This third significant stimulus package impacts both individuals and businesses. And it’s complicated. Here’s what you need to know.
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Dear clients and friends:
Spring appears around the corner and with it, Congress passed a third significant stimulus package—the American Rescue Plan (ARP). There are several facets that will impact both individuals and businesses. Much more guidance is needed, but we broke down the key tax sections and highlighted provisions that affect our clients. The first section deals with individual changes and the latter part businesses. As we learn more we will certainly share.
Stimulus payments
The largest immediate impact of this bill is another round of stimulus payments – $1,400 per taxpayer and all dependents, regardless of age. If you recall, children age 17 and older were left out of the calculation for the earlier payments, but not this time.
The phase-out range also changed. The ranges start at $75,000 for Single filers, $150,000 for Married filers and completely phase out at $80,000 for Single filers and $160,000 for Married filers. A married couple filing jointly with adjusted gross income of $160,000 or more will receive no stimulus payments.
The IRS will base your stimulus payment on your most recently filed tax return. Clients that have sent in their tax data and have higher income in 2020 than 2019, please know that we will hold your return until stimulus funds arrive. If your income dropped in 2020 compared to 2019 and you are now under the threshold, we are working to file your return as quickly as possible.
NOTE: The ARP has a clause stating that stimulus payments will be paid out in two phases. In Phase I, the IRS will take the data on file and pay stimulus payments based on those amounts. If you have not filed a 2019 or 2020 tax return, you will not receive a stimulus payment. For anyone who earned less in 2020 than 2019 and has not filed a return, there will be a second date in which the IRS pays out the stimulus funds based on that 2020 filing. That date is the earlier of 90 days after the tax deadline day OR September 1.
Unemployment Benefits
This bill allows makes the first $10,200 in unemployment compensation (UC) benefits non-taxable, but only for filers who made less than $150,000 in 2020. Many of our clients were aware this might happen, and we have held returns until guidance arrived. We will continue to hold these returns until the IRS updates their system and forms to properly report this change.
Further, if you remain unemployed, your benefits were set to expire on March 14th. Benefits have been extended through September 6, 2021. The $300 extra federal assistance will also continue through September 6.
Expanded Child Tax Credit
The current Child Tax Credit claimed on your form 1040 is $2,000 for children under age of 17 and $500 for age 17 and older. The ARP expands that credit to $3,600 per child under the age of 6 and $3,000 for children ages 6-17. Dependents 18 years and older remain at $500. This change is for tax year 2021 only and not permanent.
Added bonus –the IRS will pay half of the child tax credit on a monthly basis from July 2021-December 2021. For example, if you qualify, you will receive $300/month per child under age 7 and/or $250/month per child aged 7 through 17 from July – December.
This additional credit comes with the same phaseout for stimulus payments – if you make more than $75,000 single or $150,000 married joint, you will not receive the expanded credit. Please note, if you end up receiving the advance and your income exceeds the phaseout limitation, the IRS will require this to be repaid when you file your 2021 taxes. The IRS will create a portal to allow taxpayers to OPT OUT of receiving advanced payments.
Expanded Earned Income Credit
If you are a low-income taxpayer and have earned income (W2 wages, self-employment income) you can qualify for the earned income credit (EIC). The ARP nearly triples this credit from $543 to a maximum of $1,502 annually. Also, the credit was only available for taxpayers aged 25-65, now all full-time students who are at least 19 years of age can qualify if they meet the income requirements.
No Minimum Wage Increase or Loan Forgiveness
What didn’t the bill include? Raising the minimum wage to $15/hour and student loan forgiveness.
For business owners there are few extensions to existing programs.
Extension of Family and Sick Leave Credits
The ARP extends the credits through September 30, 2021, allowing employers to pay employees affected by COVID-19 to be compensated dollar for dollar with tax credits. Note: This includes self-employed individuals. The requirements are the affected person cannot work due to contracting COVID-19, having symptoms, or being compelled to quarantine because of COVID-19.
Extension of the Employee Retention Credit
This is a big one. The extension continues through 12/31/2021. We have not had the opportunity to calculate anyone’s ERC for2021 as we are still working on the changes to this program that were enacted at the end of 2020, but we will share new guidance as we learn it.
PPP application two-month extension
Earlier law required eligible businesses to apply by March 31, but the ARP extended the deadline till May 31, 2021. If you qualify for Round 2, we recommend getting in touch with your bank and applying sooner than later. In the ARP, Congress injected more money into the program. As for the forgiveness application, many banks are waiting for new forms to be released before allowing applications. If you are looking to apply, get in touch with your bank and talk to us before submitting the forgiveness application. We want to make sure your loan is forgiven.
Restaurant Revitalization Fund
SBA will have new grants for the food and beverage industry (and rightfully so) that will compensate for most operating expenses paid up to $10 million. Amounts available will depend on lost revenue in 2020 compared to the same time period in 2019. As more details become clear we will share.
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Again, we appreciate the opportunity to work with you. This tax season certainly appears to be more challenging than the last, but our goal is to continue servicing you all. If you have questions, please let us know.
The team at Werner & Co. CPAs
To our clients and friends: