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​​​​​​​Tax provisions in the American Rescue Plan Act


Yardley CPA

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https://www.journalofaccountancy.com/news/2021/feb/tax-provisions-american-rescue-plan-act.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01Mar2021

Tax provisions in the American Rescue Plan Act

By Alistair M. Nevius, J.D.

February 27, 2021

The $1.9 trillion stimulus plan passed by the House of Representatives early Saturday contains many tax provisions, including a new round of economic impact payments, a tax credit for COBRA continuation coverage, and the expansion of several other tax credits. The House passed the bill, the American Rescue Plan Act of 2021, H.R. 1319, by a vote of 219–212, and it now goes to the Senate for consideration.

Recovery rebates

Subtitle G of the bill, titled "Promoting Economic Security," enacts 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 for 2021. As with the two recovery rebates enacted in 2020, the IRS will make advance payments, which the Service has been calling economic impact payments.

The recovery rebate credit phases out for taxpayers with adjusted gross income (AGI) over $75,000 ($150,000 for married filing jointly).

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

COBRA continuation coverage

Subtitle F of the bill, titled "Preserving Health Benefits for Workers," provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 21, 2021. The bill creates a new Sec. 6432, which allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against the Sec. 3111(b) Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.

The credit applies to premiums and wages paid after April 1, 2021.

Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.

Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.

Under new Sec. 139I, continuation coverage premium assistance is not includible in the recipient's gross income.

Child tax credit

The bill expands the Sec. 24 child tax credit in several ways. It makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.

The bill 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.

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.

The taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year's return and increase taxable income 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 credit

The bill also makes several changes to the Sec. 32 earned income 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 and dependent care credit

The bill makes changes to the Sec. 21 child and dependent care credit, including making it refundable for 2021. The bill also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Family and sick leave credits

The credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, would be extended to Sept. 30, 2021.

The bill 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 bill extends the employee retention credit 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 bill, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.

Premium tax credit

The bill expands the Sec. 36B premium tax credit for 2021 and 2022 by changing the applicable percentage amounts in Sec. 36B(b)(3)(A). 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.

Miscellaneous tax provisions

The bill repeals Sec. 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis.

The bill provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants.

The bill temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.

For more on the nontax portions of the bill, see, "House Passes $1.9 Trillion Stimulus Bill with a Variety of Small Business Relief."

— Alistair M. Nevius, J.D., ([email protected]) is the JofA's editor-in-chief, tax.

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Now I have clients who want to file extensions because the think they won't qualify for the next stimulus check when they file the 2020 tax return! 

These payments, if passed, won't even come until July. By then, the IRS will already have everyone's income statements whether they file a return or not. 

Is anyone else having these issues? I'm about to cut loose on someone. All this free money is crazy. It brings out the worst in people. 

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8 minutes ago, Possi said:

Now I have clients who want to file extensions because the think they won't qualify for the next stimulus check when they file the 2020 tax return! 

These payments, if passed, won't even come until July. By then, the IRS will already have everyone's income statements whether they file a return or not. 

Is anyone else having these issues? I'm about to cut loose on someone. All this free money is crazy. It brings out the worst in people. 

Even if the IRS has the outside party reporting, it won't accumulate that data like doing a SFR. If it is handled like the first 2 EIPs were, I'd expect IRS to use the 2019 for anyone that hasn't filed 2020 by then.

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1 hour ago, jklcpa said:

Even if the IRS has the outside party reporting, it won't accumulate that data like doing a SFR. If it is handled like the first 2 EIPs were, I'd expect IRS to use the 2019 for anyone that hasn't filed 2020 by then.

So, my client is justified in holding her tax return. Great. 

not

I'm a whiny baby, I know. I'll step away and have some wine. That always makes things better! 

Cheers!

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2 hours ago, Possi said:

 

Is anyone else having these issues? I'm about to cut loose on someone. All this free money is crazy. It brings out the worst in people. 

That is called tax planning, which we have been suggesting for a long time. 

I think I read that the next stimulus will be reconciled with 2021 return.

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The tickler in the EIP's specifically is the "no pay back if too much received" rule.  If it was accounted for eventually, then when one files would not matter greatly, as it would level out eventually.  With the ability to plan and maximize, in certain situations, knowing any overage is to be kept, is what has people jumping to see how they can maximize.  While a PITA because it is new, and short timing, it really is no different than any other tax planning.

As I see it, those who can gain (some would say game, but I call proper planning):  A dependent who can self file for 2020 (covered in other threads) and deceased TP during 2020 with no filing requirement (File to get EIP 1 and 2 if not already received), 2020 income high enough to eliminate or lower credit (if not already filed for 2020).  I could be missing other scenarios, like one someone touched on where EIP 1&2 might have allowed, with certain timing, for dependents to receive credit for two separate parent returns.

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10 hours ago, Medlin Software said:

The tickler in the EIP's specifically is the "no pay back if too much received" rule.  If it was accounted for eventually, then when one files would not matter greatly, as it would level out eventually. 

I read that the overpayments from the 3rd stimulus payment will be taxable income in 2021.

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6 minutes ago, JoeFreitag said:

If they want to delay filing, do the tax return / extension and have it all completed including a signature. When they are ready you can efile it. Doesn't really add to your workload.

I can prep it and send any payment that might be due with the extension, but I can't have them sign it. I'll have to re-create any e-file and get the signature when they actually file. But, yes, that's my plan. I do a lot of returns, and this is just a hiccup this little whiner didn't want. 

In other news, Bar Dog Cab is outstanding! 

cheers!

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2 minutes ago, JoeFreitag said:

If they want to delay filing, do the tax return / extension and have it all completed including a signature. When they are ready you can efile it. Doesn't really add to your workload.

That would be considered stockpiling and is against the rules of being an ERO. Transmission of the returns is supposed to occur within a reasonable time after the ERO has all the required information and signed documents in order to process the return, and any more than 3 days delay is stockpiling. The exception to this rule is for returns prepared and ready to e-file prior to the IRS' MeF opening date for the filing season.  See pub. 1345. 

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2 hours ago, jklcpa said:

That would be considered stockpiling and is against the rules of being an ERO. Transmission of the returns is supposed to occur within a reasonable time after the ERO has all the required information and signed documents in order to process the return, and any more than 3 days delay is stockpiling. The exception to this rule is for returns prepared and ready to e-file prior to the IRS' MeF opening date for the filing season.  See pub. 1345. 

So in your opinion I am stockpiling returns by following the instructions of the client solely for their benefit?

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3 minutes ago, JoeFreitag said:

The response to this is interesting and informs me I shouldn't be coming to this board wanting information. Thanks for the heads up.

Why, when I gave the correct response and the cite that contains the rules that you agreed when you signed up to be an ERO?  As EROs, we are governed by the rules in pub 3112 and pub 1345 that I referenced in my first post, and before you argue that an IRS pub isn't authoritative, Pub 1345 references back to the actual underlying law.  Maybe you should read it sometime.

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2 minutes ago, jklcpa said:

Why, when I gave the correct response and the cite that contains the rules that you agreed when you signed up to be an ERO?  As EROs, we are governed by the rules in pub 3112 and pub 1345 that I referenced in my first post, and before you argue that an IRS pub isn't authoritative, Pub 1345 references back to the actual underlying law.  Maybe you should read it sometime.

I was an IRS agent for over 20 years. I've read it. I also know the court cases involved. Bye.

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Not preparing for others, I had no idea what this rule was.  The first search result I opened was a case where the rule was waived for a short time, because of late changes (2013?).  I definitely learned something.  There must be a way to safely avoid stockpiling rules, such as the prior exception, if that is what makes sense for the TP's interests.

I always look at the pubs similar to a DMV booklet.  Good as reminders, but when it gets down to "it", refer to the law itself, if the pub is not including a quote of the law.  Then, there are always considerations for how the rule is (if at all) enforced.  Refer to the talk about S Corp owner health insurance not on a W2 as a recent example.  Many offered ways to accomplish the proper taxation, even when the rule (has to be on a W2) was not followed, and none reported any issues with the "alternatives".  We also are in a time when MANY employees and employers are ignoring nexus (work at home) issues.  Indeed, the workplace rules are outdated, but they still exist.  How many work at home employees have the required labor posters in a highly visible area?

If EIP3 has a taxable component (as a quasi repayment in some cases), it is still a win to pay tax on the amount rather than not get it at all.

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2 minutes ago, cbslee said:

That's the thing about opinions, everyone has one, but how we react to someone else's opinion is a choice.

Great sentence.  I try to remember, even when I am certain I am correct, others may have different experiences and perspectives.  I fight this one often, as I am of the mind of taking action to fix things first, and have had to learn how to listen, and just share my experience without saying my was is the only/right way.

I am facing a repeat of dealing with my instincts, as only a first grandchild can bring up.  I have not yet - but it is inevitable - tried to force my opinions on the parents.  We did spend some time explaining how we may share our opinions, but we are not the ones in charge, so our opinions can be ignored with no repercussions, and we will not be hurt when reminded we are not in charge!

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16 minutes ago, Medlin Software said:

I always look at the pubs similar to a DMV booklet

Well, I went back as far as Rev Proc 2007-40 found as part of this IRB 2007-26, that has many other references the tax code regarding e-filing, and it also includes this in section 5:

Quote

SECTION 5. RESPONSIBILITIES OF AN AUTHORIZED IRS e-file PROVIDER

.01 To ensure that returns are accurately and efficiently filed, an Authorized IRS e-file Provider must comply with the provisions of this revenue procedure and all publications and notices governing IRS e-file. The Service will from time to time update such publications and notices to reflect changes to the program. It is the responsibility of the Authorized IRS e-file Provider to ensure that it complies with the latest version of all publications and notices. The publications and notices governing the IRS e-file Program include:

  • (1) Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns;
  • (2) Publication 1345A, Filing Season Supplement for Authorized IRS e-file Providers of Individual Income Tax Returns;
  • (3) Publication 1346, Electronic Return File Specifications and Record Layouts for Individual Income Tax Returns;
  • (4) Publication 1436, Test Package for Electronic Filers of Individual Income Tax Returns;
  • (5) Publication 1437, Procedures for the 1041 e-file Program, U.S. Income Tax Return for Estates and Trusts;
  • (6) Publication 1438, File Specifications, Validation Criteria and Record Layouts for the Form 1041 e-file Program, U.S. Income Tax Return for Estates and Trusts;
  • (7) Publication 1438-A, (Supplement) for the 1041 e-file Program, U.S. Income Tax Return for Estates and Trusts;
  • (8) Publication 1474, Technical Specifications Guide For Reporting Agent Authorization and Federal Tax Depositors;
  • (9) Publication 1524, Procedures for 1065 e-file Program, U.S. Return of Partnership Income;
  • (10) Publication 1525, File Specifications, Validation Criteria and Record Layouts for the 1065 e-file Program, U.S. Return of Partnership Income;
  • (11) Publication 1855, Technical Specifications Guide for the Electronic Filing of Form 941, Employer’s Quarterly Federal Tax Return;
  • (12) Publication 3112, IRS e-file Application and Participation;
  • (13) Publication 3416, 1065 e-file Program, U.S. Return of Partnership Income (Publication 1525 Supplement);
  • (14) Publication 3715, Technical Specifications Guide for the Electronic Filing of Form 940, Employer’s Federal Unemployment (FUTA) Tax Return;
  • (15) Publication 3823, Employment Tax e-file System Implementation and User Guide;
  • (16) Publication 4162, Modernized e-file Test Package for Forms 1120/1120S;
  • (17) Publication 4163, Modernized e-file (MeF) Information for Authorized IRS e-file Providers of Forms 1120/1120S;
  • (18) Publication 4164, Modernized e-file (MeF) Guide for Software Developers and Transmitters;
  • (19) Publication 4206, Information for Authorized IRS e-file Providers of Exempt Organization Filings; and
  • (20) Postings to the IRS web site at: http://www.irs.gov on the Internet, and published and future guidance in the Internal Revenue Bulletin and the Federal Register.

.02 The publications and notices listed in section 5.01 supplement this revenue procedure. A violation of any provision of these publications and notices is considered a violation of this revenue procedure and may subject an Authorized IRS e-file Provider to the sanctions provided in section 7 of this revenue procedure.

 

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