On March 12, following the American Rescue Plan Act’s approval and signing, the IRS began sending out the third round of Economic Impact Payments. Most payments were sent out via direct deposit, but approximately 150,000 checks were mailed by the Treasury Department as well. Taxpayers who received EIP1 or EIP2 but didn’t receive a third payment (EIP3) via direct deposit will generally receive a check or, in some instances, a prepaid debit card (EIP Card).

Highlights:

• The third stimulus payment will generally be larger for most people. Most eligible people will get $1,400 for themselves (those filing joint returns will get $2,800) and $1,400 for each of their qualifying dependents claimed on their tax return. Eligible families will get a payment based on all of their qualifying dependents claimed on their return, including older relatives like college students, adults with disabilities, parents, and grandparents. Unlike the first two payments, the third stimulus payment is not restricted to children under 17. Typically, this means a single person with no dependents will get $1,400, while a family of four (married couple with two dependents) will get $5,600. Under the new law, an EIP3 cannot be offset to pay various past-due federal debts or back taxes.
• The first batch of payments primarily went to eligible taxpayers who provided direct deposit information on their 2019 or 2020 returns, including people who don’t typically file a return but who successfully used the Non-Filers tool on IRS.gov last year. Additional batches and payments will be sent in the coming weeks by direct deposit and through the mail as a check or debit card.
• The payments are automatic and, in many cases, like how people received their first and second round of Economic Impact Payments in 2020. No action needs to be taken by most taxpayers and contacting either financial institutions or the IRS on payment timing will not speed up their arrival.
• Income levels in this new round of stimulus payments have changed. As such, some people will not be eligible for the third payment even if they received a first or second Economic Impact Payment or claimed a 2020 Recovery Rebate Credit. Payments begin to phase out for individuals making $75,000 or above in Adjusted Gross Income ($150,000 for married filing jointly). The payments end at $80,000 for individuals ($160,000 for married filing jointly); people above these levels are ineligible for a payment.
• Taxpayers who received EIP1 or EIP2 but didn’t receive a third payment (EIP3) via direct deposit will generally receive a check or, in some instances, a prepaid debit card (referred to as an “EIP Card).A payment will not be added to an existing EIP card mailed for the first or second round of stimulus payments.
• If a taxpayer’s payment is less than the full amount and is based on their 2019 return, they may qualify for a supplemental payment after filing their 2020 return. The IRS will automatically reevaluate their eligibility. If they are entitled to a larger payment or the full payment, then a supplemental payment will be sent covering the difference. If the reevaluated amount is smaller, they won’t need to pay back the difference. Aside from filing a 2020 tax return, no additional action needs to be taken.

Paper Checks and Prepaid Debit Cards

Taxpayers who did not receive a direct deposit by March 24 should check their mail carefully in the coming weeks for a paper check or a prepaid debit card, known as an Economic Impact Payment Card, or EIP Card.

The form of payment for the third EIP may be different than earlier stimulus payments. More people are receiving direct deposits, whereas those receiving the economic impact payments in the mail may get either a paper check or an EIP Card. This may be different from how they received their previous stimulus payments.

Paper Checks. Paper checks will arrive by mail in a white envelope from the U.S. Department of the Treasury. For those taxpayers who received their tax refund by mail, this paper check will look similar but referenced as an “Economic Impact Payment” in the memo field.

EIP Card. The EIP Card will also come in a white envelope prominently displaying the seal of the U.S. Department of the Treasury. The card has the Visa name on the front and the issuing bank, Megabanks, N.A., on the back. The information included with the card will explain that this is an Economic Impact Payment. Each mailing will include instructions on how to activate and use the card securely.

None of the EIP cards issued for any of the three rounds is reloadable; recipients will receive a separate card and will not be able to reload funds onto an existing card. EIP Cards are safe, convenient, and secure. EIP Card recipients can make purchases online or in stores anywhere Visa Debit Cards are accepted.

They can get cash from domestic in-network ATMs, transfer funds to a personal bank account, and obtain a replacement EIP Card if needed without incurring any fees. They can also check their card balance online, through a mobile app, or by phone without incurring fees. The EIP Card provides consumer protections against fraud, loss, and other errors and is sponsored by the Bureau of the Fiscal Service and issued by Treasury’s financial agent, Megabanks, N.A. The IRS does not determine who receives a prepaid debit card.

Social Security and Other Federal Beneficiaries

Most Social Security retirement and disability beneficiaries, railroad retirees, and recipients of veterans benefits who are eligible for an Economic Impact Payment do not need to take any action to receive a payment. These payments will be automatic, and Social Security and other federal beneficiaries will generally receive this third payment the same way as their regular benefits.

Anyone who didn’t file a return but receives Social Security retirement, survivor or disability benefits (SSDI), Railroad Retirement benefits, Supplemental Security Income (SSI), or Veterans Affairs benefits, will receive their third round of economic impact payments the same way as their regular benefits – similar to the first and second rounds of Economic Impact Payments.

If You Don’t Normally File a Tax Return

While payments will be automatic for many people based on their federal benefits information, some may need to file a 2020 tax return – even if they don’t usually file – to provide information the IRS needs to send payments for any qualified dependent. People in this group should file a 2020 tax return to be considered for an additional payment for their dependent as quickly as possible.

People who don’t normally file a tax return and don’t receive federal benefits may also qualify for these stimulus payments, including those experiencing homelessness and others. If you are eligible and didn’t get a first or second Economic Impact Payment (that is, an EIP1 or EIP2) or got less than the full amounts, you may be eligible for the 2020 Recovery Rebate Credit but will need to file a 2020 tax return.

Q & A: The $10,200 Unemployment Tax Break

Generally, unemployment compensation received under the unemployment compensation laws of the United States or a state is considered taxable income and must be reported on your federal tax return. However, a new tax break – in effect only for the 2020 tax year – lets you exclude the first $10,200 from taxable income. Here is what you should know:

What do I need to do to get the tax break?

The tax break, which is part of the American Rescue Plan Act of 2021 (ARPA is available to all taxpayers whose 2020 modified adjusted gross income is less than $150,00 and allows you to exclude the first $10,200 of unemployment compensation received in 2020. For joint returns, the first $10,200 per spouse (i.e., $20,400 for two workers who are married filing jointly) is not included in gross income.

Amounts over $10,200 for each individual taxpayer are still considered taxable income and the tax break only applies to federal income taxes.

Who does not qualify for the tax break?

Taxpayers with a modified adjusted gross income of $150,000 or more last year do not qualify for the tax break and are required to file taxes on the full amount of unemployment compensation.

The $150,000 earnings limit does not include amounts received as unemployment compensation.

How do I know how much unemployment compensation I received and how much tax was taken out?

If you received unemployment compensation, you should have received Form 1099-G, Certain Government Payments (Info Copy Only). Form 1099-G shows the amount of unemployment compensation paid and any federal income tax you elected to have withheld. Many taxpayers chose to have federal income tax withheld from their unemployment benefits by filling out Form W-4V, Voluntary Withholding Request. If you completed the form and gave it to the paying office (e.g., your state’s Department of Labor), they should have withheld tax at 10 percent of your payments.

What if I already filed my 2020 tax return?

If you already filed your 2020 tax return and paid tax on unemployment compensation that qualifies for the tax break, in most cases, there is no need to file an amended return. Taxpayers should only file an amended return if the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return. Taxpayers may want to review their state tax returns as well.

The IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and because the exclusion changed the income level, may now be eligible for an increase in the EITC amount, which may result in a larger refund. However, taxpayers would have to file an amended return if they did not initially claim the EITC or other credits but now are eligible because the exclusion changed their income.

The IRS will determine the correct taxable amount of unemployment compensation and tax. If there is any overpayment of tax, it will be either refunded or applied to other outstanding taxes owed. The recalculations will take place in two phases; single filers and other taxpayers eligible for the up to $10,200 exclusion, followed by married filing jointly taxpayers eligible for the up to $20,400 exclusion and others with more complex returns.

Questions?

Don’t hesitate to contact the office if you have any questions regarding unemployment compensation and your taxes.

The Paycheck Protection Program Extension Act of 2021 was signed into law on March 31, 2021, extending the deadline to apply for a loan by an extra 60 days, from March 31 to May 31, 2021. The law also gives the Small Business Administration (SBA) an additional 30 days after the May 31 deadline to review and process loan applications.

The passage of the PPP Extension Act does not provide additional funding; however, as part of the American Rescue Plan Act, an additional $7.25 billion was earmarked for the Paycheck Protection Program to expand eligibility to additional nonprofits and digital news services.

In February 2021, SBA also made four additional changes to open the PPP to more underserved small businesses, generally small and low- and moderate-income (LMI) businesses who have not received the needed relief a forgivable PPP loan provides. Congress set a $15 billion set-aside for small and LMI First Draw borrowers. To advance these goals, SBA has:

• Allowed sole proprietors, independent contractors, and self-employed individuals to receive more financial support by revising the PPP’s funding formula for these categories of applicants
• Eliminated an exclusionary restriction on PPP access for small business owners with prior non-fraud felony convictions, consistent with a bipartisan congressional proposal
• Eliminated PPP access restrictions on small business owners who have struggled to make student loan payments by eliminating student loan debt delinquency as a disqualifier to participating in the PPP
• Ensured access for non-citizen small business owners who are lawful U.S. residents by clarifying that they may use Individual Taxpayer Identification Number (ITIN) to apply for the PPP

Prior to addressing these inequities, the current 2021 round of PPP loans had only deployed $2.4 billion to small LMI borrowers, in part because a disproportionate amount of funding in both wealthy and LMI areas is going to firms with more than 20 employees. As a result, in February 2021, SBA established a 14-day, exclusive PPP loan application period for businesses and nonprofits with fewer than 20 employees. The program opened to all borrowers on March 10, 2021, and, as mentioned, has been extended through May 31, 2021.

Business owners who have not received a PPP loan previously can apply for a First Draw Loan. Certain businesses that have already received a PPP loan are eligible for a Second Draw PPP loan.

Finally, borrowers may be eligible for PPP loan forgiveness. First Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8 to 24-week covered period following loan disbursement:

• Employee and compensation levels are maintained.
• The loan proceeds are spent on payroll costs and other eligible expenses; and
• At least 60 percent of the proceeds are spent on payroll costs.

Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness under the same requirements as First Draw PPP loans provided employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan.

If you are thinking about applying for a PPP loan, don’t hesitate to contact the office with any questions.

Signed into law on March 11, 2021, the American Rescue Plan Act (ARPA) contains several tax provisions affecting individuals and families. Let us look:

Economic Impact Payments (EIP3). A third round of economic impact payments (EIP3) will be sent to qualifying taxpayers; individuals will receive $1,400 ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent, which includes college students and relatives who can be claimed as dependents. These payments are sent out as advance payments of the recovery rebate credit. Anyone not receiving EIP3 will be able to claim the recovery rebate credit when they file a 2021 tax return next year. There are specific income phaseouts, and eligibility is determined using a taxpayer’s 2019 adjusted gross income unless the taxpayer has already filed a 2020 return. For more information, see, Economic Impact Payments: Round Three, below.

Student Loan Debt Forgiveness. Normally, canceled debt – including student loan debt – is considered taxable income and taxed as such. Under the ARPA, however, for eligible loans, the discharge of student loan debt – either full or partial – will not be viewed as taxable income for tax years 2021 through 2025. Eligible loans are those that have been used solely for post-secondary education and that are made, insured, or guaranteed by the US government.

COBRA: Continuing Health Coverage. ARPA requires employers to subsidize at 100 percent premiums paid for COBRA continuation coverage for assistance eligible individuals (AEIs) and is in effect for the period April 1, 2021, to September 30, 2021. Employer costs for the subsidy are offset by a payroll tax credit against the employers’ quarterly taxes. Employers whose credit is greater than the amount of payroll tax owed receive a refund when they submit Form 941, Employer’s Quarterly Federal Tax Return.

Unemployment Benefits. A $300-per-week supplement to federal unemployment benefits that would have expired March 14, 2021, is now extended through September 6, 2021. ARPA also gives eligible taxpayers a special tax break for 2020: the first $10,200 in unemployment benefits is tax-free for taxpayers whose income is less than $150,000 per year. For more information about this topic see, Q & A: the $10,200 Unemployment Tax Break, below.

Child Tax Credit. ARPA includes several important changes pertaining to families, which are summarized below:

• The amount of the credit is $3,000 per child ($3,600 for children under age 6)
• The credit is reduced by $50 for each additional $1,000 of income above the following threshold limits: $150,000 and up for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for single taxpayers and married filing separately.
• The amount of child tax credit is to be paid monthly in advance in the amount of one-twelfth of an annual amount estimated by the IRS. Payments begin in July 2021 and continue through December 2021.

Child and Dependent Care Credit. For tax year 2021, the child and dependent care credit is refundable and is a maximum of $4,000 for one qualifying individual and a maximum of $8,000 for two or more. The credit begins to decrease for households whose income exceeds $125,000 – and as much as 20 percent for households whose income is more than $400,000.

Earned Income Tax Credit. Several special rules pertain to individuals without children. For 2021, the age range of workers without children is expanded to include adults ages 19-24 and older adults age 65 and over. Students under age 24 who are attending school at least part-time are excluded. The maximum earned income credit increases threefold and income levels required to qualify for the credit increase from $16,000 to $21,000. Additional changes under ARPA include:

• Allowing taxpayers to temporarily use 2019 instead of 2021 income if that income is greater.
• Allowing certain separated spouses to take the credit.
• Increasing the amount of investment income that would disqualify a taxpayer from receiving the EITC from $2,200 to $10,000.

Affordable Care Act Premium Tax Credit. For 2020, taxpayers who received premium tax credits in advance that were more than what they should have received will not have to repay the excess amount. It applies to taxpayers who have received, or have been approved to receive, unemployment compensation for any week beginning during 2021.

Taxes are Complicated.

If you have any questions or would like more information about how recent tax law changes affect your tax situation, please call.

Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five important points to keep in mind if your child has investment income this year:

1. Investment Income. Investment income generally includes interest, dividends, and capital gains.

It also includes other unearned income, such as from a trust.

2. Parent’s Tax Rate. If your child’s total investment income is more than $2,100, then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.

3. Parent’s Return. You may be able to include your child’s investment income on your tax return if it was more than $1,100 but less than $11,000 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more information.

4. Child’s Return. If your child’s investment income was $11,000 or more in 2020, then the child must file their own return. File Form 8615 with the child’s federal tax return.

5. Net Investment Income Tax. Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax.

If you have any questions about your child’s investment income, help is just a phone call away.

Apps like Robinhood make it easy for everyone to play the stock market. If you’re a retail investor who made money last year buying and selling stocks, you may owe capital gains tax when you file your tax return this year. If you lost money, you may be able to deduct that loss and reduce your income.

Here’s what you need to know about capital gains tax:

Capital Gains and Losses Defined

A capital gain or loss is the difference between your basis – the amount you paid for the asset – and the amount you receive when you sell an asset. All capital gains (or losses) must be reported on your tax return.

Losses Limited to $3,000

If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

Carryover of Losses Allowed

If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.

Long- and Short-Term Gains and Losses

Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

Net Capital Gain

If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the amount of net capital gain you must report.

Capital Gains Tax Rates

The tax rates that apply to net capital gain depend on your income, but are generally lower than tax rates that apply to other income such as wages. The maximum tax rate on a net capital gain is 20 percent; however, for most taxpayers a zero or 15 percent rate will apply. If your income is above a certain amount you may be subject to the 3.8 percent Net Investment Income Tax (NIIT) on these capital gains.

Reporting Capital Gains and Losses

Report capital gains or losses using Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses to summarize capital gains and losses. Please contact the office if you need more information about reporting capital gains and losses.