It's been a whirlwind of a year with a new tax law passing every few months and 2021 is shaking out to be no different. Luckily, every law that has passed has been so helpful for small business owners and we're so excited to share with you the changes in this law.
We have a new round of economic impact payments being sent beginning March 17, 2021. They're functioning the same as last year’s two rounds of stimulus payments, except with bigger payments. Each individual and dependent on a tax return is receiving $1,400. Unlike the first round of stimulus, all dependents are eligible for this payment, regardless of age.
For single taxpayers, the payment will begin to phase out when your adjusted gross income (AGI) is $75,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000. And for heads of household (single parents), the phaseout begins at an AGI of $112,500.
The IRS will use 2019 AGI to make payments, unless you have already filed a 2020 return. If your income in 2020 was higher than the limits above, you'll be best served by waiting to file your tax return. There is no payback if you receive the credit based on your 2019 income and your 2020 income was above the threshold.
The first $10,200 of unemployment is not taxable if your income was less than $150,000 in 2020. Will the states follow? It's a complete mystery. At this point the IRS is asking those who have already filed their returns to NOT file an amendment just yet.
If you are currently receiving unemployment, the extra $300/week benefit has been extended to September 6, 2021.
For the past few years the child tax credit has been $2,000. For the 2021 tax year, that is being increased to $3,000 for children 6 and over and $3,600 for children under 6.
Of course there are phase outs based on income. Phase outs begin as follows:
Head of Household: $112,500
Married Filing Jointly: $150,000
Here's the odd thing. The IRS has been asked to pay out this credit during 2021 beginning in July. Approximately half of the credit will be paid out monthly between July and December 2021. The remaining half will be paid when you file your 2021 tax return next year. To put that into perspective, each family with a child 6 and older would receive $250 per month per child. Under 6 years old would receive $300 per month.
The IRS will set up an online portal to allow taxpayers to opt out of the monthly payments. It does appear you would have to pay this credit back if the IRS paid you based on your 2020 income and you end up not qualifying because your 2021 income was too high. Be aware of this and let the IRS know through the online portal this summer.
If your income is above the phase out thresholds listed above, your child tax credit is reduced to the normal $2,000.
This credit is for low income tax payers. The rules have been modified to allow those without children to qualify more easily. For 2021 only, the minimum age has been reduced to 19 and there is no longer a maximum age. The income phase out amounts have also increased. Taxpayers are also allowed to use their 2019 income to qualify if their 2020 or 2021 income doesn't allow them to.
This credit is for health insurance. If you received your health insurance through healthcare.gov, you're likely utilizing this credit. Of all the changes made in this bill, I believe this one to have the biggest impact. While for now it's only covering the next two tax years, I can see this provision being extended, which would allow our country to have a long term solution to the cost of health insurance for those who are self-employed. Here's how it works:
Health insurance premiums purchased through healthcare.gov will be limited to 8.5% of the taxpayers income. That may sound like a lot to you, but the average cost of health insurance for a family is $20,000-$25,000 a year. In this scenario, a family earning $100,000/year would only have to pay $8,500 of those premiums, a significant savings. Previously there was a cliff and if taxpayers income rose above that amount, they would have to pay back all of the tax credit. That is not the case for 2020. If your premiums were overpaid in 2020, you will not have to pay them back. Phew!
If you do not currently have health care coverage and would like to, you have until April 1, 2021 to sign up on healthcare.gov.
The Families First Coronavirus Relief Act was passed in mid-2020 and allowed employers to give paid sick leave in 3 situations.
In December 2020, this credit was expanded to include self-employed individuals filing Schedule C.
Under the American Rescue Plan, this credit has been extended to September 30, 2021. It's also expanded the amount of paid days you can take caring for children from 50 days to 60 days.
This tax credit was set to expire on 3/31/2021, but has been extended through the end of 2021. If you had a 20% decrease in sales when compared to 2019, you may qualify for this tax credit. This tax credit is taken on your payroll tax returns so please reach out to your payroll processor if you believe you qualify.
Student loans that are forgiven between January 1, 2021 and December 31, 2025 will not be included in taxable income.
EIDL grants are not taxable income at the Federal level and no expenses paid with the EIDL will be denied.
Big changes to the child and dependent care credit, effective for 2021 only. First, this credit will be refundable. The credit is calculated based on 50% of eligible expenses, up to a limit based on income. This means qualifying taxpayers can receive up to $4,000 for one qualifying child and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. If you're lucky enough to make over $400,000, the credit is reduced below 20%.
That's all for now folks, but I won't be surprised if there's another major bill in a few more months. It seems to be the trend these days.