Stimulus and a Chance to Tax Plan

Taxes. I am probably not in the minority when I say that I do not like paying taxes. In fact, I do not like preparing tax returns either. I can say that after a few years of preparing taxes early in my career, I certainly do not miss the tax-season grind. The days of leaving early in the morning before the sun was up and coming home well after the sun has gone down while trying to ensure that every figure was perfectly filled out on each IRS schedule day-in and day-out filled me with existential dread.

With a little introspection, however, I have learned that I actually enjoy doing tax planning. The ability to help shape items within my control to ensure that someone is efficiently saving tax dollars is like solving a puzzle each time. For most individuals, the American Rescue Plan Act of 2021 (ARPA) is only appealing because of the “stimulus checks” they are set to receive. But for me, it is a chance to see what kind of new planning can come into play as we have new legislation. It is like a new puzzle to solve. Below, you will see a few of the puzzle pieces that might be pertinent to your situation.

Please note, none of this should be considered tax advice, and you should consult with your financial planner and/or tax advisor to see if these situations apply to you.

2021 Recovery Rebates

A cornerstone of the American Rescue Plan is the third installment of Recovery Rebates, mostly referred to as “stimulus checks”. These rebates are, much like those in 2020, advances of a 2021 tax credit that will be a part of your 2021 tax return. There are a few changes (beside dollar amounts) to the American Rescue Plan’s $1,400 rebates from those distributed last year:

• Expanded eligibility: The 2020 rebates were only eligible to taxpayers and children age 16 and under (effectively those who qualify for the Child Tax Credit); whereas the 2021 American Rescue Plan expands that to include dependents on a tax return. This expansion opens the possibilities of taxpayers to receive Recovery Rebates for children who are in the latter stages of high school or college, as well as, claiming elderly parents/family members who are dependents.
• Faster phaseouts: Both of the 2020 rebates were phased out (reduced) by $5 for every $100 that Adjusted Gross Income (AGI) was over an applicable threshold ($150,000 for Married Filing Joint; $112,500 for Head of Household; $75,000 for Single Filers and Married Filing Separate). Therefore, the larger the number of eligible individuals you were receiving a rebate on, the higher your income could be to still receive some rebate. By contrast, the 2021 American Rescue Plan rebates have narrower windows before being fully phased out (disproportionality impacting those with larger numbers of dependents) and taxpayers receive no stimulus check. Those ranges are:
  • $150,000 - $160,000 for Married Filing Joint
  • $112,500 - $120,000 for Head of Household
  • $75,000 - $80,000 for Single and Married Filing Separate

This provides a couple of unique planning opportunities:

1. If your 2019 AGI was under the bottom of the phaseout listed above, but was above the phaseout range in 2020, it may not be worthwhile filing your taxes early this year if you have not already received a stimulus check (procrastinators unite!). This is because the current calculations are based on the most recent tax return that the IRS has on file. So, if your 2020 return with higher income is not yet on file, then you may still be eligible to receive a 2021 rebate based on your 2019 tax return.
2. The inverse of #1 is also true. If your 2019 income was too high to receive any rebate, but your 2020 income was low enough for AGI to be underneath the phaseout limits (understandably given the pandemic that ARPA is attempting to help aid in recovery from), then it is likely worthwhile to file your taxes early this year so the most recent tax return on file with the IRS is 2020.

It should be noted that this is still an advancement of a 2021 tax credit. If your 2021 AGI is low enough to where you should have received a Recovery Rebate, but did not receive one earlier in the year, there will be a tax credit on your 2021 tax return for the amount you are due to receive. If a taxpayer had too high of income in 2019 and 2020 they won’t receive an advance on the tax credit. If 2021 AGI is expected to be around the phaseout amount, monitoring income would be prudent. Because of the narrow phaseout window, an additional $15,000 worth of income in 2021 that pushes AGI from $150,000 to $165,000 for a Married Filing Joint couple with no dependents may cost the taxpayers an additional $2,800 of “taxes” by way of missing out on the Recovery Rebates (bringing the total up to almost 41% of effective taxes on the $15,000 of income when the taxpayers are only in the 22% Federal tax bracket)!

Expansion on the Child Tax Credit for 2021

The American Rescue Plan has also increased the Child Tax Credit from $2,000 to $3,000 for each qualifying child. The credit is even increased up to $3,600 for qualifying children under the age of six (this makes up for at least a couple of those sleepless nights…. right?). Although, the increased amount in the Child Tax Credit for 2021 does have its own set of phaseout ranges, making it is best to confirm with a qualified tax advisor on the impact and eligibility.

Also for 2021, children under the age of 18 (so 17 and under) by the end of the year are eligible for the Child Tax Credit. Which is normally reserved for children under the age of 17 (16 and under) by the end of the year.

Major Boon to the Child and Dependent Care Tax Credit for 2021

Normally, the Child and Dependent Care Credit is calculated on a maximum of $3,000 of childcare expenses for a single child, and $6,000 of expenses for two or more children. For 2021, those amounts have more than doubled to $8,000 for a single child and $16,000 for two or more children. Those familiar with the Child and Dependent Care Credit are aware that they only receive a portion of the expenses incurred for childcare, and that percentage is phased down depending on AGI (what’s new?). The American Rescue Plan also increased the maximum deductible percentages, as well as bumping the phaseout amounts, so your deductible credit could be considerably higher:

Image credit: www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more

If you earn more than $440,000, you could possibly see the Child and Dependent Care Credit that you normally would have been eligible to receive completely go away in 2021. Therefore, some of the tax changes are not favorable for everyone.

Potential for Tax-Free Unemployment Compensation Received in 2020

If you received unemployment compensation in 2020, up to $10,200 of that may be eligible to be excluded from income for 2020, if your AGI is under $150,000. Normally all unemployment compensation is taxable for the year it was received.

Increased Eligibility for Healthcare Subsidy for Those on State Health Insurance Exchanges

Those who have health insurance through a state-provided exchange are likely aware that there are federal subsidies available depending on your income level in order to help subsidize the cost of coverage. How much of a subsidy you are eligible to receive is related to a comparison of your income to the Federal poverty line. A portion of the American Rescue Plan has increased the eligibility of those available to receive the subsidies depending on income, allowing for a larger portion of the premiums to be subsidized in 2021 and 2022. The calculation here gets to be a bit messy, so I will just suggest consulting with your tax advisor on your eligibility to receive a subsidy and how much.

Conclusion

This year may turn out to be one of the more impactful years to do tax planning. Connecting with your financial planner or tax advisor at some point this year may be worthwhile. There are quite a few more items included in the American Rescue Plan that haven’t been discussed in this article. The provisions discussed above are less than half of the funding in the relief bill. Each of the relief packages over the last year has added additional complexity when it comes to not only tax planning but also tax preparation. If you talk with a CPA today, give them a hug (erm, COVID.…maybe just a virtual one) as their tax season was just extended by another month to May 17^th.