Recovery Rebate Restlessness
Does Punxsutawney Phil have the Cure for “Recovery Rebate Restlessness” Syndrome? If you are a follower of our weekly blogs or perhaps attended the Get Ready for Filing Season webinar…
April 6th, 2021
With the American Rescue Plan, signed by President Biden on March 11, 2021, comes a great deal of items for tax preparers to be aware of in order to provide the best possible advice and service to tax clients.
Tom covers things like recovery rebates, unemployment benefits, COBRA continuation coverage, the child tax credit, the earned income credit, child and dependent care credit, family & sick leave credits, employee retention credit, premium tax credit, student loans, and a few miscellaneous provision in the following video.
by Tom O’Saben, EA
Earned income credit also is going to have some changes going forward. There’s going to be new rules, this is going to be also effective in 2021, not 2020 returns. This is §9621 of the American Rescue Plan. There are going to be new rules for taxpayers with no children. I would suspect that the income threshold is going to be lowered so that taxpayers with no children could in fact receive some EIC. The minimum now is going to be age 19 (or even you can look in the regs yourself, go and look at 9621) and you’ll see that there could be people that are students, and also age 18 if they’re in a foster child situation or what have you. But instead of age 25, lowering it to 19. The maximum age is being eliminated. It used to be age 65. Beyond that you couldn’t get earned income credit. In 2021, you can. When you phase out, that phase out percentage is being increased and the phase out range is being increased. Again, you can look at §9621 of the American Rescue Plan to see what happens. It is going to be allowed in certain circumstances when you have separated spouses, it’s probably going to be in a spousal abuse type situation. You know, in general, earned income credit is not available under married filing separately. I would not expect that to be a change. The change I would expect is – are they separated because of a hostile family environment. The investment income disqualification, which was about $2200, is being raised to $10,000. Okay. Also in 2021, taxpayers can go back to their 2019 income if that would result in a better outcome for them. Many, many people saw a tremendous drop in income in 2020. They may still be experiencing that now in 2021. And remember earned income credit that it’s a bell curve. If you make too little, you don’t get anything. If you make too much, you don’t get anything. There’s kind of a sweet spot in the middle. So keep that in mind. If 2019 would get that taxpayer closer to the sweet spot, they can use that in 2021, referencing back to 2019 if it results in a better outcome for that taxpayer. More complication to the EIC rules.
How about the child and dependent care credit, §9631 of the American Rescue Plan? It is going to be refundable for 2021 only. You know that the child and dependent care credit has always been a non refundable credit. Now, for one year, 2021, it’s going to be refundable. It’s being increased finally. You know, it’s amazing to me when I see clients… My kids are in their 30s. But when we had daycare expense, we were putting out $6-7,000 a year and thought it was just horrible. Now I see folks out there paying $25,000… $30,000 for daycare. And so finally, finally, finally, the government is reacting. Well, the increase is now up to $4,000 for one child, that’s the eligible amount, or $8,000 for two or more. So it’s gone from three and six to four and eight, Hey, you know what we’ll take what we can get. But then the credit, the percentage off of those amounts, begins to decrease at $125,000. If income is greater than $400,000, you heard President Biden when he was running for office, that there was going to be tax increases on people making more than $400,000. It used to never decrease below 20%. Remember when we used to be able to get $600 for one child or $1200 for two or 10? Well, that was 20% of three or 20% of six. Well, if their income is greater than $400,000, the percentage decrease can even go below 20%. So there’s good news and there’s bad news out there. §9631 of the American Recovery Act. Remember, again, these changes start in 2021.
The family and sick leave credits that came out of the FFCRA (that was the predecessor to the CARES Act) in 2020 is being extended. This is a really, really good benefit for COVID-impacted persons. My son actually went through this, and I remember him telling me “Hey, Dad, I got COVID.” This was in December. So you think well, this is way past, but the FFCRA kind of got lost in the the scuttlebutt of the CARES Act with PPP and all of it. But he said that his boss said he had to take a week of vacation, and he had to take a week unpaid. And I was like “whoa, whoa, whoa, whoa. FFCRA says you can get up to two weeks paid and your employer gets it back.” My son said, “you know what, Dad, I talked to my boss, and I told him to tell his boss to talk to his tax person.” He talked to his tax person. And sure enough, they said, Yeah, you can have this. And so my son got two weeks paid, didn’t lose a week of vacation, and the employer gets the money back from the US taxpayers. The paid family leave part (this is §3132 of the American Rescue Plan, ARP) increased to $12,000. For those self-employed individuals, the days they can use have been increased from 50 to 60. Look at this – time off because people have gotten COVID vaccinations. You know, some people who have gotten COVID vaccination, sometimes they don’t, they don’t feel very good, especially after the second one for a number of days. So they may have to take time off. The family and sick leave credits will count for days off for COVID vaccinations. And get this one… what we had most recently, the Consolidated Appropriations Act from December of 2020, extended the program to March 31. And I told you then when we did our webinar in January, that I’m sure they’re going to be looking at that as a full 12 month period. That’s true. But remember now what the American Rescue Plan is doing…it’s extending this to September 30. So after March 31, guess what? The program resets. So let’s take my son, for example. He used his two weeks under COVID impact. So let’s say in April, he contracts it again God forbid. Well, that’s going to be a reset. And he, as that employee, could receive the benefit again. Now if it happened before March 31, it’s still under this rolling 12 months. But after March 31 it resets for that final six months. This is a big deal, folks. You should share it with your clients to really checkit out.
The employee retention credit – a another big, big time credit – again, kind of got lost in FFCRA, since the CARES Act kind of took center stage when it came out at the end of March of last year. But the employee retention credit, §9651 of the American Rescue Plan, has been extended all the way through this year, the end of 2021. This is a big deal. I know when our office, after quarterlies were filed, now our payroll people are working on going back and amending second and third quarters of 2020 to get taxpayers this money on the employee retention credit. Just watch the interplay between this and PPP loans. It used to be you couldn’t have employee retention, if you had PPP. So the Consolidated Appropriations Act back in December fixed that error. So that’s why I say you can go back and amend second or third quarter 941s and get some tax payer business owners some money. But you just can’t use the same payroll for both benefits. In other words, your use of PPP money for payroll, you can’t go and use employee retention credit for the same payroll. So my advice is for those clients who’ve gone out and gotten a PPP loan, hey, use that money first. And probably one of the biggest changes, which has nothing to do with what we’re talking about today is realize that we’ve gotten guidance in the last few weeks (and the guidance keeps changing) for our self-employed people on the PPP side. And I don’t have a slide for this, I just want to throw it out there. They’ve clarified that taxpayers can use their gross income on a schedule C or a schedule F like Frank. So I was talking with a client just the other day, she’s got a hair salon. She goes, “I didn’t qualify for a PPP loan.” Why? No employees and she had a loss last year. I said you need to call your bank, because they have clarified that PPP is going to work off of gross income. Again, I don’t have a slide for it. But the point I want to make out of this is watch that interplay, that we can’t use the same money for an employee retention credit that we would for the PPP loan. If a client gets a PPP loan, my advice is spend that money first on payroll or owners compensation and move forward.
Okay, premium tax credits. This is for our clients who purchase insurance on the marketplace, §§9661, 9662 and 9663 of the American Rescue Plan. Look at this: In 2020, you’ve got a client… I had this discussion with a client where we were doing a zoom meeting about a week and a half ago and we talked about that for 400% of the poverty line that it’s like a tripwire. That you end up owing all the premium assistance back. Look at this: in 2020, if we hit the trip wire, they don’t have to pay it back. Can you imagine that? That’s a huge deal. I know we’ve dealt with it from a planning standpoint, from the perspective of should we take §179 or bonus for those self- employed people to try to get their income under four times the poverty line? You know what, maybe you don’t have to do that. So you don’t hit that trip wire. If you hit the trip wire, guess what? The American Rescue Plan says they don’t owe it back. So that may do some planning, because I’m concerned that tax rates in the future are going to go up. So if we take all the §179 and bonus right now, and in the world of the premium tax credit, were we concerned about the fact that we have to go ahead and take all these accelerate depreciation methods in order to get the taxpayer’s income down so they don’t hit the tripwires, we’re calling it. Hey, no, no worry in 2020. A 2021 change again, under these these provisions of the American Rescue Plan, unemployment makes someone an applicable taxpayer. And the best definition that I could find within the Act says basically, you don’t have to include it as part of household income in certain circumstances. It depends on what the overall family income is, as a percentage of the poverty line. Look at the code section if you’ve got someone in that circumstance where would unemployment cause them to hit the trip wire. Well in 2020, it doesn’t matter. But what happens in 2021? You want to take a look at that provision.
Student Loans- This is §9675 of the American Rescue Plan. I haven’t seen anything which said there’s been an additional deferral of student loan interest beyond what we’ve got in the Consolidated Appropriations Act. But for those amounts of student loans that are forgiven, there is no discharge of indebtedness income to be included for taxpayers who have student loans forgiven in 2021 through 2025. Again, §9675 of the American Rescue Plan.
A couple of miscellaneous things… I know I’m going really, really long. I try to keep these blogs relatively quick. But you know what I didn’t make the law. I’m just sharing it with you. In a miscellaneous provision – §9672 of the American Rescue Plan – EIDL grants. They are non taxable, but much like PPP loans, the expenses paid with the tax free EIDL money are still deductible. One other provision – excess business losses (EBLs). They were gone CARES Act got rid of those for tax years 18 through 20. But they’re now back in 21. Not only are they back, but these excess business losses are being continued for another year, they were scheduled to expire with TCJA. Remember that, the Tax Cuts and Jobs Act way back in 2018? Well, excess business losses have returned, you have to watch that in your planning for 2021. And they’ve been continued for another year, which means 2027. This is §9041 of the American Rescue Plan.
I don’t know about you, but I’m out of wind. And I know there’s going to be a lot more coming to you. At the same time, I warn you that Monday is March the 15th. Beware the Ides of March. We have no extension in the filing of corporate or partnership returns. At the very least, ladies and gentlemen, get those extensions filed on Monday so you don’t have those failure to file penalties (you know, which are pretty severe, depending on the number of partners and the number of shareholders in that entity). So if you can’t get the returns completed by Monday the 15th, the Ides of March are upon us, get those extension filed. And in those states, for example I’m coming from Illinois, Illinois has that 1.5% replacement tax. I just did this last Saturday with a client… I said you just brought us our stuff. There’s no way we’re going to be able to get your corporate return filed timely. We’ll get an extension filed but let’s go ahead and send some money into the state. And hopefully, it’ll be more than we need. Or at least it could minimize your penalties.
Ladies and gentlemen, I know it’s a tough, tough tax season. We’re at the halfway point, we get a new law thrown on us at the at the 12th hour, not the 12th hour, I guess a mid midpoint. I don’t know yet what’s going to happen with the possibility of extending the filing season. I think you should proceed with the expectation that one of two things, expect April 15 or if you just don’t feel like you can do a good service for your client, file extensions. I know people want to get their money and they’re driving us all crazy. But take a deep breath, take a walk around the block. Don’t forget to keep yourself in good shape. This too shall pass. So for all of us here at the University of Illinois Tax School, this is Tom O’Saben saying I’ll say goodbye for just a while and I’m wondering how long that while may be. It may be shorter than we expect. Hang in there, my friends.
Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact email@example.com if you have more up-to-date, supported information and we will create an addendum.
University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.