The Internal Revenue Service reviewed some of the key tax rules of the American Rescue Plan Act, with several provisions affecting the 2020 tax return.
A new 2020 exemption will tax unemployment benefits up to $ 10,200 from taxation, and another provision will benefit many people who have purchased subsidized health insurance through the federal or state health insurance markets.
The law also provides for a third round of economic impact payments that are now going to eligible Americans, generally equivalent to $ 1,400 per person for most people.
The best way to keep up with developments in tax law is to regularly review IRS.gov.
In the meantime, the IRS urges taxpayers who have already filed their 2020 tax returns to avoid filing amended tax returns, claim refunds, or contacting the IRS in order to receive newly enacted tax benefits. Taking either of these actions now will not expedite a future refund and may even slow down an existing refund claim. Instead, as noted below, the IRS will automatically make these benefits available to eligible filers.
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Some unemployment benefits are not taxed for many
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For tax year 2020 only, the first US $ 10,200 of unemployment benefits is non-taxable for most households. This tax benefit is only available to individuals whose 2020 adjusted gross income is less than $ 150,000. The same income cap applies to all enrollment statuses.
This means that those eligible who have not yet filed a 2020 tax return will be able to deduct the first $ 10,200 from the total compensation received and only consider the difference in their taxable income. For couples where both spouses have received unemployment benefits, each spouse can deduct $ 10,200. Details, including a worksheet, are available at IRS.gov/Form1040.
For any eligible taxpayer who has already submitted their compensation and reported it as fully taxable, the IRS will automatically adjust their tax return and grant them this tax benefit. Refunds based on this adjustment will be issued in May and will last through summer.
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Excess tax credit repayment suspended
Taxpayers who have taken out health insurance through a federal or state health insurance market will not report excessive repayment on filing or include Form 8962 (Premium Tax Credit). Taxpayers use Form 8962 to determine the amount of Incentive Tax Credit (PTC) they are entitled to and reconcile it with any Upfront Tax Credit (APTC) they receive through the marketplace. If the prepayment was too small, they request a net premium tax credit. The process remains unchanged for taxpayers applying for a net PTC for 2020. You must submit Form 8962 when filing your 2020 tax return.
However, if the prepayment was greater than the PTC allowed, they must repay the difference, known as the excess APTC.
The new law abolishes the repayment obligation for 2020. This means that affected taxpayers do not need to report any excess APTC or submit Form 8962. The IRS will automatically reduce the repayment amount to zero. In addition, the agency will automatically reimburse anyone who has already repaid their 2020 APTC surplus.
The loan for children and people in need of care was only increased for 2021
The new law increases the amount of credit and eligible expenses for caring for children and dependents. changes the exit from credit for higher earners; and make it refundable.
For 2021, the highest loan share of qualifying expenses rose from 35% to 50%.
In addition, Eligible Taxpayers can Eligible Child and Dependent Child expenses up to:
- $ 8,000 for a qualified or dependent child, down from $ 3,000 in previous years or
- $ 16,000 for two or more eligible dependents, down from $ 6,000 before 2021.
This means that the maximum credit in 2021 of 50% for the qualified expenses of one loved one is $ 4,000 or $ 8,000 for two or more loved ones.
When calculating the loan, employer-provided dependent care benefits, such as those provided through a Flexible Spending Account (FSA), must be deducted from the total eligible cost.
Still, the more a taxpayer earns, the lower the credit percentage. However, under the new law, more people will qualify for the new credit rate of 50% or less. This is because the Adjusted Gross Income (AGI), where the loan percentage is reduced, is increased significantly from $ 15,000 to $ 125,000.
Above $ 125,000, the 50% credit percentage is reduced as income increases, which is a rate of 20% for taxpayers with an AGI above $ 183,000. The loan percentage level will remain at 20% until it reaches $ 400,000 and will then taper off above that level. It is not at all available to taxpayers with an AGI greater than $ 438,000.
The credit will be fully refunded for the first time in 2021. This means that a legitimate family can get it even if they don’t owe federal income tax.
Workers can set aside more in an FSA for dependent care
For 2021, the maximum amount of employer’s tax-exempt dependent care benefits increased from $ 5,000 to $ 10,500. This means that an employee can set aside $ 10,500 in a FSA for dependent care, if their employer has one, instead of the normal $ 5,000.
Employees can only do this if their employer accepts this change. Interested employees should contact their employer for details.
Childless EITC expanded for 2021
For 2021 only, more childless workers and couples will be able to qualify for the Earned Income Tax Credit (EITC), a fully refundable tax break that helps many low- and middle-income workers and working families. This is because the maximum credit for these taxpayers nearly tripled and for the first time it will be made available to both younger workers and senior citizens.
In 2021, the maximum EITC for individuals with no dependents is $ 1,502, down from $ 538 in 2020. It is available to filers with an AGI below $ 27,380 in 2021 and can be used by eligible employees aged 19 and over Years. Full-time students under the age of 24 do not qualify. In the past, the Unrelated EITC was only available to people aged 25 to 64 years.
Another change is available to both childless workers and families with dependents. For 2021, they can calculate the EITC based on their 2019 income if it was higher than their 2021 income. In some cases, this option will give them a larger credit.
Changes that expand the EITC for 2021 and future years include:
- Singles and couples with social security numbers can apply for credit even if their children do not have SSNs. In that case, they would get the smaller loan available to childless workers. In the past, these filers did not qualify for credit
- More workers and working families who also have capital income can get the loan. Starting in 2021, the cap on investment income will be increased to $ 10,000. After 2021, the limit of $ 10,000 is indexed for inflation. The current limit is $ 3,650.
- Married but separated spouses may choose to be treated as non-married for EITC purposes. To qualify, the spouse applying for the credit cannot jointly apply with the other spouse, cannot have the same primary residence as the other spouse for at least six months a year, and must have a qualified child who is longer than half a year Year lives with him.
Extended child tax credit for 2021 only
The new law increases the amount of child tax credit, makes it available to 17-year-old loved ones, makes it fully refundable, and allows families to get up to half of it upfront in the final half of 2021, and families can get the credit themselves when they have little or no income from a job, business, or other source.
Currently, the balance is worth up to $ 2,000 per eligible child. The new law increases it to up to $ 3,000 per child for dependents ages 6-17 and to $ 3,600 for dependents under 5.
Taxpayers with a modified AGI of: have the maximum credit available.
- $ 75,000 or less for singles,
- $ 112,500 or less for Heads of Households and
- $ 150,000 or less for married couples filing a joint return and qualified widows and widowers.
Above these income thresholds, the additional amount over the original $ 2,000 balance – either $ 1,000 or $ 1,600 per child – is reduced by $ 50 per $ 1,000 modified AGI.
In addition, the credit for 2021 will be fully refunded. Prior to this year, the refundable portion was capped at $ 1,400 per child.
Prepayment of child tax credits
From July through December 2021, up to half of the loan will be passed on to eligible families by the Treasury and IRS. Prepayments are estimated from the 2020 rate of return or, if not available, from the 2019 rate of return.
It is for this reason that the IRS urges families to submit their 2020 return as soon as possible. This includes many low and middle income families who typically do not file returns. Often these families are eligible for an economic impact payment or tax break such as the EITC. This year, taxpayers have until May 17, 2021 to file a tax return.
To expedite the delivery of refunds, you must submit them electronically and choose direct deposit. This will also ensure that the child tax credit prepayments are made quickly later this year.
Eligible families can refuse to receive the advance payments in the next few weeks. Likewise, families can notify the Treasury Department and the IRS of changes in their income, enrollment status, or the number of qualified children. Details will be available shortly.
The IRS also encourages community groups, nonprofits, associations, educational groups, and anyone else who has connections with people with children to share this important information about child tax credit and other important benefits. The IRS will provide additional materials and information in the near future that can be easily shared through social media, email, and other methods.
For the most up-to-date information on Child Tax Credit and Prepayments, see Child Tax Credit Prepayments in 2021.