Biden signs US bailout, increasing tax credits

President Biden enacted the American Rescue Plan Act Thursday, unlocking $ 1,400 in economic impact payments as well as tax breaks to stimulate the economy.

The $ 1.9 trillion legislation includes a one-year extension of the child tax credit to $ 3,600 per child, which promises to halve the child poverty rate in the United States. Another provision exempts the first $ 10,200 from unemployment benefits for households earning up to $ 150,000, which could prompt many taxpayers to submit revised tax returns. The bill also extends employee retention credit and adds more money to the paycheck protection program.

The legislation promises to significantly stimulate the economy at a time when it is still slowly recovering from the ongoing COVID-19 pandemic that has left millions of people unemployed. The bill forced Democrats, who hold a very small margin in the Senate, to resort to a budget reconciliation maneuver to get it passed, without any Republican support in both chambers. Biden signed the bill a day before the date announced Friday, as he plans to deliver his presidency’s first prime-time speech Thursday night. The legislation was expected to be passed before the May 14 deadline for expanded unemployment benefits, which have now been extended until September 6.

“This historic legislation aims to rebuild the backbone of our country and to give the people of this nation – the working people and middle class people who built the country – a fighting chance,” Biden said during the signing of the bill. “That’s the essence of it all. “

President Joe Biden signs the US bailout in the Oval Office.

Doug Mills / Bloomberg

Employee retention credit

One of the most important provisions for businesses is the Employee Retention Credit, which was introduced in the $ 2 program..The 2,000 billion CARES Act that Congress passed last March under the Trump administration in an attempt to keep workers on the payroll by offering tax credits to employers at the start of the pandemic. Congress extended the tax credit in December in the $ 900 billion Consolidated Appropriations Act, which allowed employers to use the ERC as well as the Paycheck Protection Program which provides forgivable loans guaranteed by the Small Business Administration. companies that retain workers.

“The grandfather is extending employee retention credit and all the changes to it, piled on the Consolidated Appropriations Act,” said Bill Smith, chief executive of the National Tax Office of CBIZ MHM. “He extended it until the end of the year. The CAA extended it until the first two quarters of 2021. It changed the amount of eligible salaries and the eligible percentage to 70%. Who stays there all year round. They changed the eligible salaries from $ 10,000 per year to $ 10,000 per quarter. In 2020, if you have the eligible salary, you can obtain a maximum for the year of a credit of $ 5,000 per employee. For 2021, this rises to $ 28,000 per employee, an increase of 560% compared to 2020. This is obviously very important. “

The intersection between the ERC and the Paycheck Protection Program is worth watching, however. “You can’t include the wages that are used to justify the cancellation of the PPP loan, but employers should generally have a lot of qualifying wages on top of that,” Smith said. “It creates an interesting interaction there as well, because when they removed the eligible expenses for the PPP loan cancellation that must be attributable to the 75% to 60% salary, it is now an incentive to get that much. qualifying non-salary expenses for your remission as possible because the more you get down to 60% with your PPP loan remission, the more potential tax credits you can get for employee retention because you will have more wages that did not used to justify PPP loan forgiveness.

The incentives may cause some businesses to go back and change their previous tax returns. “The amended tax returns would be amended if they claimed the employee retention credit for 20202,” said Alisha Jernack, partner at Mazars USA. “The reason is that all of this only came out after the deposits for 2020 were made. So companies are now going to exercise their advisers to see if they are eligible for employee retention credit for 2020. You have to. claim the credits for your payroll tax returns, which are due quarterly. For example, if they are looking to claim it for the second quarter of 2020, that payroll tax return would have been filed in July 2020. Or s ‘they wanted to claim it for December 2020, this payroll tax return would have been filed in January 2021. We are working with our clients. If we know they are eligible, we can help them prepare these forms and returns amended, which are just payroll tax returns, and then they can go back and claim the credit and receive the employee retention credit for 2020. ”

The extension of the employee retention credit could provide an additional potential of $ 14,000 per employee. “There was a really interesting question we were concerned about on the income tax side, because you would generally have an income tax credit,” Smith said. “When you pay income taxes, you don’t deduct them. But that’s a payroll tax credit, and when you pay payroll taxes, you deduct it. So that raised the question: we know that we have to reduce the payroll deduction by the amount of the employee retention tax credit, but should we also reduce the payroll deduction? This makes the overall benefit a lot less. But the IRS came out and said you just have to lower your payroll deduction. You don’t reduce your payroll deduction at all, and you don’t have to include the credit in your income, whether it’s the non-refundable portion of the credit or the refundable portion of the credit. The combination of all of these things made it very beneficial to extend this period for the second two trimesters. “

Wolters Kluwer Tax & Accounting has published an updated explanation of various sections of the legislation.

Child tax credit

Expanding the child tax credit could also bring huge benefits to taxpayers, especially large families, and could significantly reduce child poverty, at least for a year. Democrats hope to extend the program beyond a year.

“This looks like a great new program in terms of transferring money to low-income families,” Smith said. “There are two different aspects. There is the child credit, which was $ 2,000 for the maximum eligible children for 2020. For 2021, only one year, it will increase to $ 3,600 for each child. [ages] zero to five years old and $ 3,000 for children six to 17 years old. This is an increase of $ 1,600 and $ 1,000, respectively, from the previous year. It’s just to have the baby until you are in an elimination phase. So if you have [up to] $ 75,000 if you are single or the head of a household, or $ 150,000 if you are married and file a joint return, you get this full benefit. It’s similar to what we had in 2020, except the numbers have increased dramatically. This is almost double the amount for children zero to five years of age from $ 2,000 to $ 2,600, and 50% for children six to 17 years old. The second benefit is that the IRS is supposed to start issuing half of that amount of the expected amount in periodic payments starting in July, so you’re going to start seeing that money soon.

This benefit will be in addition to stimulus payments and could help millions of families. “Let’s say if you’re a single mom who’s the head of a household with a four-year-old, you’ll soon see $ 2,800 in stimulus payments, assuming you’ve filed your 2020 return and opted for direct deposit,” Smith said. “That should go to your bank account. Then they’re going to look at this 2020 statement and say, do you qualify for the 2021 child credit? And they’re going to start paying that in July in the form of periodic payments. And then you would get the rest back when you file your 2021 income tax return. “

Many families will also benefit from the costs of childcare and dependents. “Again, this is a one-year contract for 2021 only,” Smith said. “This has gone from qualifying expenses of $ 3,000 for one child or $ 6,000 for more than one child, up to $ 8,000 and $ 16,000, respectively, for 2021. So if you have a child, you can get a credit for child care expenses of up to $ 4,000. From what I understand, you won’t see this until you file your 2021 return, but it’s another huge increase in that lower income bracket, where they obviously need the money.

Popular tax credits

It’s hard to predict whether the Biden administration will be able to extend the expanded child tax credit beyond a year, given the narrow margin in Congress between Republicans and Democrats. However, tax benefits like the child tax credit are widely supported.

In a recent study, “The Other Side of The Coin: Public Opinion Towards Social Tax Expenditures,” Professors Christopher Ellis of Bucknell University and Christopher Faricy of Syracuse University discovered that if Republican voters don’t like Usually not welfare programs, they support tax credits that accomplish similar goals of helping Americans pay for health insurance, colleges, and retirement plans. “In the study, we talked about the popularity of the benefits offered by the Tax Code,” Ellis said. “What we’re saying is that it’s not all that surprising that most Republicans in the electorate support provisions like the child tax credit and the earned income tax credit. These are the kinds of things you would expect to be supported and popular because people like spending more on the tax code than spending with direct government checks.

No Republican in Congress voted for the American Rescue Plan Act, but criticism of the tax credits was toned down. “There was no serious Republican opposition to the US bailout,” Faricy said. “One popular strategy is to take part of a bill and attack it.”

The tax break for unemployment benefits is helpful, but some taxpayers may need to file amended returns if they filed earlier this year. “Unemployment benefits are a big deal, mainly because on the tax side, they’ll be tax-exempt until the first $ 10,200 in benefits as long as you don’t have more than $ 150,000 in income,” he said. Smith said. “We have had situations where people are confused about stimulus and unemployment benefits, what is taxable and what is not. I can’t believe I have to pay tax on this, or am I supposed to pay tax on my raise? This could be confusing, but its non-taxable nature will be welcomed by those receiving the amounts now. “

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