Editor's Note: Removed information from unemployment section pertaining to the Unemployment Compensation Exclusion worksheet that was posted on March 12. The IRS updated the worksheet on March 23, 2021 to clarify that taxpayers should not include the first $10,200 in received unemployment compensation when calculating AGI for the purposes of qualifying for the unemployment exclusion. Here's what the agency says about the update: "The IRS revised the worksheet and instructions after it became aware that the worksheet posted on March 12 did not correctly construe the amendment to Section 85 of the Internal Revenue Code under the American Rescue Plan Act. Those who have already filed their 2020 Form 1040 or 1040-SR, should not file an amended return at this time. The IRS will issue additional guidance as soon as possible."

President Biden signed into law the $1.9 trillion American Rescue Plan Act of 2021, which includes a number of tax-related provisions that lawmakers say will help struggling Americans weather the pandemic recession. As with any legislation that affects taxes, that means tax professionals need to know how it will affect their clients return preparation.

Here’s a short rundown of some of those changes.

How much are the new individual payments?

The upcoming third economic impact payment (EIP3) is an advance payment of a 2021 refundable tax credit, and it’s the most well-known component of the American Rescue Plan Act of 2021. Qualifying individuals, couples, and filers claiming dependents are expected to start receiving their payments soon:

• $1,400 for single filers with an adjusted gross income of up to $75,000
• $1,400 for heads of household with an adjusted gross income of up to $112,500
• $2,800 for married couples filing jointly with an adjusted gross income of up to $150,000
• $1,400 for each dependent, including college students and qualifying relatives who are claimed as dependents

And the credit completely zeroes out when AGI reaches the following amounts:

• $80,000 for single filers
• $120,000 for heads of household
• $160,000 for married couples filing jointly

Generally, taxpayers qualify for EIP3 if their AGI doesn’t zero out the credit and they have a valid Social Security Number. While nonresident aliens, dependents who can be claimed by another taxpayer for the 2021 calendar year, and estates and trusts will not qualify for EIP3, there are exceptions to the SSN requirement.

Married members of the Armed Forces who file jointly will receive the full $2,800 as long as one spouse has a valid Social Security Number and their AGI doesn’t start phasing out the credit. And an adoption taxpayer identification number is considered a valid identification number for qualifying dependents.  

What are the tax year 2021 changes for the child tax credit?

For tax year 2021, the entire child tax credit will be refundable, and its amount will depend on the age of each qualifying child:

• Up to $3,600 for each qualifying child younger than 6
• Up to $3,000 for each qualifying child younger than 18

Previously, the child tax credit was worth up to $2,000 for qualifying children younger than 17 years, and only $1,400 of the credit was refundable.

What are the changes to the Earned Income Tax Credit?

For tax year 2021, it will be easier for more taxpayers to qualify for the earned income tax credit due to the following changes:

• The minimum age for most taxpayers to claim the credit is dropping to 19
• The minimum age for qualified former foster youths and qualified homeless youths to claim the credit is dropping to 18
• The minimum age for specified students to claim the credit is dropping to 24
• The percentage of the credit and phaseout for individuals without children is increasing to 15.3 percent
• Disqualified investment income is increasing to $10,000
• Separated spouses may qualify as an individual for purposes of the EIC if they no longer live with their spouse by the end of 2021 and have a written separation agreement or receive maintenance payments, or they are married and meet all of the following criteria:
• Does not file a joint return
• Resides with a qualifying child … for more than one-half of [tax year 2021]
• During the last 6 months of [tax year 2021], does not have the same principal place of abode as [their] spouse
• Taxpayers whose 2021 earned income is less than their 2019 earned income may instead use their 2019 information to determine the amount of the EIC

Remember, these changes only apply to tax year 2021.

What are the changes to the Premium Tax Credit?

For tax year 2020, taxpayers who received an advance payment of the premium tax credit will not have to repay any of the advance that exceeds the allowed amount when reconciling the credit on the tax return for that year.

For tax year 2021, taxpayers “who [have] received, or [have] been approved to receive, unemployment compensation for any week beginning during 2021” will be “treated as an applicable taxpayer” for the PTC.  

For tax years 2021 and 2022, the premium tax credit will use the following income percentages table:

Note: If you already filed your taxes and reported your repayment of the Advance Premium Tax Credit (APTC), the current guidance is to wait—do not file an amended return until the IRS releases official guidance. Continue to check the News section of the IRS website for updates.

If you haven't filed and meet the same criteria, software companies will be updating their programs once they receive guidance on the APTC from the IRS. It is advised that you should wait until software companies receive official guidance and make the necessary changes.

What are the changes to unemployment compensation?

For tax year 2020, federal income tax will be waived on unemployment compensation that doesn’t exceed $10,200 for individuals and married couples filing jointly whose adjusted gross income is less than $150,000. In the case of joint filers, the $10,200 limit applies per spouse. 

For tax year 2021, unemployment benefits are extended until September 6, 2021, and starting March 31, 2021, weekly compensation will be increased by $300.

Note: If you already filed your taxes and reported unemployment benefits, the current guidance is to wait—do not file an amended return until the IRS releases official guidance. Continue to check the News section of the IRS website for updates.

If you haven't filed and meet the same criteria, software companies are updating their programs now to include the new Unemployment Compensation Exclusion Worksheet. It is anticipated that most software companies will release updates for this new calculation during the week starting March 15.

Expect IRS guidance for provisions of the American Rescue Plan Act

The American Rescue Plan of 2021 is a sweeping recovery package that also affects the Paycheck Protection Program, paid sick and family leave, and a number of other business and individual tax credits. So, be on the lookout for Internal Revenue Service guidance for all of the legislation’s tax-related provisions in the coming weeks and months, including what’s outlined above.

Source: H.R. 1319; IRS Statement - American Rescue Plan Act of 2021