Congressional reaction to the COVID Pandemic has led to unprecedented spending to keep the economy afloat. And much of that spending has created tax implications that are affecting all of us. And like Clint Eastwood's classic 1966 spaghetti western, there's some good, some bad and some ugly.
And since it's all new, it is therefore confusing. So let's see what they did to . . . uh . . . for us.
(Note - this writing is as of July 2021 and is subject to (probable) change as Congress has already proven in its infinite (lack of) wisdom.
In mid-March, Congress passed a COVID relief law making a number of tax law changes for 2021 (many outlined below), but unfortunately a couple of changes were applied retroactively to 2020. Realize that this was AFTER we had already filed hundreds of our clients' tax returns.
The two major changes were:
1. The first $10,200 of unemployment benefits per person were tax-free (subject to income limitations).
2. If you received an Obamacare health care subsidy that would have been repaid, you got a free pass on the repayment.
Both of these changes are for 2020 ONLY and at this point are not extended to 2021.
This mid-season retroactive change created two huge problems:
1. The IRS computers weren't ready to change their processing software to reflect the new law.
2. What about those hundreds of returns we'd already filed under the old law?
RE: #1 - For taxpayers filing AFTER the tax law change, the IRS is MANUALLY processing those returns. Even if we filed electronically (which normally results in a refund within 2-3 weeks), the IRS is manually processing these and that can take up to 16 weeks in non-COVID times. You can check the status of your return processing at https://www.irs.gov/refunds. Thanks Congress!
RE #2: - The IRS has asked taxpayers and preparers NOT to file amendments to claim the benefits of these changes and assured us that the IRS would "figure it out" internally, automatically make those adjustments, correct all accounts and send checks when warranted. And we have seen some of that. But with all of those promises, the IRS computers are still sending out bills for those taxpayers that had balances due on the original filings using prior law. Several of my clients' patience are exhausted and we've filed some amendments to stop the incorrect billings.
Child Tax Credit
For the last several years, the child tax credit for dependents under age 17 was $2,000. The 2021 ARA tax law change raised that to $3,000 for children 6-16 and $3,600 for children 0-5. Age on 12-31-2021 is the relevant date.
This increase is ONLY for 2021 and will revert back to $2,000 in 2022 (barring any further law changes).
On its face, that's a good thing, but the implementation is proving to be a nightmare and will only get worse.
Child Credit Prepayments - Congress has decided to prepay half of this credit monthly, starting this month (July 2021). So you would get $250 (or $300) per month per eligible child for the second half of 2021. You are automatically enrolled for these prepayments unless you opt out (see below). If the IRS thinks you're qualified for this, you'll be getting half of the credit during 2021, and then the balance with your tax filing next spring. So unlike the stimulus checks, this WILL reduce your refund next spring. If you opt out of the prepayments, but are still entitled, you will get the full credit on your 2021 return. Opting out will not cost you anything.
Income Limits on Child Credit - Simply having dependents under age 17 will not qualify you for the child credit. If your income is too high ($75,000 for singles, $112,500 for heads of households, $150,000 for married filing jointly) you will start to lose the credit. And if you received monthly prepayments, and later find that you're not fully eligible, you will have to repay those prepayments. So again, unlike the stimulus checks, you MAY have to repay child credit prepayments.
Prepayments- Tracking what you've been prepaid is necessary for preparing your 2021 return next spring. If you didn't get enough, we can get the rest, or if you got too much, you'll have to repay it. This is one of the nightmares they've created. If you got anywhere from $0-$1,800 per child during the second half of 2021, I'll need to know that EXACT amount. I can virtually assure you that, if we claim the WRONG amount, it will delay the processing of your tax return indefinitely and possibly prompt an unwelcome letter from the IRS. And we don't want an IRS NastyGram. Supposedly the IRS will send a 1099 type form indicating what they've prepaid you in late January.
Automatic Enrollment - As indicated above, the IRS has automatically enrolled you for this whether you want it or not. What's wrong with that? Let me count the ways:
1. Address changes for mailed checks getting returned.
2. Bank account changes with rejected direct deposits.
3. Unmarried parents who alternate claiming kids each year.
4. Income changes from 2020 to 2021 which can (dis)qualify entitlement..
5. Change in marital status.
These all can, and will, cause massive problems. As will the birth of a child during 2021, since the IRS doesn't know of the blessed event (see below).
Opting Out and Updating Information with the IRS - The IRS has set up a section on their website to:
1. Opt out of prepayments.
2. Update banking information.
Other features they plan to add by late summer 2021 include:
3. Address Changes.
4. Change to dependents.
5. Change of marital status.
6. Change to expected income.
This can be found at:
Congress also expanded the child care credit for 2021 only. Both the credit percentage and the limit on the amounts paid for eligible dependent care are higher than in 2020.
But what Congress giveth, Congress taketh away. While the credit amounts are potentially higher, they are also phased out as you make more money (which has never been done before).
There's nothing here to plan for, just a potentially larger benefit.
2021 Stimulus Checks
The third round of stimulus checks went out beginning in April 2021 and have continued throughout the rest of the spring. Like the stimulus checks from last year, these are tax free and will NOT have to repaid (even if your 2021 income would otherwise disqualify you).
However, if you did NOT get the full stimulus check in 2021, it is possible to get it with your 2021 filing next spring. For example, a student who was a dependent in 2020, but is on their own in 2021, will qualify for the stimulus, but not until the 2021 return is filed.
For the last 20 years or so, unemployment benefits have been taxed by the IRS. Personally, I never quite understood that, but I'm not in charge (dammit).
During the massive unemployment mandated by the government shutdown in 2020, millions of people were collecting unemployment. When we started the tax season this past spring, it was still taxable. Congress changed that (partially) in mid-March allowing up to $10,200 or unemployment benefits per recipient to be tax-free.
Despite the continued extension of unemployment subsidies into 2021, the tax-free treatment has NOT been extended to 2021 benefits.
Unemployment benefits ARE taxable in 2021.