The American Rescue Plan Act (ARPA), signed into law on March 11, 2021 affected the 2020 filing season but it will have even more effect on 2021 tax returns. Summarized below are tax changes for both individuals and businesses for the 2021 filing season.
2021 Recovery Rebates to Individuals
The third Economic Impact Payment was $1,400 per individual plus $1,400 for each dependent claimed on the tax return. These advance payments were based on the taxable status on the 2020 tax return (or the 2019 return if no 2020 return was filed at the time the payments were disbursed).
The 2021 Recovery Rebate Credit will be calculated on the 2021 tax return.
Child Tax Credit
Sweeping changes were made to the Child Tax Credit (CTC) for 2021. See here for more details:
Earned Income Tax Credit
Changes to the Earned Income Tax Credit include expanded availability, higher earned income limitations, and extended age eligibility. Some changes will impact the 2021 tax year only while others will impact future tax years. See here for more details:
Child and Dependent Care Credit
This may be the largest tax credit change in the 2021 tax year for taxpayers with dependents. Note that these changes are only for the 2021 tax year.
- The credit is increasing from $3,000 to $8,000 for one child, and from $6,000 to $16,000 for more than one child.
- The percentage of childcare expenses eligible for the credit is increasing from 35% to 50%.
- The credit AGI phase-out is being raised from $15,000 to $125,000. The credit will be reduced by 50% for every $2,000 above $125,000, getting capped at 20% when AGI reaches $400,000. Once AGI reaches $440,000 the credit is eliminated.
- The credit is a refundable credit for tax year 2021.
- In addition, employer-provided care assistance is increasing from $5,000 to $10,500 for 2021.
Credit for Sick leave for the Self-Employed
Sick leave benefits due to COVID-19 for the self-employed are being extended through September 30, 2021. To learn more, see instructions for Form 7202 at the link below.
- Sick days reset as of April 1, 2021. The previous qualification period was April 1, 2020 through March 31, 2021. This credit was reported on Form 7202 on the 2020 return and will also be available to self-employed taxpayers in 2021.
- The number of sick days self-employed taxpayers can consider in calculating the family leave equivalent is increasing from 50 to 60.
- The maximum credit limit is increasing to $12,000.
- The credit includes paid time to get the COVID-19 vaccination.
- The credit is expanding to allow 501(c)(1) governmental organizations to claim.
Premium Tax Credit
For 2021 and 2022, the premium tax credit has been adjusted to allow households with income above 400% of the federal poverty level to receive the credit in the amount that health coverage exceeds 8.5% of their Household Income. (Under the previous rules, a taxpayer with income above 400% of the federal poverty level for their household size was not allowed any credit.)
Student Loan Debt
The ARPA is allowing a temporary relief from taxation on most student loans forgiven after December 31, 2020, and before January 1, 2026. This includes all federal student loans and certain private education and institutional loans. Normally, the forgiveness or cancellation of this debt is included as taxable income. Student Loan Interest remains deductible.
Net Operating Loss Carry-back:
There are multiple changes to both the loss limitations and allowable carryback and roll-forward rules.
- Under the CARES Act of 2020, the carryback limitations were eased to allow losses up to the extent there is taxable income. If an entity elects to carry back, they must carry back 5 years. Losses are allowed to the extent there is taxable income. Any remaining NOL may roll forward indefinitely. The CARES Act also provided a special rule for carrybacks of NOLs by a real estate investment trust (REIT). For NOLs arising in 2018 through 2020, a loss in a REIT year cannot be carried back to prior years, and losses from non-REIT years cannot be carried back to REIT years (Sec. 172(b)(1)(D)(ii)).
- ARPA is continuing the abatement of loss limitations through December 31, 2026.
- There is a 12-month period after filing a return with a loss to make a carryback election.
- The IRS has provided Form 1045 (individuals) and Form 1139 (Corporations) for taxpayers electing to carry an NOL back. Taxpayers may also elect to file amended returns. For additional information, see instructions for Forms 1045 and 1139 below.
Employee Retention Credit
The Employee Retention Credit (ERC) is available to employers for qualified wages and is claimed through payroll tax filings, not on the employer's tax return. Hence, it is not available in TaxSlayer Pro.