Decoding Tax Implications: ARPA Unveiled for Tax Filing

Decoding Tax Implications: ARPA Unveiled for Tax Filing

In a significant legislative move, President Biden signed the American Rescue Plan Act (ARPA) into law on March 11, 2021. This comprehensive article aims to dissect the key tax-related provisions embedded within ARPA, providing readers with a nuanced understanding of how these changes impact tax filing processes. Let's delve into the crucial sections that unfold tax implications emanating from ARPA.

Key Tax Provisions from ARPA

1. Unemployment Compensation

For the tax year 2020, a noteworthy provision unfolds: up to $10,200 of unemployment compensation is rendered non-taxable for taxpayers with an adjusted gross income (AGI) below $150,000. This provision introduces a significant departure from the conventional phase-out approach. The IRS has committed to providing guidance on rectifying previously filed returns where unemployment compensation was inaccurately included in income.

2. Individual Recovery Rebate

ARPA instigates a $1,400 rebate for taxpayers and their dependents. The term "dependents" in this context refers to those defined under section 152 (c), encompassing qualifying children and qualifying relatives. This marks the third implementation of an individual recovery rebate through COVID-19-related legislation. The distinct phase-outs for these three rebate credits introduce scenarios where married filing separately could potentially secure a larger overall rebate for a married couple.

3. Child Tax Credit (CTC) Expansion

The Child Tax Credit (CTC) undergoes expansion for the tax year 2021. The qualifying age sees an extension by one year to include 17-year-olds. Beyond the existing $2,000 CTC, which phases out for taxpayers with AGI over $400,000 (MFJ) and $200,000 (others), additional provisions include:

  • An extra $1,000 credit ($1,600 for children under age 6), subject to phase-outs at AGI thresholds of $150,000 (MFJ), $112,500 (HOH), and $75,000 (others).
  • Commencing in July, the IRS initiates an advance rebate of the CTC, distributed monthly and equating to one-twelfth of the expected credit. Eligibility relies on the 2019 return or the 2020 return if already filed. A safe harbor is established for low-income taxpayers regarding repayment.

The IRS is developing an online tool enabling taxpayers to update filing status, modify the number of qualifying children, alter income figures, and opt-out of advance payments.

4. Child and Dependent Care Tax Credit Enhancement

ARPA enhances and broadens the Child and Dependent Care Tax Credit. Notably, taxpayers can utilize 2019 income instead of 2021, and the maximum percentage is elevated to 50% for those with an AGI of $125,000 or below. A phased-out 20% rate commences at an AGI of $400,000.

5. Premium Tax Credit

The Premium Tax Credit sees an increase in tables, enabling a larger credit. Noteworthy changes include the absence of any repayment obligation for excess advance payments in 2020. For 2021, the credit is augmented for recipients of unemployment benefits.

6. Student Loan Discharge

Between 2021 and 2025, specific student loan discharges are excluded from gross income.

7. COBRA Continuation Coverage

Eligible individuals (employees, former employees, spouses, or dependents) may receive a 100% subsidy for COBRA premiums from April 1, 2021, through September 30, 2021. Employers are entitled to a refundable credit for premiums not paid by individuals.

8. Employer-Provided Dependent Care

For 2021, the exclusion is doubled from $5,000 to $10,500 and from $2,500 to $5,250 for Married Filing Separately (MFS).

9. 1099-K Reporting

Effective for the 2022 tax year, the reporting threshold is lowered from $20,000 and 200 transactions to $600.

10. EIDL Advances

A new funding injection of $15 billion is allocated. The received amounts are exempt from gross income, and the expended amounts from the grant qualify as deductions.

11. Restaurant Revitalization Grants

The Small Business Administration (SBA) offers tax-exempt grants for eligible businesses, spanning restaurants, food trucks, caterers, and more.

12. Deduction of Compensation for Publicly Held Corporations

Publicly held corporations are capped at deducting $1 million annually for compensation paid to covered employees. Starting from tax years after 2026, the count of covered employees expands from three to five.

13. Extension of Limitation on Excess Business Losses

The Section 461(l) limit ($500,000 MFJ and $250,000 others) is extended through 2026.

14. Election to Allocate Interest on a Worldwide Basis

Section 864(f) is repealed for tax years starting after December 31, 2020.

15. Paid Sick and Family Leave Credit

With modifications, this credit is extended through September 30, 2021.

16. Paycheck Protection Program (PPP)

Additional funding is allocated for PPP, and more nonprofits become eligible.

17. Employee Retention Credit

Extended through December 31, 2021, with adjustments. Recovery Startup businesses qualify even without a significant decline in gross receipts or a government-ordered shutdown.

Navigating the New Normal: Implications for Tax Filing

As the tax season unfolds, it becomes paramount for individuals and tax professionals alike to comprehend the nuances introduced by ARPA. Whether filing taxes for clients or personal returns, a comprehensive grasp of these tax provisions becomes pivotal in ensuring accurate and optimized tax outcomes, especially amid the busy season. Stay informed, adapt proactively, and leverage reliable resources to navigate the ever-evolving landscape of tax legislation.

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