Gambling Winnings & Losses - How does it work?
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Gambling Winnings & Losses - How does it work?

The Tax Cuts and Jobs Act (TCJA), enacted at the end of 2017, suspended certain deductions for 2018 through 2025. For example, you can’t currently deduct any miscellaneous expenses, including unreimbursed employee business expenses and production-of-income expenses. But one other type of expense that is sometimes thought to be a miscellaneous expense is still deductible by itemizers: gambling losses.

That being said, a special limit applies to gambling loss deductions. Furthermore, you must keep detailed records to back up your claims.

There’s no AGI limit on gambling loss deductions. However, your annual losses are deductible only up to the amount of your winnings.  For example, say that you incur $10,000 in gambling losses and pull down $7,500 in winnings in 2022. In that case, your gambling loss deduction is limited to $7,500. Conversely, if you have $5,000 in losses, you can write off the entire $5,000.

The IRS takes a broad view of what constitutes a gambling activity. This isn’t restricted to betting on the racetrack or dog track or high stakes at the casinos, although those count, too. It also encompasses lotteries, raffles, keno, poker games, sports wagering and the like—even bingo at the local church!

What sort of records do you have to keep? This may vary slightly, depending on the type of gambling activity, but generally the IRS expects you to keep track of the following:

  • The date & type of gambling you engage in;
  • The name & address of the places where you gamble;
  • The individuals you gambled with; and, most important;
  • The amount of your winnings & loses.

The supporting documentation for gambling loss deductions may include Form W-2G; Form 5754; wagering tickets; canceled checks or credit card statements; and receipts from the gambling source.

Of course, you can write off gambling losses only if you itemize deductions. In other words, if you opt for the standard deduction instead, you get no deduction, regardless of the amount of income and losses. Note that gambling income may also be subject to state and local taxes.

Finally, you might have an ace up your sleeve. If gambling is legitimately your livelihood, you can report winnings and losses from such activities on Schedule C as a self-employed individual, but you can’t claim an overall loss. And you may also be entitled to write-offs for certain travel expenses and other costs (e.g., subscriptions to gambling magazines) as ordinary and necessary business expenses. Plus, the value of complimentary rooms, vacations, and other gifts from casinos is treated as taxable income, but may be offset by losses from gambling activities.

Caution: The IRS is often suspicious of such claims, so tread carefully. Only play this card when you have a winning hand.

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2021 Recovery Rebate Credit FAQs

If you didn’t get the full amount of the third Economic Impact Payment, you may be eligible to claim the 2021 Recovery Rebate Credit and must file a 2021 tax return – even if you don’t usually file taxes – to claim it. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund.

Q: How does the 2021 Recovery Rebate Credit differ from the 2020 Recovery Rebate Credit?

A: 2020 Recovery Rebate Credit: The first two rounds of Economic Impact Payments were advance payments of 2020 Recovery Rebate Credits claimed on a 2020 tax return. The IRS issued the first and second rounds of Economic Impact Payments in 2020 and in early 2021.

2021 Recovery Rebate Credit: The third round of Economic Impact Payments, including the plus-up payments, were advance payments of the 2021 Recovery Rebate Credit claimed on a 2021 tax return. The IRS began issuing the third round of Economic Impact Payments in March 2021 and continued through December 2021. In addition, the third payments differ from the earlier payments in several respects:

  • Payment amounts are different. The maximum credit is $1,400 per person, including all qualifying dependents claimed on a tax return. Typically, this means a single person with no dependents will have a maximum credit of $1,400, while married taxpayers who file a joint return that claims two qualifying dependents will have a maximum credit of $5,600.
  • Qualifying dependents expanded. Unlike the 2020 Recovery Rebate Credits and first two rounds of Economic Impact Payments, the 2021 Recovery Rebate Credit and third round of Economic Impact Payments include additional amounts for all dependents, not just children under 17. Eligible individuals will get up to $1,400 for each qualifying dependent claimed on their return, including older relatives like college students, adults with disabilities, parents, and grandparents.
  • Income thresholds changed. The credit amount begins to be reduced at the same income thresholds as the 2020 Recovery Rebate Credits, for example with adjusted gross income of more than $75,000 if filing as single or $150,000 if filing as married filing jointly. However, the 2021 Recovery Rebate Credit amount is fully reduced to $0 more quickly. For example, individuals can’t claim any credit with adjusted gross income of $80,000 or more if filing as single or $160,000 or more for if filing as married filing jointly. Due to these new income limitations, some individuals won’t be eligible to claim the 2021 Recovery Rebate Credit even if they received a 2020 stimulus payment.

Q: What were Plus-Up Payments?

A: Some eligible individuals received more than one third Economic Impact Payment. The IRS sent additional or plus-up payments to people who:

  • Received a third Economic Impact Payment based on a 2019 tax return or information received from the Social Security Administration, Railroad Retirement Board, or the Department of Veterans Affairs, and
  • Filed a 2020 tax return which allowed a greater third Economic Impact Payment but only if the 2020 return was processed by Dec 1, 2021.

For example, you may have gotten a plus-up payment if your income was less in 2020 compared to 2019 or you added a dependent on your 2020 return.
The IRS automatically evaluated your eligibility for plus-up payments after they processed your 2020 return. The IRS sent plus-up payments separately from your 2020 tax refund and previous Economic Impact Payments. They issued weekly plus-up payments to eligible taxpayers until December 31, 2021, the deadline set by law to make Economic Impact Payments. Individuals who did not receive the full amount of the third Economic Impact Payment, including the plus-up payments, may be eligible to claim the 2021 Recovery Rebate Credit on their 2021 tax return.

Q: Will I receive a letter or notice from the IRS about the third Economic Impact Payment?

A: Yes, the IRS mailed Notice 1444-C, Your Third Economic Impact Payment, at the address they had on file for you. The IRS sent separate letters to people who received a plus-up payment.
The IRS will send Letter 6475, Your 2021 Economic Impact Payment(s), in early 2022 to confirm the total amount of the third Economic Impact Payment and any plus-up payments you received for tax year 2021.
Please keep any IRS notices/letters you receive related to the third round of Economic Impact Payments with your tax records and refer to it when you file your 2021 tax return.

Q: I used the Non-Filers tool last year and don’t usually file a tax return. What should I do to claim a 2021 Recovery Rebate Credit?

A: If you’re eligible – and either didn’t qualify for a third Economic Impact Payment or got less than the full amount – you’ll need to file a 2021 tax return to claim the Recovery Rebate Credit even if you otherwise are not required to file a tax return. The best way to file a complete and accurate 2021 tax return is to file electronically. Your CPA or the tax preparation software will ask questions about your income, credits and deductions and will help you figure your 2021 Recovery Rebate Credit.

Please Note: Avoid processing delays that can slow your refund by filing a complete and accurate tax return. You will need the total amount of your third Economic Impact payment and any plus-up payments to claim the 2021 Recovery Rebate Credit, which you can find in your Online Account. Any third Economic Impact Payments you received will reduce the amount of the credit you claim on your tax return. If the information on your return is not accurate it will delay the processing of your return.

Advance 2021 Child Tax Credit FAQs
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Advance 2021 Child Tax Credit FAQs

The advance child tax credit payments ended in December, but there’s still more money coming to eligible families in 2022. Now that tax season has arrived, the final enhanced child tax credit payment for 2021 — including any money you didn’t receive in advance — will arrive with your tax refund. Families who received the advance child tax credit in 2021 (the money went out from July through December) must reconcile what they received last year with what their financial situation is this year, and file a Schedule 8812.

To help taxpayers reconcile and receive 2021 CTC, the IRS is sending Letter 6419, Advance Child Tax Credit Reconciliation. A married couple filing a joint return will receive two letters. Taxpayers should keep this, and any other IRS letters about advance CTC payments, with their tax records.

Families who received advance payments must:
• File a 2021 tax return
• Compare the advance payments received in 2021 with the CTC amount they can claim for 2021

This letter contains helpful information for preparing tax returns. Taxpayers who received advance payments can also check amounts using the CTC Update Portal and Online Account on IRS.gov.
Eligible families who didn’t receive advance child tax credit payments can claim the full amount of the child tax credit on their 2021 federal tax return. This includes families who don’t normally need to file a tax return.

For more detailed information please read the FAQs below:

Q: What is the 2021 Child Tax Credit?

A: The Child Tax Credit is a fully refundable tax credit for families with qualifying children. The American Rescue Plan expanded the Child Tax Credit for 2021 to get more help to more families. The credit increased from $2,000 per child in 2020 to $3,600 in 2021 for each child under age 6. Similarly, for each child age 6 to 16, it’s increased from $2,000 to $3,000. It also provides the $3,000 credit for 17-year-olds. Under the American Rescue Plan, the IRS disbursed half of the 2021 Child Tax Credit in monthly payments during the second half of 2021.

The advance Child Tax Credit payments disbursed by the IRS from July through December of 2021 were early payments from the IRS of 50 percent of the amount of the Child Tax Credit that the IRS estimated you may properly claim on your 2021 tax return during the 2022 tax filing season.

Important: You don’t need to have income or a permanent address to claim this tax credit if you’re eligible.

Q: What is the amount of the Child Tax Credit for 2021?

A: For tax year 2021, the Child Tax Credit is increased from $2,000 per qualifying child to:

  • $3,600 for each qualifying child who has not reached age 6 by the end of 2021, or
  • $3,000 for each qualifying child age 6 through 17 at the end of 2021.

Note: The $500 nonrefundable Credit for Other Dependents amount has not changed. For more information about the Credit for Other Dependents, see the Instructions for Schedule 8812 (Form 1040).

Q: How much of the Child Tax Credit can I claim on my 2021 tax return?

A: This amount will depend on the following factors:

  1. You received advance Child Tax Credit payments for a qualifying child. You may have received a portion of your Child Tax Credit through advance Child Tax Credit payments during 2021. Generally, the total amount of advance payments for each of your qualifying children equaled 50 percent of the amount of the credit that the IRS estimated you would be eligible to claim on your 2021 tax return for those children.
  2. You didn’t receive advance Child Tax Credit payments for a qualifying child. If you didn’t receive one or more monthly advance Child Tax Credit payments in 2021 for a qualifying child, you can still receive those payments – and the remaining amount of your credit – by claiming the Child Tax Credit for that child when you file a 2021 tax return during the 2022 tax filing season. This includes families who don’t normally need to file a return.
  3. Your family experienced life changes during 2021. Changes throughout 2021, such as a change in filing status, change in the number of your qualifying children, or a change in your income could increase or decrease the amount of Child Tax Credit you are eligible to claim on your 2021 tax return. Families who received advance Child Tax Credit payments will need to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return.

Q: How did the IRS determine the amount of my advance Child Tax Credit payments?

A: The IRS determined your advance Child Tax Credit payment amounts by estimating the amount of the Child Tax Credit that you may properly claim on your 2021 tax return filed during the 2022 tax filing season. The estimate was based on information shown on your processed 2020 tax return (including information you entered in the Child Tax Credit Non-filer Sign-up Tool in 2021). If the IRS hadn’t processed your 2020 tax return when they determined the amount of your advance Child Tax Credit payment for any month, they estimated the amount of your 2021 Child Tax Credit based on information shown on your 2019 tax return (including information you entered in the Non-Filer Tool on IRS.gov in 2020). Generally, once the IRS processed your 2020 return, they recalculated your advance Child Tax Credit payments and adjusted any remaining monthly payments. You may claim the remaining amount of your 2021 Child Tax Credit when you file your 2021 tax return during the 2022 tax filing season.

Q: Will the amount of my Child Tax Credit be reduced if my 2021 income is too high?

A: Yes, if your 2021 income is high enough, the amount of Child Tax Credit you can claim will be reduced. The amount of your Child Tax Credit will not be reduced if your 2021 modified adjusted gross income (AGI) is at or below:

  • $150,000 if you are married and filing a joint return, or if you are filing as a qualifying widow or widower;
  • $112,500 if you are filing as a head of household; or
  • $75,000 if you are a single filer or are married and filing a separate return.

Q: How does my 2021 modified adjusted gross income (AGI) reduce the amount of my Child Tax Credit?

A: The Child Tax Credit is reduced (“phased out”) in two different steps, which are based on your modified adjusted gross income (AGI) in 2021.

The first phaseout can reduce the Child Tax Credit down to $2,000 per child.

  • That is, the first phaseout step can reduce only the $1,600 increase for qualifying children age 5 and under, and the $1,000 increase for qualifying children age 6 through 17, at the end of 2021.

The second phaseout can reduce the remaining Child Tax Credit down to zero per child.

Q: How does the first phaseout reduce the 2021 Child Tax Credit to $2,000 per child?

A: The Child Tax Credit begins to be reduced to $2,000 per child if your modified adjusted gross income (AGI) in 2021 exceeds:

  • $150,000 if you are married and filing a joint return, or if you are filing as a qualifying widow or widower;
  • $112,500 if you are filing as head of household; or
  • $75,000 if you are a single filer or are married and filing a separate return.

The first phaseout reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above that applies to you.

Example: Your family has one 10-year-old qualifying child. The amount of income that reduces the $3,000 Child Tax Credit under the first phaseout depends on your family’s filing status. Specifically, the Child Tax Credit is reduced to $2,000 if modified AGI in 2021 exceeds:

  • $169,000 if you are married and filing a joint return, or if you are filing as a qualifying widow or widower;
  • $131,500 if you are filing as head of household; or
  • $94,000 if you are a single filer or are married and filing a separate return.

Q: How does the second phaseout reduce the Child Tax Credit amount remaining after the first phaseout?

A: The second phaseout won’t begin to reduce the remaining Child Tax Credit until your modified adjusted gross income (AGI) in 2021 exceeds:

  • $400,000 if married and filing a joint return; or
  • $200,000 for all other filing statuses.

The second phaseout reduces, down to zero, the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above that applies to you.

Q: Is my Child Tax Credit refundable?

A: Yes, if you meet the main home requirement described below, your Child Tax Credit will be fully refundable even if you had no income during 2021.

Main Home Requirement: You — or your spouse, if you are married and filing a joint return — must have your main home in one of the 50 states or the District of Columbia for more than half of 2021.

Important Rules:

  • Your main home can be any location where you regularly live.
  • Your main home may be your house, apartment, mobile home, shelter, temporary lodging, or other location and doesn’t need to be the same physical location throughout the taxable year.
  • You don’t need a permanent address.
  • If you are temporarily away from your main home because of illness, education, business, vacation, or military service, you are generally treated as living in your main home.

Q: What does it mean to me if my Child Tax Credit is fully refundable?

A: It means that you do not need any income or need to owe any tax in 2021 to receive the full amount of the Child Tax Credit for which you are eligible.

Q: What does it mean to me if my Child Tax Credit is not fully refundable?

A: If you don’t meet the main home requirements outlined above, you may still qualify for a $3,000 or $3,600 Child Tax Credit for each qualifying child. However, the refundability of the credit is limited, similar to the 2020 Child Tax Credit and Additional Child Tax Credit. For more information, please discuss this with your tax preparer.

Q: Are advance Child Tax Credit payments taxable?

A: No. Advance Child Tax Credit payments are not taxable and will not be reported as income on your 2021 tax return. Advance Child Tax Credit payments are advance payments of your Child Tax Credit for tax year 2021.

Q: Will I need to repay the IRS any of the advance Child Tax Credit payments that I received during 2021?

A: Maybe. The total amount of advance Child Tax Credit payments that you received during 2021 was based on the IRS’s estimate of the amount of Child Tax Credit that you may properly claim on your 2021 tax return.
Important: If the total amount of your advance Child Tax Credit payments was greater than the Child Tax Credit amount that you may properly claim on your 2021 tax return, you may have to repay the excess amount on your 2021 tax return during the 2022 tax filing season – unless you qualify for repayment protection.
For example, if you received advance Child Tax Credit payments for two qualifying children properly claimed on your 2020 tax return, but you no longer have qualifying children in 2021, the advance Child Tax Credit payments that you received based on those children are added to your 2021 income tax unless you qualify for repayment protection. For more information regarding your eligibility for repayment protection, please discuss this with your tax preparer.

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Michigan Unemployment Update - July 2021

Work Search Requirement Reinstated

As of May 30, 2021, the Unemployment Insurance Agency (UIA) has reinstated work search requirements for unemployment benefits claimants. The requirement to search for work in order to receive unemployment benefits had been suspended since March 2020 to help the increased volume of hardworking Michiganders who faced unemployment due to the pandemic.

Claimants must now actively seek work and report at least one work search activity per week for each week they claim benefits. A work search activity could include submitting a job application, attending a job fair or employment workshop, interviewing with employers and more.

There are COVID-specific exemptions for people who are self-employed, unable to work due to COVID-19 and parents with children attending school remotely because the school is closed. If an individual has an approved waiver, they are exempt from the work search requirement. Claimants must apply for a waiver prior to their certification for benefits.

In addition to COVID-specific waivers, claimants may also be exempt from the work search requirement if they are granted a temporary layoff waiver. This type of waiver must be requested by the employer before a worker is laid off. The Registration and Seeking Work Waiver may be approved for 45 days. The criteria for establishing a waiver are:

  • The separation must be a layoff for lack of work
  • The layoff is temporary (work will be available within 45 days)
  • The request must be received before the layoff occurs (no later than the week prior to the layoff.)

Refusing an Offer of Suitable Work

When an employer makes an offer of suitable work to an employee or makes an offer for an employee to return to their previous job, the employee can possibly lose unemployment benefits it he/she refuses. Wages, workplace safety and other factors are considered in determining whether work is “suitable.”

Both employers and employees have an obligation to report offers and refusals of suitable work to the Agency. The employer should notify the UIA by submitting details of the refusal in MiWAM.

If a claimant fails to return to work or refuses an offer of work, this can be reported online through your MiWAM account.

  • Under Online Services for Employers
  • Click on Report Refusal of Offer to Work
  • Complete all steps with information and then submit.

If a claimant fails to interview, you can submit the date, time and employer name and address of where the interview was to take place, along with the claimant’s name, address, and phone number so the UIA can research and investigate. This type of protest will need to be mailed to:
UIA, P.O. BOX 169, Grand Rapids, MI 49501-0169.

For more information on suitable work, including what to do if an employee refuses an offer of suitable work see Fact Sheet 144 – Returning to Work and Refusal to Work Information for Employers.

Non-Charging of Benefits Ended

On March 27, 2021, temporary statutory amendments codifying Gov. Whitmer’s Executive Order 20-76 for charging unemployment benefits to Unemployment Insurance Agency’s Non-Chargeable Benefits Account (NBA) has expired. Under the temporary provisions, employers were not charged for benefits paid to claimants who were laid off, placed on a leave of absence, or whose work hours were reduced due to COVID-19. As of March 28, 2021, all benefits paid to claimants based on these types of separations will be charged to the involved employer’s experience account.

When you receive Form UIA 1136, Weekly Statement of Benefit Charges (dated as of March 28 and forward), and you disagree with benefit charging of unemployment claims for separated workers, you must file a protest. Additionally, employers must follow up and respond timely to Form 1713, Request for Information, for fact finding information if a protest is filed.

From April 4 – Sept. 4, 2021, reimbursing employers are eligible for 75% federal reimbursement of the benefit charges for COVID-related or non-COVID related reasons under the American Rescue Plan Act of 2021. Reimbursing employers will be responsible for the remaining 25% of the benefit charges.

For faster service, all documents should be submitted through MiWAM.  It is recommended that all employers gain access to their MiWAM account in addition to your third-party administrator’s access.

Changing Your Work Share Plan

If changes in your business necessitate an update to your Work Share plan, there are two ways to go about it. You can choose to modify your plan, or you can terminate your plan and start a new one.

The Modify Plan link should only be used to update the start date of your Work Share plan. You can backdate your start date by up to two weeks from your original start date requested. If you enter
a date that is more than two weeks from the original plan start date, an error message will display: Start date can only be backdated up to two weeks from original start date requested.

IMPORTANT NOTE: Be sure to answer No when asked “Do you need to change the percentage of work reduction for this unit?” Submitting a percentage lower than the original Work Share plan will result in an overpayment for those affected employees.

If you need to change your percentage of work reduction – you will need to Terminate your Plan, and then start a new plan with the desired percentage. View or download the Work Share Toolkit for step-by-step instructions on how to terminate your plan.

UIA EMPLOYER AUDITS

UIA tax audits are conducted periodically to ensure compliance with the Michigan Employment Security (MES) Act. Employers are selected for tax audits based on computer-generated sampling or employer account referrals. If selected for an audit, you will receive a Notification of Audit letter from a UIA auditor by mail (USPS), and by a web notice in your MiWAM account.

Starting July 12, 2021, in person audits will resume. UIA has also launched an E-Audit (Electronic Audit) process using a Secure Employer Documentation Portal available in your MiWAM account. The E-Audit process allows you to upload all required documents that are needed for an audit so that the auditor can review and perform the audit without going to your place of business. This is a fast and convenient process for employers to use. At the conclusion of either the standard “in person” audit or the e-audit, you will be notified regarding the results in a post audit discussion with the auditor and you’ll be sent a Notice of Audit Results letter via US mail.

Employers may also be contacted by an auditor regarding investigation of a claimant’s request for benefits. The auditor may need to verify claimant wages, W-2’s or 1099’s, or investigate any misclassification of employees. The auditor will ask for documentation to make a determination for claimant benefits.

This information is provided by the Michigan Department of Labor and Economic Opportunity.

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2021 Child Tax Credit & Advanced Payments

Under the American Rescue Plan Act (ARPA), P.L. 117-2, the IRS must make 2021 periodic advance child tax credit payments to taxpayers up to the “annual advance amount.” These payments — up to $300 per month per child under age 6 and up to $250 per month per child age 6 through 17 — will be paid in equal amounts and made no earlier than July 1, 2021, and no later than Dec. 31, 2021.

For tax year 2021 only, ARPA increased the child tax credit amount to up to $3,000 for each qualifying child between age 6 and 17 at the end of the 2021 tax year, and $3,600 for each qualifying child under age 6 at the end of the 2021 tax year. ARPA also made the child tax credit for 2021 fully refundable if the taxpayer (or spouse, on a joint return) has a principal place of abode in the United States for more than one-half of the 2021 tax year.

The IRS has opened an online site to enable taxpayers to unenroll from receiving advance payments of the 2021 child tax credit (CTC).

The new “Child Tax Credit Update Portal” allows parents to view their eligibility, view their expected CTC advance payments, and if they wish to do so, unenroll from receiving advance payments (opt out).

You may want to unenroll from receiving advance Child Tax Credit payments for several reasons, including if you expect the amount of tax you owe to be greater than your expected refund when you file your 2021 tax return. The payments you receive are an advance of the Child Tax Credit that you would normally get when you file your 2021 tax return. Because these credits are paid in advance, every dollar you receive will reduce the amount of Child Tax Credit you will claim on your 2021 tax return. This means that by accepting advance child tax credit payments, the amount of your refund may be reduced or the amount of tax you owe may increase. You may avoid owing tax to the IRS if you unenroll and claim the entire credit when you file your 2021 tax return.

There is, of course, a deadline to unenroll. To stop advance payments, you must unenroll 3 days before the first Thursday of next month by 11:59 p.m. Eastern Time. You do not need to unenroll each month.

Payment MonthUnenrollment DeadlinePayment Date
July06/28/202107/15/2021
August08/02/202108/13/2021
September08/30/202109/15/2021
October10/04/202110/15/2021
November11/01/202111/15/21
December11/29/202112/15/21

If you miss a deadline to unenroll, you will get the next scheduled advance payment until we process your request to unenroll. Once unenrolled it may take up to 7 calendar days to process it, and you can NOT re-enroll at this time. Unenrollment is a one-time action, however the IRS is working on an option to re-enroll.

If you file your tax return “Married Filing Jointly” BOTH the taxpayer and the spouse will need to unenroll. Unenrolling applies to the individual only. If you don’t unenroll, you will get half of the joint payment you were supposed to receive with your spouse.

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Tax Effects of the American Rescue Plan Act

In addition to the $1,400 stimulus payments to many Americans, the American Rescue Plan Act provides many other relief measures, and also some new business tax measures, that should be noted.

CPA Practice advisor

The American Rescue Plan Act of 2021 (ARPA), enacted by President Joe Biden on Thursday, is an approximately $1.9 trillion COVID-19 relief, funding and tax bill that has received a lot of attention for the inclusion of $1,400 direct payments to individuals.

Here is a look at the final version of the tax provisions:

Unemployment Benefits

The act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year. The State of Michigan has recently announced they will follow suit.

Recovery Rebates aka Stimulus Checks

The act creates a new round of economic impact payments to be sent to qualifying individuals. The same as last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. The act creates a new Sec. 6428B that provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent (as defined in Sec. 152) for 2021, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.

For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.

The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.

Child Tax Credit

The act expands the Sec. 24 child tax credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.

The act increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.

The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.

The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.

Taxpayers in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and their increase tax by the excess of the advance payment amount over the actual credit allowed. But taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.

Earned Income Tax Credit

The act also makes several changes to the Sec. 32 earned income tax credit. It introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.

The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.

The credit would be allowed for certain separated spouses.

The threshold for disqualifying investment income would be raised from $2,200 to $10,000.

Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.

Child & Dependent Care Credit

The act makes various changes to the Sec. 21 child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.

The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Family & Sick Leave Credits

The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, as Secs. 3131 (credit for paid sick leave), 3132 (credit for paid family leave), and 3133 (special rule related to tax on employers). The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.

The act increases the limit on the credit for paid family leave to $12,000.

The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.

The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.

The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.

The credits are expanded to allow 501(c)(1) governmental organizations to take them.

Employee Retention Credit

The act codifies the employee retention credit in new Sec. 3134 and extends it through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and it allows eligible employers to claim a credit for paying qualified wages to employees.

Under the act, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.

Premium Tax Credit

The act expands the Sec. 36B premium tax credit for 2021 and 2022 by changing the applicable percentage amounts in Sec. 36B(b)(3)(A). Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.

Student Loans

The act amends Sec. 108(f) to specify that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.

What else does the American Rescue Plan Act do?
  • An extension of the $300 federal unemployment benefit supplement through Sept. 6,
  • $15 billion of additional targeted Economic Injury Disaster Loan (EIDL) grants
  • $28.6 billion to fund a new grant program for certain restaurants,
  • $7 billion of expanded Paycheck Protection Program (PPP) eligibility for certain nonprofit organizations,
  • support for Affordable Care Act coverage,
  • an extension and expansion of paid sick leave and Family and Medical Leave Act leave tax credits through September,
  • an extension of and increase in certain FFCRA (defined below) credits,
  • extends the 15% increase in Supplemental Nutrition Assistance Program benefits through September
  • provides $7.5 billion for Centers for Disease Control and Prevention vaccination distribution,
  • $5.2 billion for Biomedical Advanced Research and Development Authority vaccine procurement;
  • $48.3 billion for testing, contact tracing and personal protective equipment for healthcare workers;
  • $50 billion for the Federal Emergency Management Agency Disaster Relief Fund;
  • $125 billion for K-12 schools; $39.6 billion for colleges and universities;
  • $39 billion for child care programs; $25 billion for emergency rental assistance;
  • $7.6 billion for community health centers; $7 billion to help with broadband for remote learning;
  • $4.5 billion for the Low-Income Home Energy Assistance Program;
  • and $3.8 billion to support state mental health and substance abuse programs.

The ARPA contains several revenue-raising provisions, including

  • an outright repeal of the long-delayed Section 864(f) worldwide interest allocation rules, which otherwise would have applied beginning this year;
  • an expansion of the Section 162(m) compensation deduction limitation to include an additional five of the highest-paid corporate employees, beginning in 2027;
  • increased information reporting for certain third-party settlement organizations regarding payees receiving in excess of $600 annually;
  • and an extension for one year – through 2026 – of the Section 461(l) limitation on excess business losses for noncorporate taxpayers.

The ARPA does not include federally proposed so-called Mobile Workforce provisions or COVID-19-related liability protections, and most believe those proposals are unlikely to be enacted in 2021. The ARPA also contains no restrictions on the Section 461(l) loss limitation suspension for 2018-2020 pursuant to prior COVID-19 relief legislation and also does not prevent net operating losses generated in 2018-2020 from being carried back even if not yet carried back in filed tax returns.

Portions of the ARPA are supplemental in certain respects to the Dec. 27, 2020, Consolidated Appropriations Act, 2021 (CAA); the March 27, 2020, Coronavirus Aid, Relief, and Economic Security (CARES) Act; the March 18, 2020, Families First Coronavirus Response Act (FFCRA); and the March 6, 2020, Coronavirus Preparedness and Response Supplemental Appropriations Act.

I. Details of Certain Corporate Tax Provisions

A. Repeal of IRC Section 864(f) Worldwide Interest Allocation Rules IRC Section 864(f), enacted in 2004 with a delayed effective date, would have allowed taxpayers to elect to allocate and apportion interest expense on a worldwide basis. The provision has been repeatedly delayed by legislation but was finally scheduled to be effective in 2021. The ARPA permanently repeals the provision. The repeal is scored as raising $22 billion to help lower the cost of the ARPA.

B. Increase in Number of Employees Subject to IRC Section 162(m)’s Limitation on Deductions of Executive Compensation IRC Section 162(m) generally prohibits tax deductions by publicly traded corporations for so-called covered employees to the extent annual compensation of those employees exceeds $1 million. Section 162(m) generally applies to the CEO, the CFO and the three next-highest-compensated individuals. For tax years beginning in 2027, the ARPA requires corporations to also include the five next-highest-compensated individuals, so that the total number of covered individuals will be at least 10. Once an individual is subject to Section 162(m) under pre-ARPA law, the individual continues to be covered by Section 162(m) even if not among the five highest-compensated employees. With respect to the five next-highest-compensated individuals, the ARPA does not provide for continuing coverage by Section 162)(m) if they later fall outside the ARPA-expanded group. The expansion of Section 162(m) is scored as raising $6 billion to help lower the cost of the ARPA.

II. Details of Certain Tax and Related Provisions Relevant to Noncorporate Businesses and Individuals

A. Extension of IRC Section 461(l)’s Limitation on Excess Business Losses of Noncorporate Taxpayers IRC Section 162(l) generally disallows use of noncorporate losses in excess of $250,000 ($500,000 for joint filers). The CARES Act removed the Section 461(l) limitation for tax years 2018-2020. The ARPA pushes out the current expiration of Section 461(l) from 2026 to 2027. The ARPA does not remove or change CARES Act provisions relating to Section 461(l).

B. Recovery Rebate PaymentsThe ARPA provides for additional recovery rebates of up to $1,400 for most individual U.S. residents. The rebates begin to phase out for individuals with earnings in excess of $75,000 ($150,000 for joint filers), with rebates being unavailable to individuals with earnings in excess of $80,000 ($160,000 for joint filers). The rebate, which will be delivered via direct deposit when possible, is not taxable income; it is an advance payment of a refundable tax credit on the taxpayer’s 2021 federal income tax return.

III. Additional Infrastructure Spending and Very Significant Tax Changes Are Forthcoming

With passage of the ARPA, the focus in Washington, D.C., now shifts to a second budget reconciliation bill – Biden administration tax changes, expected to be joined with infrastructure spending. The tax changes are expected to be substantial and far-reaching and to include corporate, individual and capital gains tax rate increases; international tax changes; and estate and gift tax changes.

President Biden’s fiscal year 2022 budget is expected to be released in mid- to late April, at which point the House and then the Senate will craft and approve a budget resolution to serve as the vehicle for the next reconciliation process. Most expect committee action to begin in the next few months, with ultimate enactment in the fall. Only 51 votes are needed to pass budget reconciliation legislation in the Senate.

The effective dates of the newly enacted provisions generally are expected to be Jan. 1, 2022, but certain provisions may have proposed effective dates tied to committee action or the date of enactment (for example, capital gains tax rate increases may be proposed to apply to sales occurring after the date of committee action in early October or the date of enactment of the legislation later in the fall). The effective dates of certain provisions may be phased in over time, and certain provisions may be enacted on a temporary basis to help keep the scored cost of the legislation within acceptable parameters.