• Unemployment Received in 2020 Partially Excluded from Income for Some Taxpayers

    • Under ARPA, in the case of any tax year beginning in 2020, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer does not include so much of the unemployment compensation received by the taxpayer (or, in the case of a joint return, received by each spouse) as does not exceed $10,200

    COBRA Benefits

    • Under ARPA, Assistance Eligible Individuals (AEIs) may receive an 85% subsidy for COBRA premiums paid during any period of COBRA coverage during the period beginning on April 1, 2021 (the first day of the first month beginning after enactment) and ending on September 30, 2021.

    Dependent Care Assistance

    • The amount of taxable wage exclusion for dependent care benefits is increased from $5,000 to $10,500 for married couples filing jointly. The amount of excludable wages for married couples filing separately is $5,250. This increase applies to any taxable year beginning after December 31, 2020, and before January 1, 2022, effective December 31, 2020

    2021 Individual Recovery Rebate/credit

    • Under ARPA, an eligible individual is allowed an income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus (2) $1,400 for each dependent of the taxpayer (as defined under  Code Sec. 152 for purposes of the dependency exemption).
    • The amount of the credit is ratably reduced (but not below zero) for taxpayers with adjusted gross income (AGI) of over:
      • $150,000 for a joint return
      • $112,500 for a head of household; and
      • $75,000 for all other taxpayers

    Child Tax Credit Expanded for 2021

    • Before ARPA, the child tax credit (CTC) was $2,000  per “qualifying child.” A qualifying child was defined as an under-age-17 child, whom the taxpayer could claim as a dependent (i.e., a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year), and who was a U.S. citizen or national, or a U.S. resident. The $2,000 CTC is phased out for taxpayers with modified adjusted gross income (AGI) of over: $400,000 for joint filers, and $200,000 for all other filers. Under ARPA, for tax year 2021 as amended by ARPA Sec. 9611(a)), the CTC is temporarily expanded as to eligibility, and amount, as follows:
      • The definition of a qualifying child is broadened to include a child who hasn’t turned 18 by the end of 2021
      • The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year). But, the increased credit amounts are phased out at modified AGI of over $75,000 for singles, $112,500 for heads-of-households, and $150,000 for joint filers and surviving spouses at a rate of $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold.
      • The CTC is fully refundable for 2021 for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S.  for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. That is, refundability will be determined without regard to either the earned income, or alternative, formula.
    • Temporary advance payments of the CTC: IRS must establish a program to make monthly (periodic) advance payments (generally by direct deposits) which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, in July 2021 through December 2021. Each advance payment is 1/12 of an “annual advance amount” for the calendar year. But, if IRS determines it’s not feasible to make monthly advance payments, IRS may make advance payments based on a longer interval and adjust the amount of the advance payment accordingly.
    • IRS must also create an online portal to allow taxpayers to:
      • update information-change the number of qualifying children, the taxpayer’s marital status, reflect a significant change in the taxpayer’s income, and any other factors IRS determines; or
      • elect out of the advance payments

    Child and Dependent Care Credit Enhanced and Made Refundable

    • An individual taxpayer who has one or more qualifying individuals (certain dependents) may qualify to receive a credit for expenses the taxpayer paid (“employment-related expenses”) for the care of the qualifying individual(s) so that the taxpayer can be gainfully employed. Before ARPA, the expenses taken into account in determining the credit couldn’t exceed $3,000 for one qualifying individual or $6,000 for more than one.
    • New law: ARPA makes several child and dependent care credit changes that apply for tax years that begin in 2021:
      • Refundable. The child and dependent care credit is refundable for taxpayers who have a principal place of abode in the U.S.  for more than one-half of the tax year. In the case of a joint return, either spouse must have a principal place of abode in the U.S. for more than one-half of the tax year.
      • Increase in limits.  For tax years beginning in 2021, the dollar limit on the amount taken into account is increased to $8,000 (from $3,000) if there is one qualifying individual with respect to the taxpayer, or $16,000 (from $6,000) if there are two or more qualifying individuals with respect to the taxpayer.
      • Application of phaseout to high income individuals. The applicable percentage is not reduced below the “phaseout percentage;” the phaseout percentage is 20% reduced (but not below zero) by 1 percentage for each $2,000 (or fraction thereof) by which the taxpayer’s AGI for the tax year exceeds $400,000.

    New Percentage Tables Will Increase Premium Tax Credit for 2021 and 2022; Taxpayers With Household Income Over 400% of FPL Made Eligible for Credit

    • A refundable premium tax credit (PTC) is available on a sliding-scale basis for individuals and families with household income between 100% and 400% of the federal poverty line (FPL) who are enrolled in an Exchange-purchased qualified health plan, and who aren’t eligible for other qualifying coverage or affordable employer-sponsored health insurance plans providing minimum value.

    Premium Tax Credit Increased for Taxpayers Receiving Unemployment Compensation in 2021

    • Applicable taxpayers enrolling in a qualified health plan through an Exchange may be able to claim the premium tax credit (PTC). A taxpayer is an “applicable taxpayer” for a tax year if:
      • the taxpayer’s household income for the tax year equals or exceeds 100%, but doesn’t exceed 400%, of an amount equal to the federal poverty line (FPL) for a family of its size;
      • the taxpayer can’t be claimed as a dependent by another taxpayer; and
      • the taxpayer files a joint return if married

    Student Loan Discharges

    • ARPA excludes from gross income certain discharges of student loans after December 31, 2020, and before January 1, 2026.   The “student loan discharge” exclusion applies to these types of loans:
      • Loans provided expressly for post-secondary educational expenses if the loan was made, insured, or guaranteed by a federal, state, or local governmental entity or an eligible educational institution.
      • Private education loans.
      • Any loan made by any educational institution qualifying as a 50% charity (for purposes of the income tax charitable deduction) if the loan is made under an agreement with any governmental entity (described in item (1)) or any private education lender that provided the loan to the educational organization, or under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt charitable organization.
      • Any loan made by an educational organization qualifying as a 50% charity or by an tax-exempt organization to refinance a loan to an individual to assist the individual in attending any educational organization but only if the refinancing loan is under a program of the refinancing organization which is designed as described in item above.
    • The discharge of a loan made by either an educational institution or a private education lender is not excluded under the above rules if the discharge is on account of services performed for either the organization or for the private education lender.

    Earned Income Tax Credit changes (click here for more detail about these changes)

    For tax years beginning after December 31, 2020, and before January 1, 2022, for taxpayers with no qualifying children:

    • The 7.65% credit percentage and phaseout percentage is increased to 15.3%.
    • The $4,220 earned income amount is increased to $9,820.
    • The $5,280 phaseout amount is increased to $11,610. These amounts are not adjusted for inflation.
    • Observation: ARPA does not mention any change to the $5,000 amount for married taxpayers. Presumably, then, the phaseout amount for married taxpayers is $16,610 (using the unadjusted $5,000 amount).

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