Big Increase in Child Tax Credit For 2021

An increased child tax credit is part of President Biden’s stimulus package to help tackle the coronavirus pandemic and stimulate the economy. This stimulus package, known as the American Rescue Plan Act, was passed by Congress on March 10, 2021, to provide lower-income parents with financial assistance and support various other efforts to stimulate the economy. Although the benefit of a tax credit traditionally isn’t available until after that year’s tax return has been filed, for 2021, the IRS will pay a portion of the credit in advance in the form of monthly payments from July through December. Details are as follows:

Additional Credit Amounts – Normally, the credit is $2,000 per eligible child. For 2021, it has increased to $3,000 for each child under age 18 (normally under age 17) and $3,600 for children under age 6 at the end of the year.

Refundability – A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the child tax credit is nonrefundable, but for 2021, it is fully refundable.

High-Income Phaseout – The credit is designed to only provide parents of lower incomes with a tax benefit. Thus, the credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold.

2021 MAGI PHASEOUT – CHILD TAX CREDIT
Filing Status Threshold
Married Filing Jointly $150,000
Heads of Household $112,500
Others $75,000
  • Example 1: Jack and Jill have two children: Ella, age 4, and Joe, age 8. Their child tax credit for 2021 before the phaseout will be $6,600 ($3,600 + 3,000). They file a joint return and their MAGI is below $150,000, so they are entitled to the full $6,600. However, if their MAGI for 2021 were $170,000, they would have to reduce (phase out) the credit by $1,000 ($50 x [($170,000 – $150,000)/1,000]). Therefore, their child tax credit would be $5,600. 

Note: This phaseout only applies to the increase in the child tax credit. Families that aren’t eligible for the higher credit would still be able to claim the regular credit of $2,000 per child subject to the normal phaseout thresholds of $400,000 for married couples filing jointly and $200,000 for others.

  • Example 2: Using Jack and Jill from Example 1, they qualified for a credit of $6,600 before phaseout. If their MAGI had been $220,000, they would be completely phased out of the additional 2021 credit, but would still qualify for the normal $2,000 per child credit. Since their MAGI is below the regular $400,000 phaseout threshold, their credit for 2021 would be $4,000 (2 x $2,000).

Advance Payments – Under a special provision included in the new tax law, the Secretary of the Treasury has been charged with establishing an advance payment plan to get the credit benefit into the hands of taxpayers as quickly as possible. Under this mandate, those qualifying for the credit would receive monthly payments equal to 1⁄12 of the amount the IRS estimates the taxpayer would be entitled to by using information on the 2020 return. If the 2020 return has not yet been filed, 2019 information is to be used. If the 2019 return is used to determine the advance payments, the amount of the payments can be altered (either reduced or increased) when the 2020 return is filed. Initial advance payments are scheduled to arrive after July 1, 2021, and monthly payments will end in December 2021. Any balance of the credit due to a taxpayer would be claimed on their 2021 tax return.

  • Reconciliation on the 2021 Tax Return – The advance payments will reduce the child tax credit claimed on the tax return, but not below zero. If the aggregate amount of the advance payments to the taxpayer exceeds the amount of the allowable credit, the excess must be repaid unless the taxpayer qualifies for the safe harbor provision.
  • No Repayment Safe Harbor – The amount of the excess advance repayment is eliminated or reduced based on a safe harbor provision that applies to lower-income taxpayers. Thus, families with a 2021 MAGI below the applicable income threshold (see table below) will not have to repay any advance credit overpayments that they receive.
SAFE HARBOR APPLICABLE MAGI
Filing Status Threshold
Married Filing Joint $60,000
Heads of Household $50,000
Others $40,000

Child’s Death – A child isn’t taken into account in determining the annual advance amount if the death of the child is known to the IRS as of the beginning of the calendar year for which the estimate is made.

Online Portal – The Secretary of the Treasury will establish an online portal for taxpayers to elect to not receive advance payments or provide information that would affect the amount of the advance payment, including the birth of a qualifying dependent, change in marital status or significant changes in income.

It will take the Treasury some time to initiate the advance payments, but if you have questions about the child tax credit, please give our office a call.

Entrepreneur Success Stories: Zapier

Success leaves clues.

Zapier is a software company founded in 2011 by Wade Foster, Bryan Helmig and Mike Knoop. Zapier provides a service that helps end users automate the integration of online applications. Let’s take a look at how this software integration company has taken the industry by storm.

HOW ZAPIER GOT THEIR START

Before becoming a company valued at over $5 billion, Wade Foster (CEO) and Bryan Helming (CTO) were members of a jazz quartet, playing gigs together in their hometown of Columbia, Missouri. In addition to their love for music, they discovered that they both had a passion for creating web applications and began working on projects together.

In September 2011, they came up with an idea that would change the course of their lives. They decided to start a company that helped end users integrate two different software applications. To help get their idea off the ground, they enlisted a third co-founder, Mike Knoop (CPO), and went to work.

They created the first iteration of their software application (known then as API Mixer) and entered a local start-up competition. Their idea won, and they knew they were onto something.

They continued to develop their idea and submitted it to Y Combinator, where they were initially rejected. However, Foster, Helmig and Knoop refused to take no for an answer and continued submitting their application to Y Combinator until they were finally accepted in 2012. At that time, the project included integrations with 34 applications. Today, that number is over 3,000 integrations, and they have more than 300 application partners.

During their early stage, they were able to secure $1.3 million in Series A funding from investors, and within two years, they reached profitability. This was the only venture capital funding that they’ve accepted thus far, though they have received numerous offers. Zapier went on to be named the #1 company in the early-stage category as evaluated by top venture funds in the industry.

KEYS TO SUCCESS

Building a $5 billion company within a decade is no easy feat. Zapier’s success can be attributed to many of the decisions that the founders have made along the way.

Building Relationships with the Zapier User Base

Zapier believed that building relationships was crucial to helping cultivate their user base. Foster, Helmig and Knoop started by visiting online forums of larger software applications such as Dropbox and Basecamp, seeking users who were frustrated with their inability to use the functionality of one application along with another, often having to repeat the same tasks across applications. The Zapier team would reach out to these users and offer to help them resolve their issues. In the early stages of the company, this was how they generated their first customers. Customer service continues to be a foundational part of Zapier as a company.

Customer-Centric Values

As an employee of Zapier, each team member participates in the customer support function. Whether an employee is in HR or IT, the founders believe that hearing first-hand about how customers are experiencing the product and understanding their frustrations will help create a better product and experience.

Teamwork is Key

Zapier has been a remote company since its founding. With employees across the globe, it is important for them to be able to communicate with one another so that each team member is on the same page. They do this by sharing information across multiple channels and at multiple times to ensure that important ideas are communicated. Transparency is one of their keys to success.

Tell the Customer’s Story

Zapier has been very deliberate in how they reach out to current and potential customers. One part of their marketing efforts is sharing the success stories of their clients through their blog. Zapier interviews customers, identifies pain points that have been resolved through the application and uses this as a guide to assist other customers who might be experiencing the same issue.

Zapier’s attention to detail in addressing customer concerns has helped the company grow from its first customers in 2012 to its current user base of over 600,000. Their success demonstrates how dedicated client focus can have a huge impact on the bottom line.

If you have any questions about how to turn your business into a success story, please contact our office for more information.

SBA Raises Loan Limit For COVID-19 EIDL Loans to $500,000

As U.S. businesses continue to recover from COVID-19’s economic devastation, the U.S. Small Business Administration (SBA) is expanding loan opportunities. The agency announced that beginning in April, nonprofits and small businesses will be able to borrow up to $500,000 for up to 24 months. This expansion of the COVID-19 Economic Injury Disaster Loan (EIDL) program more than triples the existing limit of six months and maximum loan amount of $150,000.

In a news release announcing the change, SBA Administrator Isabella Casillas Guzman said, “More than 3.7 million businesses employing more than 20 million people have found financial relief through SBA’s Economic Injury Disaster Loans, which provide low-interest emergency working capital to help save their businesses. However, the pandemic has lasted longer than expected, and they need larger loans.”

Businesses that have already applied for a COVID-19 EIDL loan need not worry about reapplying, as all applications in process will automatically be considered for the increased amounts. Similarly, instructions will be published to allow those who have already been approved for a loan to apply for the expanded limits. A loan increase can be requested via SBA.gov, and an email will go out to all previously approved borrowers containing this information.

The COVID-19 EIDL program has been extremely successful, with over $200 billion in loans already approved by the SBA. Small businesses, including independent contractors and sole proprietors, have been provided 30-year maturity loans at a 3.75% interest rate, while nonprofits will pay 2.75% in interest.

Additionally, the SBA announced on March 12th that borrowers for all disaster loans, including the COVID-19 EIDL loans, would be provided extended deferment periods. Although payments are not required until 2022, interest will still accrue on all outstanding loan balances, so borrowers may elect to begin making payments during the deferment period.

If you have any questions about the EIDL loan limit expansion and how it could affect your business, please contact our office.

New Tax Credit Covers Paid Leave for COVID-19 Vaccinations and Recovery

The American Rescue Plan Act (ARP) expands the tax credits available under the Families First Coronavirus Response Act (FFCRP). The ARP Act does not mandate that employers provide paid family or sick leave; however, tax credits for employers that choose to continue providing Emergency Paid Sick Leave (EPSL) or Emergency FMLA (EFMLA) are available through September 30, 2021. The ARP extends a tax credit to employers who pay for leave taken by employees to receive COVID-19 vaccinations and recover from vaccination-related side effects.

For more details, click here to read the full IRS release. As always, we encourage you to reach out to us with any and all questions regarding this credit.

SBA Announces Changes to COVID-19 EIDL Loans

The U.S. Small Business Administration (SBA) recently announced a major update to the COVID-19 Economic Injury Disaster Loan (EIDL) program. As of the week of April 6, 2021, the maximum loan amount for COVID-19 EIDLs will increase to $500,000.

Under the CARES Act, the EIDL program was expanded to cover eligible businesses experiencing substantial economic injury due to the pandemic. The act also relaxed a number of traditional EIDL loan stipulations, making COVID-19 EIDL loans more readily available.

This latest update from the SBA drastically expands both the maximum loan limit and the period of economic injury that is covered. Previously, the limit for COVID-19 EIDL loans was a maximum of $150,000 covering six months of economic injury. The new maximum loan amount will be $500,000 and covers up to 24 months of economic injury.

Loan applicants whose loans are already in process at the time of the EIDL expansion will automatically be considered for the new maximum limits. Additionally, current COVID-19 EIDL loan recipients will be able to request a loan increase. Borrowers should visit the SBA website for further guidance.

IRS Announces Individual Tax Deadline Extension

On Wednesday, March 17, the Internal Revenue Service (IRS), in conjunction with the U.S. Treasury Department, announced an extension of the federal income tax filing due date for individuals. Individual returns for the 2020 tax year are now due on May 17, 2021, rather than the standard date of April 15, 2021.
The IRS stated their intention to issue formal guidance on the extension soon. As of now, here are the details that we are aware of per the IRS news release:
  • In addition to a filing extension, any federal income tax payments owed for 2020 are also automatically extended to the new due date, with no penalties or interest.
  • The filing and tax payment extensions are applicable for self-employed individual filers.
  • Taxpayers who do not pay any amounts owed by May 17 will begin to accrue penalties and interest at that point.
  • There is no need to file for an extension or contact the IRS—this extension is automatic.
  • Individuals who need more time than the May 17 due date should file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return to apply for an extension through October 15, 2021. This would result in an extension for filing; any payment due would still need to be paid by May 17 to avoid penalties and interest.
  • The extension does not apply to the April 15 deadline for first quarter estimated tax payments.
This extension only applies to federal income tax filings. While it is possible that states will follow suit with a due date extension, most states have not made formal announcements on an extended deadline.

American Rescue Plan Act

The American Rescue Plan Act (ARPA) was passed by the Senate on Saturday, March 6 and in the House on Wednesday, March 10. President Biden signed the bill into law on Thursday, March 11. Read on for details on the provisions included in the ARPA.

Individual Stimulus Checks

Estimated portion of the stimulus package: $422 billion

The ARPA includes another round of economic impact payments for people who meet certain income eligibility requirements. Single taxpayers who earn less than $75,000 will receive $1,400 and married taxpayers filing jointly who earn less than $150,000 will receive $2,800. The payments phase out at an adjusted gross income of $80,000 for single filers and $160,000 for joint filers. The bill also includes a payment of $1,400 per dependent. Payment amounts will be determined using 2020 tax returns if they have been filed and processed by the IRS; otherwise, 2019 returns will be used.

Federal Unemployment Assistance

Estimated portion of the stimulus package: $242 billion

The bill renews federal unemployment benefits at a lower level ($300 per month) through September 6, 2021. Additionally, it makes the first $10,200 of unemployment insurance benefits non-taxable for households with incomes at or below $150,000.

Aid to Businesses

Estimated portion of the stimulus package: $47.25 billion

The ARPA includes funding for various industries hard hit by the pandemic, as well as a financial boost for the Paycheck Protection Program (PPP). The funds are allocated as follows:

  • $15 billion for airlines and eligible contractors (must refrain from furloughing workers or cutting pay through September 2021)
  • $25 billion for restaurants and bars (includes grants of up to $10 million per entity to be used for covering payroll, rent, utilities and other operating expenses)
  • $7.25 billion for the PPP

Child Tax Credit

The ARPA makes a number of changes to the existing child tax credit, including:

  • Making the credit fully refundable for 2021
  • Including 17-year-olds in the definition of qualifying children
  • Increasing the amount of the credit for children over age 7 to $3,000
  • Increasing the amount of the credit for children ages 0-6 to $3,600
  • Directing the IRS to estimate each taxpayer’s child tax credit and pay it in advance monthly from July through December 2021

The increased credit amounts phase out at certain income levels ($75,000 for singles, $150,000 for married couples filing jointly and $112,500 for heads of household).

To facilitate distribution of the monthly estimated child tax credit payments, the IRS will create an online portal where taxpayers can choose to opt out of advance payments or provide information that modifies their payment amount.

Additional Tax Credits

The ARPA includes a number of additional tax credits:

  • COBRA continuation coverage – On top of the extended unemployment benefits, the ARPA includes a 100% subsidy of COBRA health insurance premiums. This means that laid-off workers can maintain health insurance through their former employer’s plan at no cost. The subsidy covers the period from April 1, 2021, through September 30, 2021.
  • Earned income tax credit – For 2021, the ARPA expands the EITC by making it available to taxpayers without children.
  • Child and dependent care credit – The bill makes this credit refundable for 2021 and increases the exclusion for employer-provided dependent care assistance for 2021 to $10,500.
  • Employee retention credit – The bill extends this credit, which was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, through the end of 2021. Additionally, it allows the credit to be claimed by eligible employers for paying qualified wages to employees.
  • Family and sick leave credits – The ARPA extends these credits, which were established by the Families First Coronavirus Response Act (FFCRA), through September 30, 2021. Additionally, it increases the limit on the credit for paid family leave, increases the number of leave days a self-employed individual can take, qualifies leave taken due to COVID-19 vaccination, creates a reset date for counting paid sick leave (March 31, 2021) and allows 501(c)(1) governmental organizations to participate.
  • Premium tax credit – The ARPA expands the premium tax credit for both 2021 and 2022, and adjusts the definition of an applicable taxpayer to include those who received (or have been approved to receive) unemployment compensation any time in 2021.

Aid to States and Cities

Estimated portion of the stimulus package: $350 billion

The bill allots $350 billion to assist state, local, tribal and territory governments in responding to the coronavirus pandemic, allocated as follows:

  • $195.3 billion to states
  • $130.2 billion to cities and counties
  • $20 billion to tribal governments
  • $4.5 billion to U.S. territories

Housing Assistance

Estimated portion of the stimulus package: $45 billion

The ARPA provides aid in the form of emergency rental assistance ($30 billion), funding for preventing COVID-19 outbreaks among the homeless ($5 billion) and mortgage assistance ($10 billion).

Aid to Schools

Estimated portion of the stimulus package: $170 billion

K-12 schools will receive $130 billion. The money is to be used to reduce class sizes, modify classrooms to enable social distancing, install ventilation systems, purchase personal protective equipment, hire nurses and counselors, and provide summer school.

Of the $170 billion, the remaining $40 million is earmarked for colleges and universities. The institutions are instructed to use the money to defray pandemic-related expenses and to provide emergency aid to students to cover expenses (e.g., food, housing and computer equipment).

Funding for Testing and Vaccinations

Estimated portion of the stimulus package: $60 billion

Of the $60 billion allocated in this area, $14 billion is designated for expansion of COVID-19 testing, including enhanced contact tracing, laboratory expansions and the creation of mobile testing units, and $46 billion is set aside for vaccination distribution and administration.

Sources:

https://www.politifact.com/article/2021/mar/05/whats-revamped-pandemic-and-stimulus-bill-now-sena/

https://www.journalofaccountancy.com/news/2021/mar/senate-passes-coronavirus-stimulus-bill-recovery-rebates.html

https://www.journalofaccountancy.com/news/2021/feb/tax-provisions-american-rescue-plan-act.html

https://www.cnn.com/2021/03/04/politics/stimulus-senate-democrats-proposal/index.html

https://www.cnet.com/personal-finance/new-stimulus-bill-to-become-law-in-days-what-to-know-now-what-happens-next/

Employee Spotlight – Aaron B. Coers

What year did you join Slattery & Holman?
1991

Where did you attend college?
I graduated from Indiana State University in May 1991.

Tell us a little about your family.
Jennifer and I got married in August 1994 after we had known each other for 11 months. I have two daughters, Morgan is 21 and a junior at Purdue majoring in Industrial Engineering, and Madison is 18 and a freshman at Hope College majoring in History. In August I will have a son-in-law, Adam.

What is your favorite activity?
I have been a Pacers season ticket holder for 11 years. I really enjoy attending the games with my family, but I enjoy going with anyone willing to go. Rumor has it I have been seen dancing on the Jumbotron during timeouts of games.  (Picture courtesy of USA Today)

pacers

Where is your favorite vacation spot?
Princeville, Kauai, Hawaii. The green mountains and dark blue waters are gorgeous.

What is a new skill that you would like to master?
I would love to be able to speak Spanish. I have been on 4 mission trips to Honduras and the Dominican Republic. I have really enjoyed my time being there, but it would have been so much better if I could speak Spanish.

What would you be doing if you were not working at Slattery & Holman?
I think I would enjoy being a college professor teaching accounting.

What was your first job?
Mowing yards during the summer. It was a good job. I was making on average $8 an hour when the minimum wage was $3.35.

 

Sold or Thinking of Selling Your Home?

In spite of (or in some cases, because of) the COVID-19 pandemic, and with near-record-low home mortgage interest rates, the housing market has been booming. September 2020 existing home sales were up 9.4% from August 2020 and 20.9% from 2019, according to the National Association of Realtors. If you sold your home this year or are thinking about selling it, there are many tax-related issues that could apply to the sale. If you are in the “thinking about” stage, you may already be aware of the issues you may face in reporting the sale. This article covers the tax basics and some special situations related to home sales and the home-sale gain exclusion.

Home Sale Exclusion- For decades, Congress has encouraged home ownership, including providing a tax break for taxpayers selling their homes. Under the current version of the tax code, you are allowed an exclusion of up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you owned and lived in it for at least 2 of the 5 years previous to the sale. You also cannot have previously taken a home-sale exclusion within the 2 years immediately preceding the sale. There is no limit on the number of times you can use the exclusion as long as you meet these time requirements; however, extenuating circumstances can reduce the amount of the exclusion. The home-sale gain exclusion only applies to your main home, not to a second home or a rental property.

2 out of 5 Rule -As noted above, you must have used and owned the home for 2 out of the 5 years immediately preceding the sale. The years don’t have to be consecutive or the closest to the sale date. Vacations, short absences and short rental periods do not reduce the use period. If you are married, to qualify for the $500,000 exclusion, both you and your spouse must have used the home for 2 out of the 5 years prior to the sale, but only one of you needs to meet the ownership requirement. When only one spouse in a married couple qualifies, the maximum exclusion is limited to $250,000 instead of $500,000.

Although this situation is quite rare, if you acquired the home as part of a tax-deferred exchange (sometimes referred to as a 1031exchange), then you must have owned the home for a minimum of 5 years before the home-gain exclusion can apply.

If you don’t meet the ownership and use requirements, there are some situations in which a prorated exclusion amount may be possible. An example of this situation is if you were required to sell the home because of extenuating circumstances, such as a job-related move, a health crisis or other unforeseen events. Another rule extends the 5-year period to account for the deployment of military members and certain other government employees. Please call us if you have not met the 2 out of 5 rules to see if you qualify for a reduced exclusion.

Business Use of the Home – If you used your home for business and claimed a tax deduction-for instance, for a home office, storing inventory in the home or using it as a day care center-that deduction probably included an amount to account for the home’s depreciation. In that case, up to the extent of the gain, the claimed depreciation cannot be excluded.

Figuring Gain or Loss from a Sale -The first step is to determine how much the home cost by combining the purchase price and the cost of improvements. From this total cost, subtract any claimed casualty loss deductions and any depreciation taken on the home. The result is your tax basis. Next, subtract the sale expenses and this tax basis from the sale price. The result is your net gain or loss on the sale of the home.

If the result is negative, the sale is a loss; losses on personal-use property, such as homes, cannot be claimed for tax purposes. If the result is a gain, however, subtract any home-gain exclusion (discussed above) up to the extent of the gain. This is your taxable gain, which is, unfortunately, subject to income tax. If you owned the home for at least a year and a day, the gain will be a long-term capital gain. As such, it will be taxed at the special capital gains rate, which ranges from zero for low-income taxpayers to 20% for high-income taxpayers. Depending on the amount of all of your income, the gain may also be subject to the 3.8% net investment income surtax that was added as part of the Affordable Care Act. The tax computation can be rather complicated, so please call us for assistance.

Another issue that can affect your home’s tax basis (discussed above) applies if you purchased your home before May 7, 1997, after selling another home. Prior to that date, instead of a home-gain exclusion, any gain from a sale was deferred to the replacement home. Although this is now rare, if it matches your situation, the deferred gain would reduce your current home’s tax basis and add to any gain for the current sale.

Prior Use as a Rental – If you previously used your home as a rental property, the law includes a provision that prevents you from excluding any gain attributable to the home’s appreciation while it was a rental. The law’s effective date was the beginning of 2009, which means you only need to account for rental appreciation starting in that year. This law was passed to prevent landlords moving into their rentals for 2 years so they could exclude the gains from those properties. Prior to the law change, some landlords had done this repeatedly.

Form 1099-S – Usually, the settlement agent-typically an escrow or title company-prepares IRS Form 1099-S, Proceeds from Real Estate Transactions, which reports the home seller’s name, tax ID number, proceeds of the sale, date of the sale, etc. This form is provided to both the IRS and the seller. Note this form only includes information from the sale; it doesn’t provide any basis information to the IRS. Sometimes, sellers think if the home sale gain exclusion eliminates all of their gain from the sale of their home, they don’t need to report the transaction on their tax return. Unfortunately, this thinking could lead to correspondence (i.e., a bill for tax due) from the IRS as it attempts to match the sales price shown on the 1099-5 to the seller’s tax return. To avoid this interaction with the IRS, you should report the home’s sale on your income tax return for the year of the sale. In doing so, you will be including your basis and exclusion information for the IRS.

Records -Assets worth hundreds of thousands of dollars, including your home, need your attention, particularly regarding records. When figuring your gain or loss, you will, at a minimum, need the escrow statement from the purchase, a list of improvements (not maintenance work) with receipts and the final escrow (settlement) statement from the sale. If you encounter any of the issues discussed in this article, you may need additional documentation.

A few other rare home-sale rules are not included here. As you can see, home-sale computations and tax reporting can be very complicated, so please call us if you need assistance.

Biden’s Proposed COVID Relief Package

President Biden released his “American Rescue Plan” on January 14. It is a wish list of proposals he wants Congress to enact to address the COVID-19 pandemic and associated economic crisis. While some of the proposals are intended to be in effect for just one year, it is possible these could later be extended or made permanent, as many of them have been on the Democrats’ agenda for some time. The anticipated cost of the American Rescue Plan, if all of the proposals are agreed to by Congress, is $1.9 trillion. None of Biden’s proposals are revenue raisers, and according to a Wall Street Journal report from January 15, 2021, he intends to use government borrowing to pay for his plan. The following are some of the tax-related proposals:

Stimulus (Economic Impact) Payments: Biden’s plan requests that Congress provide an additional stimulus payment of $1,400 to qualified lower-income households. Combined with the $600 that Congress authorized in December, this will bring the latest total direct assistance to $2,000 per person. The prior stimulus distributions included stipends for dependent children under the age of 17, whereas the proposed payments will be provided for all dependents regardless of age.

So far, the payments have counted as advances toward a 2020 Recovery Rebate Credit. This includes the second round of payments that didn’t reach recipients until early January 2021. Individuals will need to reconcile the payments they received and the credits they are entitled to on their 2020 returns. Whether the proposed additional payments will be considered part of the 2020 credit (which could delay some 2020 return filings) or as an advance toward a new 2021 credit will need to be clarified in the legislation.

Unemployment Compensation: This part of the plan requests that Congress provide a $400-per-week unemployment insurance supplement through September 2021, and extend the unemployment benefits to self-employed workers such as ride-share drivers and grocery delivery workers, who do not typically qualify for regular unemployment compensation. Presumably, the $400-per-week enhancement would be in lieu of the $300-per-week benefit passed in the Consolidated Appropriations Act in December. In any event, the unemployment benefits are taxable income for federal purposes; most states also tax this income, but a few do not.

Minimum Wage: Biden’s proposal requests that Congress progressively raise the minimum wage from $7.25 to $15 per hour by 2025.

Education Assistance: The CARES Act, passed in late March 2020, included a Higher Education Emergency Relief Fund that provides funding to institutions to grant emergency financial aid to students whose lives have been disrupted by the COVID-19 pandemic. Emergency financial aid grants to students are nontaxable and can be used for expenses related to the disruption of campus operations due to coronavirus (including eligible expenses under a student’s cost of attendance, such as food, housing, course materials, technology, health care and child care). Biden’s proposal would increase funding for the Higher Education Emergency Relief Fund, including providing college and university students with up to an additional $1,700 in financial assistance from their institutions.

Families First Coronavirus Response Act: This part of the American Rescue Plan requests that Congress fund an extension of sick leave through September 30, 2021, which would provide over 14 weeks (up from 12) of paid sick and family and medical leave to help parents with additional caregiving responsibilities when a child or loved one’s school or care center is closed; for people who have or are caring for people with COVID-19 symptoms, or who are quarantining due to exposure; and for people needing to take time off to receive the vaccine. The maximum payment would be increased from $1,000 per week to $1,400 per week.

Under Biden’s plan, the exemptions for businesses with over 500 employees and those with fewer than 50 employees would be eliminated, making the program mandatory for all businesses, regardless of size. The government will reimburse employers with fewer than 500 employees for 100% of the cost.

Increase the Child Care Tax Credit: Currently, a nonrefundable tax credit is available to some taxpayers for the expenses they incur for the care of a child, spouse or other dependent while the taxpayer is gainfully employed (or is seeking a job). The maximum expenses that can be used to determine the credit are $3,000 for one child and $6,000 for two or more children. The credit rate ranges from 20% to 35% depending on income (the higher the income, the lower the credit rate).

Biden’s plan requests Congress to authorize an increase in the child care credit and make it refundable for one year. The credit would be a full 50% of the expenses, with maximum expenses of $4,000 for one child and $8,000 for two or more children (under age 13). The credit would be phased out for those whose income ranges from $125,000 to $400,000.

Child Tax Credit: For years 2018 through 2025, the child tax credit is a maximum of $2,000 per dependent child under the age of 17. In some cases, up to $1,400 of the credit is refundable. The credit phases out when the taxpayer’s modified adjusted gross income exceeds $200,000 ($400,000 for married joint filers). Biden is asking Congress, for a period of one year, to include children through age 17 in the child tax credit and increase it to $3,000 ($3,600 for children under the age of 6).

Earned Income Tax Credit (EITC): Childless adults are eligible for a lesser earned income tax credit amount than if they had a qualifying child. Biden’s plan requests that Congress make a one-year increase in the EITC for childless adults from roughly $530 to $1,500 and increase these individuals’ income limit for the credit from roughly $16,000 to $21,000. Biden would also like Congress to eliminate the age cap so that older workers without a qualifying child can claim the credit. Currently, a childless individual cannot claim the credit after reaching age 65.

Healthcare Coverage: Individuals who purchase their health insurance through the government marketplace may be eligible for a premium tax credit. An advance premium tax credit (APTC) may be used to reduce monthly premiums. The advance and actual credits are then reconciled on their income tax return each year. Biden’s plan asks Congress to increase the premium tax credit so that workers will pay no more than 8.5% of their income for coverage.

Although not tax-related, other issues in the plan affecting individuals include:

Evictions and Foreclosures: President Biden is calling on Congress to extend the eviction and foreclosure moratoriums and continue applications for forbearance on federally guaranteed mortgages until September 30, 2021, as well as to provide funds for legal assistance for households facing eviction or foreclosure.

Homelessness: The plan requests that Congress provide $5 billion to help secure housing for homeless individuals and families.

Remember, these are only Biden’s proposed changes; quite often, what Congress passes is not the same as the originally proposed legislation. If you need assistance or have questions regarding tax issues, please give us a call.