Are there special tax relief programs related to COVID-19 or the pandemic?
Numerous pandemic-related tax relief programs have emerged over the last year or so, providing financial or tax relief to millions of individuals and families. The following are four initiatives that may impact your 2021 taxes.
Expanded Child Tax Credit
The American Rescue Plan Act (ARPA), which was signed into law by President Biden on March 11, 2021, provided additional relief related to the pandemic. That law included the expanded Child Tax Credit, a tax credit that is available to parents with children under the age of 17. Like other tax credits, it may essentially lower the amount of tax you must pay dollar-for-dollar, or increase your tax return.
Under the ARPA, parents can now claim a maximum credit of $3,600 per eligible child for kids under age six and $3,000 for children six and older, up from the previous amount of $2,000 per child. In addition, this credit starts to phase out for tax filers making $75,000 for single filers and $150,000 for married couples filing jointly.
Unlike past tax credits, the 2021 credit is fully refundable if it exceeds the total amount you owe. In other words, you can receive a check for the amount of the credit that exceeds the amount of tax that you owe. This refund is paid to eligible taxpayers in the second half of 2021, with the remainder of the additional tax credit being paid after you file your 2021 taxes. Note that this expanded Child Tax Credit is scheduled to revert to its original amounts in 2022.
Extended unemployment benefits
The ARPA also extended federal unemployment benefits that were first expanded by the CARES Act. In this extension, the ARPA increased "the total number of weeks of benefits available to individuals who cannot return to work safely from 50 to 79, matching the expiration of the broader UI benefits."
Additionally, the ARPA now allows certain unemployment benefits to be excluded from taxable income. If your adjusted gross income is less than $150,000, you may be able to exclude up to $10,200 of unemployment compensation paid in 2020. Any amounts over $10,200 will likely remain taxable.
Because the ARPA was signed into law in March 2021, millions of people had already filed their 2020 taxes. Thus, you may need to make changes to your 2020 filing. If that is the case, the Internal Revenue Service (IRS) provides step-by-step instructions for reporting this exclusion.
The 2020 tax year was unusually complicated with the numerous COVID-19 relief packages. With that in mind, it is wise to check with an attorney or accountant before filing an amended 2020 return. And, with 2021 shaping up to be equally complex, getting tax guidance before you file your 2021 return may lessen any headaches post-filing.
Increased health insurance subsidies
In addition to the above tax benefits, the ARPA expanded the marketplace subsidies that many people receive under the Affordable Care Act (ACA) for both 2021 and 2022. This change extends eligibility and increases the amount of financial assistance available to lower-income individuals and families.
In the world of taxes, these subsidies are actually tax credits, and they are not taxable. However, you likely need to report them when you file your taxes as they are considered a tax credit that reduces your monthly insurance premium payment.
For example, you may need to file a Form 1095-A, Health Insurance Marketplace Statement, reporting the amounts of the premium tax credit you received. Additionally, you may need to file a Form 8962, Premium Tax Credit if you are eligible for the credit and would like to claim it.
Keep in mind that any health insurance premiums paid out of pocket, even those on the ACA marketplace, are tax-deductible. They may lower the amount of tax you owe at the end of the year.
Do I have to amend my tax filing due to the stimulus payments?
While many have questions about tax relief, pandemic-related stimulus payments have also added to the confusion when filing taxes. To date, the IRS has sent out three rounds of stimulus payments: two were delivered in 2020, and the third in 2021. However, the IRS does not consider these stimulus checks income, meaning these amounts are not taxable. Instead, the IRS has classified them as prepaid tax credits.
On your return, you may not need to indicate that you have received these stimulus payments. However, your accountant or your tax preparation software may still ask about them.
If you did not receive the total amount of the stimulus payment, for whatever reason, you might be entitled to a Recovery Rebate Credit as part of your tax refund. The IRS provides specific information about whether you qualify for this credit and how to apply.
Keep in mind that although states are also not allowed to tax these stimulus payments, receiving them may impact your state income taxes. You may be able to clarify whether this applies to you with help from an attorney or tax expert.
Can PPE, COVID-19 tests, and other COVID-19-related expenses be deducted?
To further help lower the amount you owe, certain COVID-19-related expenses may be deductible on your taxes. For example, the IRS has stated that the cost of a home COVID-19 test qualifies as a deductible eligible medical expense. Of course, as with all medical expenses, your eligible medical expenses must exceed 7.5% of your 2021 adjusted gross income to be deductible.
Additionally, in Announcement 2021-7, the IRS clarified that purchases of personal protective equipment (PPE), such as hand sanitizer, masks, and sanitizing wipes, also qualify as potentially deductible medical expenses.
Note that to be deductible, not only must these expenses meet the 7.5% threshold, but they must not be reimbursable. This means they are not eligible for reimbursement by a health plan or other arrangement.
This year, the IRS also reminded taxpayers that you can pay for both at-home COVID-19 tests and PPE from your health FSA, HSA, HRA, or Archer MSA as tax-favorable arrangements. You can learn more about these tax-favored arrangements in Publication 969.
Do I need to disclose private sales of personal property, like vehicles or collectibles, on my taxes?
One thing the pandemic has heightened is a desire for more financial stability and to live more simply. For that reason, over the last year or so, people have sold personal property, like vehicles or collectibles, to help pay bills or to get rid of excess.
However, as with any sale, the tax implications are important. If you sell a personal item for less than its value, the IRS will likely consider it a loss and not be too concerned about the transaction. However, if you sell a collectible, vehicle, or personal item at a profit, then the IRS may be interested.
If you made a profit when selling something, you may be required to report it on your taxes as a capital gain. Any capital gains are reported on Schedule D. You may have to pay state or local taxes as well.
As we close out 2021, preparing early for your 2021 taxes can result in big benefits. Not only is it helpful to understand how pandemic-related tax relief programs can impact you personally, you may also discover some worthwhile end-of-year deductible expenses. If you have any questions about your tax obligations, you may want to ask a lawyer.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.