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Unemployment Compensation - New Exclusion

March 12th the IRS released more details on how to report the new exclusion of up to $10,200 (per spouse) of Unemployment Compensation. The American Rescue Plan contains a new provision to exempt $10,200 of unemployment benefits received in 2020 from income taxes. The exclusion is retroactive, applying to unemployment insurance benefits received last year, largely to reduce the issue of surprise tax bills. It only applies to individuals with incomes below $150,000. The Joint Committee on Taxation (JCT) estimates the exemption will reduce federal revenue by $24.9 billion. 

In addition, we are actively working with state tax agencies to determine how states plan to address the federal tax law changes brought about by the American Rescue Plan Act of 2021. For state conformity updates, please check back and we will update as we receive information from the states. 

Unemployment Benefits

The American Rescue Plan also extends the three federal unemployment insurance expansions first created by the CARES Act through September 6, 2021. The American Rescue Plan increases the total number of weeks of benefits available to individuals who cannot return to work safely from 50 to 79, matching the expiration of the broader UI benefits.

The law maintains the federal supplement at its current level of $300 a week for weeks beginning after March 14 and before September 6, 2021. The American Rescue Plan provides 53 weeks of federal UI benefits after the state benefits end, up from 24 weeks. 

Premium Tax Credit - ARP Act

The American Rescue Plan Act of 2021 makes a portion of unemployment compensation non-taxable for certain filers and eliminates repayment of excess funds received through the Advance Premium Tax Credit.

We ask for your patience while we work closely with the IRS and state taxing authorities to implement any necessary changes.

We expect the IRS to issue official guidance on these items in the near future.

If you have already filed with these items, we advise that you hold off on filing amended returns until the IRS provides official guidance.

Please stay tuned for information about the Advance Premium Tax Credit (APTC) — the IRS's first priority was the Unemployment Exclusion change and we expect more information on the APTC in the near future.

The IRS has advised that you should not yet amend returns that had Unemployment Compensation or Repayment of the Advance Premium Tax Credit. Official IRS guidance is forthcoming.

Source:  https://www.irs.gov/faqs/irs-procedures/forms-publications/new-exclusion-of-up-to-10200-of-unemployment-compensation

Expanded Child Tax Credit

Finally, the American Rescue Plan greatly expands the Child Tax Credit by allowing households with children to claim up to $3,600 for younger children or $3,000 for children age 6 or older regardless of earned income. While the CTC currently phases in with income and only $1,400 can be refunded to low-income households, the American Rescue Plan allows the full credit for low-income households, which raises marginal tax rates on these filers as they are no longer provided the credit as income rises. As such, it introduces a new disincentive to work for low-income earners, though the magnitude of the disincentive is disputed.

The expanded CTC would also be paid out monthly, which will be a major administrative challenge for the IRS. The agency must obtain projected incomes, filing statuses, and number of qualifying dependents for each eligible household to accurately advance the payments. While the Biden administration hopes to have this process ready by July, that may be an unrealistic timeline; it took the IRS two years to establish advance payments of the Affordable Care Act’s premium tax credits.

As the public health situation and the economy hopefully improve this spring and summer, policymakers will have an opportunity to evaluate the effectiveness and the costs of the expanded benefits in the American Rescue Plan and determine whether they should be allowed to expire or otherwise be reformed.

$1,400 Stimulus Payments (Economic Impact Payments)

The American Rescue Plan provides a third round of stimulus payments up to $1,400 for adults and any dependent. Households with earnings of more than $80,000 for single filers, $120,000 for Head of Household filers, and $160,000 for married filing jointly will not receive any payment. The payments begin to phase out at $75,000 for single filers, $112,500 for Head of Household filers, and $150,000 for joint filers—meaning about 89 percent of filers will receive a payment.

The payment design creates steep phaseout rates for higher earners, which means they face high marginal tax rates and disincentives to work and could encourage filers to increase traditional retirement contributions in 2021 to reduce their AGI and receive an additional payment.

Did your business receive a SBA PPP loan or SBA EDIL Advance or State Grant?  If so, and in California:

AB80, the bill that would allow up to $150,000 of expenses to be deducted if paid with PPP forgiven loan amounts has not yet passed. There has been no activity, and we can't get good information on when and if it will pass, and what will actually be included in the final bill. Here are a few important things to know: 

• Because there is speculation that the $150,000 amount could change, we suggest you extend any returns where the taxpayer received a PPP loan or had EIDL or other federal grant payments until we know the details;
• Consider filing extension for all returns that have been filed and if there is a change you can file a superseded return, rather than an amended return.

Employee Retention Credit now available for employers who also took a SBA PPP Loan in 2020:

The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer's employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19.

Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:

1. the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
2. a significant decline in gross receipts. 

A significant decline in gross receipts begins:

• on the first day of the first calendar quarter of 2020
• for which an employer’s gross receipts are less than 50% of its gross receipts
• for the same calendar quarter in 2019.

The significant decline in gross receipts ends:

• on the first day of the first calendar quarter following the calendar quarter
• in which gross receipts are more than of 80% of its gross receipts
• for the same calendar quarter in 2019.

The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.

Contact us to assist if your payroll company can not amend your 941 returns for qualifying periods in 2020.  You have 3 years to amend and receive this credit.