The COVID relief and economic recovery bill enacted this spring contains a number of tax changes, some to continue to aid employers in retaining employees and providing paid leave, and more to aid families with children.
Sick Leave
The credit to employers for providing paid sick leave for COVID related absences has been extended on a voluntary basis through September, 2021. Employers with under 500 employees may claim a credit for paid leave for employees missing work due to COVID illness or quarantines for themselves or their family members. The credit has been expanded to cover paid leave for employees to receive their vaccination or recover from any side effects. The credit is received by employers by reducing their payroll tax payments, or can be paid directly to employers if the tax payments are insufficient to cover the leave.
Employee Retention Credits
The employee retention credits, first created by the CARES Act in spring 2020 have been extended through 2021. The credit had been scheduled to expire at the end of June. The credit allows employers who suffered a decline in revenue, and did not receive other aid, such as PPP loans, to claim a credit against Social Security Taxes for retaining employees. The credit is now expanded to include a credit against Medicare taxes.
Tax Treatment of Federal Aid
The American Rescue Plan (ARP) has clarified that businesses receiving Economic Impact of Disaster Loans and Restaurant Revitalization grants will be able to deduct expenses paid with this aid. A similar clarification was made last year regarding expenses paid with PPP loans. The aid under these programs was already not counted as a part of the business’ income. The IRS had previously taken the position, that because the aid was not treated as income, expenses paid with the aid should not be deductible.
Child Tax Credit
The ARP includes a one-year pilot for an expanded child tax credit. The credit is $3,600 for children under age six and $3,000 for children under age 18. The new credit is fully refundable, and no other income is required to claim the credit, where previously the credit was only partially refundable and subject to earned income minimums. The credit is payable in advance each month, resulting in $300 payable to parents of children under age 6 and $250 for parents of children ages 6 to 17.
Despite early fears that the IRS would not be ready to begin paying the credit, the first monthly payments will begin being paid out July 15th. If a family filed a 2020 tax return, no additional action will be needed to begin receiving the credit. If the family received a refund by direct deposit, the payments will be deposited to that account; otherwise, debit cards or paper checks will be mailed out.
Two websites will be launched in the near future to aid families in receiving the credit. The first will allow families that are not otherwise required to file income tax returns to apply for the credit. The second will allow families to update their information during the year to allow for changes of address, custody, bank information, or the birth of a child. Families may also opt to receive the credit in full at the time they file income tax returns, rather than as a monthly payment.
The new credit begins to phase out at $75,000 adjusted gross income for single, or married filing separately filers, and $150,000 for joint filers. Households with incomes over these thresholds remain eligible for the prior versions of the child tax credit. The Biden administration has asked Congress to extend this tax credit for future years.
Expanded Dependent Care Credit
The dependent care tax credit was also expanded for one year to provide a credit of 50% (up from 35%) of eligible care expenses, and increases the maximum amount of allowed expenses to calculate the credit to $8,000 for one eligible dependent, from $3,000, and $16,000 for two or more dependents, up from $8,000. The income level where the credit starts to phase out is also increased from $15,000 to $125,000. The exclusion of employer-provided child care from income is also expanded from $5,000 to $10,500 for 2021.
Exclusion of Unemployment Benefits.
To avoid unexpectedly large tax bills for taxpayers who received unemployment benefits in 2020, the ARP provides an exclusion from income taxes of unemployment benefits up to $10,500 for taxpayers with adjusted gross incomes below $150,000. Unemployment benefits have historically been treated as taxable because they are a substitute for wages that would also be taxable. But many states did not withhold income taxes from unemployment benefits paid during the pandemic, which would have otherwise resulted in tax liabilities due at filing for recipients. Because the ARP was passed during the filing season, if you received unemployment benefits you should confirm that the exclusion was properly claimed.
Economic Impact Payments:
A third round of Economic Impact payments, $1,400 per person, have been largely paid to eligible recipients. The payments phase out starting at $75,000 adjusted gross income for single, or married filing separately filers, and $150,000 for joint filers. If you did not receive your payment and believe you were eligible to receive it, you can check the status of your payment at: https://sa.www4.irs.gov/irfof-wmsp/ If you did not file an income tax return for years 2019 or 2020, you may need to file to receive the payment.