits, as we know it, are $2,000 per child for children under age 17. These "standard" child tax credits are subject to AGI phaseouts of $200k for single filers and $400k for married filing joint taxpayers. The American Rescue Plan Act has introduced temporary enhancements to child tax credits for 2021.
If you have a child under age 6, the child tax credit is increased to $3,600/child. This is an extra $1,600 tax credit.
If you have a child age 6-17, the child tax credit is increased to $3,000/child. This is an extra $1,000 tax credit. To note, this extra tax credit now includes children age 17, whereas the standard child tax credit only applies to children under age 17.
The standard child tax credit still exists, and these extra child tax credits (in bold above) are in addition to them. The bolded extra tax credit per child is subject to the same income phaseout ranges as the $1,400 stimulus checks. If income is too high to receive the extra amount, you are still eligible for the standard child tax credit per the standard AGI income phaseout range.
These 2021 child tax credits will be recorded on your 2021 tax return. However, Congress has requested that up to 50% of the tax credit be paid early and in equal installments, starting in July and through December 2021. These advance payments will be based on your most recently filed tax return, which will be your 2020 tax return at that point (unless your 2020 return has gone on extension and has not yet been filed). It's not yet clear whether these payments will occur monthly. The IRS also plans to set up a portal that will allow you to opt out of the periodic payments, if desired. If these advance child tax credits apply to you, we will plan to address this in our tax projection meetings later this year. You can use this calculator to calculate your expected child tax credit. Different from the recovery rebate, there will be a clawback of the advance payments of child tax care credits when you file your 2021 tax return, if you end up being eligible for a smaller tax credit than the advance payment already received. Some good news: The child tax credit expansions are projected to reduce child poverty in the United States by 45%, according to Columbia University’s Center on Poverty and Social Policy. It is expected to lift nearly 5 million children out of poverty. Child and dependent care tax credits have also been expanded and will be documented on 2021 tax returns. Without getting into the weeds, the main takeaway here is that if your income is less than $125k AGI regardless of filing status, we recommend tracking all child care expenses in 2021 in order to be prepared to take advantage of the expanded tax credit when you file your 2021 tax return. If this applies to you, we will plan to incorporate this into our tax projections discussions with you this year.
Unemployment benefits get expanded too.
If your 2020 AGI is under $150k including unemployment income, up to $10,200 of unemployment compensation received in 2020 will be tax-free. There is no phaseout, which means that if $1 more is earned over $150k, unemployment income becomes taxable. The $150k limit applies to all filing statuses.
Unemployment benefits set to expire March 14, 2021 were extended to September 6, 2021.
Pandemic Unemployment Assistance (PUA), for self-employed workers who are generally ineligible for unemployment benefits, is extended through September 6, 2021.
Federal Pandemic Emergency Unemployment will increase state compensation by an additional $300 per week through September 6, 2021.
Now that we know what was included in the American Rescue Plan Act... What was left out?
There was no elimination of required minimum distributions, which were previously waived in 2020. They will not be waived in 2021.
Student debt forgiveness was also not included in this legislation. However, it did discharge student debt as taxable income! Debt forgiven between 2021-2025 will not be taxable. This applies to Federal and private loans. President Biden has indicated that he supports forgiving up to $10,000 student debt per borrower. While student debt was not forgiven in this bill, student loan forgiveness has been pumped and primed.
There was no elimination of cost of living adjustment (COLA) for retirement plan contributions. Historically, the total maximum contribution amount to retirement plans has increased on a regular basis (though not always as often as annually). The original House version of this bill included a provision to stop this COLA increase in 2030. While it did not pass, it is still noteworthy. Why? This is effectively legislative text that can be pulled off the shelf to include with a different bill in the future, and this is exactly what happened with what has been dubbed "the death of the stretch". The Secure Act, passed into law in December 2019, requires any non-spouse who inherits an IRA to liquidate the account and effectively pay all of the account’s required tax within 10 years of death, versus being able to stretch the required minimum distributions over their lifetime and minimize the tax impact of the distributions. This legislation had been included, then removed, for years before successfully being passed into law. This nixed provision portends future law changes that may come down the pipeline.
The original House version of this bill also included a minimum wage provision to increase the minimum wage to $15/hr. This provision was not included in the final piece of legislation. This is because the bill was passed in the Senate by reconciliation. Reconciliation allows for Congress to pass bills in the Senate with only a majority vote 50/49 rather than the typical 60 votes. In order to be passed by reconciliation, a bill must be pertaining to a limited list of areas, such as spending, revenue, and the federal debt limit. The minimum wage provision fell outside the boundaries of a reconciliation bill and was therefore dropped. It is expected that President Biden's tax plan may eventually be passed through the same reconciliation strategy. If this occurs, the version that becomes law is expected to be a watered-down version, if done through reconciliation.
It is also worth noting that there are temporary changes in the American Rescue Plan Act that may become permanent, such as the expanded child tax credits.
Did you know that research shows that charitable giving makes you happier? We wanted to spread some joy.
2020 was rough. Among the many hardships that came with it, we saw small businesses suffer. As a small business, we felt extremely fortunate to be able to easily adapt to the new normal and continue business as usual. More than ever, we feel extremely grateful for our relationships with all of our wonderful clients and the trust that you place in us.
We wanted to show appreciation in a meaningful way. In keeping with our company values of charitable giving and giving back to our community, we sent gift cards to clients in January 2021 to use with TisBest, which allows for contributing to the charitable organization of your choice.
We have thoroughly enjoyed hearing about the organizations that matter to you!
Through our TisBest portal, we can see that there are a number of clients who have yet to use their gift card. With postal mail not being as reliable as we would like, we wanted to include in this newsletter that if you have not received your gift card and you engage NorthAvenue for all-inclusive financial planning services, please feel free to reach out to us, so we can make sure you receive your gift card.
Tax Deadline Extension
The IRS has announced that the 2020 tax return filing and payment deadline has been extended to May 17, 2021. Taxpayers can also defer federal income tax payments originally due April 15th to May 17th.
Ohio has also announced that it will extend the state income tax filing date to May 17th, and many other states have followed suit. However, at this time, not all states have extended their tax filing deadline to match the federal extension.
Does the extension apply to estimated tax payments? No. The payment deferment only applies to 2020 tax payments. The 2021 first quarter estimated tax payment is still due April 15th. This applies to Federal and Ohio estimated tax payments.
Can we file now and wait to pay until May 17th? We are expecting an update to our tax preparation software that will allow us to designate tax due to be paid after April 15th and up until May 17th. However, this software update is not yet in effect. If you are interested in delaying payment and your tax return has not yet been filed, please let us know as soon as possible, and we will delay filing your return until the software update to allow for designating a late payment is in place. Once your return has been filed, we cannot change the tax payment date. If your return has already been filed and set up for electronic debit, tax due will still be paid on April 15th, as this was the original date communicated to the IRS at filing.
NorthAvenue continues to track to the April 15th tax deadline in order to move on from tax season and assist our clients in other areas. We plan to do our best to complete your tax return as close to the original deadline as we are able.