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American Rescue Plan: What Tax Pros Should Know

American Rescue Plan: What Tax Pros Should Know

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

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PDF of slides used in the presentationPDF

American Rescue Plan

Tax School Facebook Group

Hello again, everybody. Tom O’Saben from the University of Illinois Tax School coming to you from Maryville, Illinois, on a recorded webinar for you. And we’re going to talk about, believe it or not, another Accountants’ Full Employment Act, this being the American Rescue Plan. I’d like to introduce myself, my name is Tom O’Saben. I’m an Enrolled Agent and the Assistant Director of Professional Education and Outreach for the Tax School. I’m a Fall Tax School instructor, and author and reviewer of the University of Illinois Federal Tax Workbook, I do these weekly blogs. And I’m also heavily involved with webinars. In addition, I’m a tax practitioner with over 30 years of experience. And I have to tell you, in that 30 plus years, I have nothing that I can recall, that would go to the level of the changes we’ve had in the tax world in the last year. So ladies and gentlemen, I certainly certainly feel your pain. So with that, what we’re going to do is we’re going to talk about the American Rescue Plan that was signed by President Biden on March the 11th. And we’re going to talk about the tax provisions. This is a huge bill, there is a lot of funding for different types of agencies, money to the states, etc. But for our purposes, I’m going to concentrate on what we deal with as tax professionals. For those of you who love code, etc. this is House Resolution 1319. I’ve given you a link to the PDF. Again, it was signed by President Biden on March 11, which is the day I recorded this blog. I will tell you, if you want to go and look at the bill with a PDF, I want to give you kind of a quick way to search for items, although I’m going to give you a lot of code sections. Once you open up the PDF, if you do a Ctrl F, that’s control find, and you can put in information, it will help you get through the many, many pages of this legislation. With that, let’s talk about what items that we as tax preparers need to concern ourselves with. There’s going to be issues about recovery rebates (which you’ve already heard about), changes to unemployment benefits, there’s Cobra continuation coverage, there’s changes coming to the child tax credit, also changes to earned income credit, changes to the child and dependent care credit after many, many years. Also, there are changes to family and sick leave credits. There’s changes to the employee retention, credit, premium tax credits for those individuals who buy their health insurance on the marketplace, student loan issues. And then there’s some miscellaneous provisions in the tax world that we’ll also talk about in the time that we have together. I want to tell you that many times it takes the IRS time to interpret how the laws are going to be applied. So be aware of that as we’re going through this. This is brand new stuff, the ink is barely dry. So let’s talk about our first point and that being recovery rebates. I have put the the code section, it is §6428B of the Act. This is going to be a $1400 credit ($2800 for a married couple filing jointly) and there’s also going to be $1400 for each dependent. Now look at this change that we’ve got here: includes college students. Up until now the $1200 recovery rebates and the $600 recovery rebates, those were all tied to “dependents,” who would have been those children claimed on a return under the age of 17. Now we have an inclusion of college students and qualifying relatives who in fact, are claimed as dependents. It’s right down here at the bottom also, that if you ask what’s the base year going to be, it’s going to be 2019 unless the 2020 return has already been filed. Now, how is this going to work? Well, for married couples filing jointly – I have it here for you on this slide – incomes below $150,000 = no issue. You’re going to get the full credit or the client’s going to get the full credit. If the income goes above $150,000, what you need to be aware of is the phase out for this recovery rebate is going to be much much quicker than the previous two. It took from about $150,000 to about $200,000 under the previous rebates before they were gone. Look at this now under married filing jointly. It’s gone by $160,000…only $10,000.For head of household, $112,500 is kind of the threshold and then it’s gone by the time we get to $120,000. For other filing statuses, the phase out begins at $75,000. By $80,000, it’s gone. You know, I’ll tell you we get a lot of questions in our Facebook group that talk about if you’ve got a married couple and they typically file jointly, could they file separately? And is that somehow unethical if it would lead to the client receiving stimulus. I’ll tell you, ladies and gentlemen, married taxpayers have an option of how they’re going to file. They don’t always have to file jointly, they could go ahead and file separately. But you need to look at the impact of doing that. Is it going to cause the individual clients to owe more tax than they would as a married couple filing jointly even though we’re getting the stimulus. Consider all the facts and circumstances, but there is nothing illegal, immoral or unethical of a married couple, filing a separate return. It may be worthwhile for you to look at. That’s what they’re paying us for, ladies and gentlemen, for us to give them advice as to which is the best way to go. The second issue I want to talk about are unemployment benefits. We’ve been waiting for this. I have returns that we were waiting to hear what’s going to happen with the American Rescue Plan. And you might be as well. So unemployment benefits… this is §9663(g) of the American Rescue Plan… unemployment benefits, the first $10,200 of benefits for 2020 are in fact, tax free. Now, I will tell you that I looked at the law, and it says the adjusted gross income must be below $150,000. And the Act does not define a taxpayer. So I will tell you right now, it looks like the $150,000 threshold applies to every taxpayer, whether they’re married filing jointly, single, married filing separately, head of household, whatever it might be. Expect that the IRS might give us some clarification on this point. But I will tell you according to §9663(g), it says taxpayers adjusted gross income shall not exceed $150,000. I’m also not aware, if you make $150,001…are you out? It looks like there isn’t a phase out of $10,200? In other words, if you make $160,000, does that mean that half of its excludable? No, it looks like we have to have AGI below $150,000. So $10,200 not taxable. You have somebody who received $15,000 in benefits, you have $4800 that’s still taxable. And I’ll tell you, I don’t know this as a fact, I’m coming to you from the State of Illinois, I have to believe that the states are not going to join into this tax free treatment. I could be wrong. But nonetheless, I would expect that the states are not going to chime in. So be aware of it. Now, you’re already going to have clients calling you, asking how are they going to get their rebate checks? Are we going to go ahead and file those returns now? I had a call just before I decided to go ahead and record this webinar. Hang on folks. We got to give our software companies time to catch up. The nice thing is I think the software vendors have been aware that this was going to be a real possibility coming along. So be aware that it is now been codified and is part of the law. There’s also been Cobra continuation. You know when people lose their job and they can continue their health insurance under Cobra guaranteed. This is §9501(A) of the American Rescue Plan. They can have premium assistance between now and September 30 of 2021. This reinstates §6432 that was actually repealed some years ago… it brings it back. The credit is allowed to be also taken against Medicare tax. It is a refundable credit. Taxpayers may also be eligible to receive this Cobra continuation credit as an advanced payment. We’re going to see advanced payments a couple of times in this law, but realize that these recipients of these Cobra continuation credits are also not eligible for the health care plan tax credit. No double dipping on this circumstance. Let’s talk about the child tax credit. This is §9611 of the American Rescue Plan. It is worth noting the changes I’m going to be describing begin in 2021. These are not changes for those returns that are sitting on your desk or in a file cabinet waiting for you to get to. Changes begin in 2021. What happens is, we go from $2,000 to $3,000 per child and get this… $3600 if a child is under age six. Seventeen year olds are now included. Remember how they had to be under age 17 in order to get the $2,000 credit? Well the $3,000 credit now includes 17 year olds. Here’s what happens with phase outs: for married couples filing jointly, the phase out begins at $150,000 and it’s gone by the time you get to $210,000. It’s a $60,000 range is what it is. $112,500 for head of household – same range so by $172,500 it’s gone. $75,000 for others, gone by $135,000. Now you think, well, my software is going to calculate this. Well, you know what? This is where it’s an Accountants’ Full Employment Act – we’re going to have to see what’s going on here. Congress is dictating to the IRS that they start offering advanced payments beginning in July. Remember years ago, for those who’ve been around for a while, like me, remember, advanced earned income credit? Taxpayers would fill out that Form W5, and they would get part of their earned income credit in their weekly or monthly paychecks. And then the employer would then recover that advance they had made via payroll tax credit. In this case, Congress is telling IRS, hey, go out there and start sending money out to people and also establish a portal for taxpayers to go to and say, Hey, I don’t want this, or to say, maybe something to the effect of I had a child during this last year, and I should be getting some more. So what’s going to happen then, is the child tax credit becomes more complicated. Look what happens: if we have advance being done, and again, if taxpayers do nothing, they’re gonna start getting an advance. But hopefully this portal will be up and running. It’s more work for the IRS to do and they’re not even done with 2019 returns yet. They’re going to have to be reconciled on the 2021 return. If they got too much, that additional credit is going to result in an increase in taxable income. I found that kind of interesting when I read it, because you would think, well, this is a credit which, dollar for dollar, reduces tax. But if we get too much, we don’t have a recovery of tax, we have that excess credit being included in income. That’s still kind of a break isn’t it, ladies and gentlemen? Well, let’s think about this. Because here’s where they’ve really muddied it. We say if the taxpayer’s adjusted gross income is not greater than 200% of that phase out range (remember the $60,000 I described earlier?), the excess is going to be reduced by a safe harbor of $2,000 per child. So it’s kind of like they’re going to let people have the old credit unless their income is too high. So that’s what I’m saying here. So if they’re in a phase out range, they’ll still get to keep some of the credit. If they’re above the phase out range, they got too much, it’s all going to be added back to income. More fun for the software vendors and even more fun for us as tax professionals next year. But again, the biggest point I want to make to you out of this is this change in the child tax credit is not for those 2020 returns. It is for 2021. So the biggest impact you’re going to have right now is planning with your clients.

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.

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