Marcum 2021 Year-End Tax Guide

2021 Year-EndReview COVID-19 relief bills enacted in December 2020 and March 2021 made a number of tax law changes that affect 2021 tax filings. More recently, there have been a number of legislative proposals that could significantly alter federal tax planning for 2021 and in the future, including the Build Back Better Act, which was issued by the House of Representatives and is consistent with the framework advanced by the Biden administration. We are waiting to see what finally develops as Congress negotiates this legislation. We have also seen an increased emphasis on IRS enforcement of tax provisions. Some of this has occurred through changes in reporting requirements established by the IRS which affected 2020 and later years. Additionally, several pieces of legislation provide increased resources for enforcement activities by the IRS, which may affect more than just the wealthy. The Treasury Department has stated that increased enforcement through additional staff and information reporting systems could raise revenue. This article will summarize the major developments as of the date of this writing, but keep in mind that things may change before the end of the year. THE AMERICAN RESCUE PLAN (ARP) ACT Earlier this year, the Biden administration passed the American Rescue Plan (ARP) Act, which made significant changes to a number of existing tax provisions. However, many of those changes are limited in scope and apply only to the 2021 tax year. Current negotiations on the Build Back Better Act involve extending some or all of this Act’s provisions for a limited number of years or, alternately, making them permanent. Recovery Rebates: ARP provides for a third round of stimulus checks (“economic impact payments”) equal to a $1,400 advance payment ($2,800 for joint filers) made to taxpayers at the beginning of 2021. An additional $1,400 (not a reduced amount) applies to each dependent of the taxpayer. The additional payments are not limited solely to a qualifying child under age 17 and include an adult dependent of any age. These payments are an advance against a credit calculated on the 2021 individual tax return. If the advance payments received are less than the calculated amount based on 2021 facts, the excess amount can be taken as a refundable credit. However, as with the 2020 stimulus payments, if the advance payments received

exceed the amount of the calculated credit, the excess does not have to be returned to the government. The credit is subject to a phase-out for single filers with Adjusted Gross Income (AGI) between $75,000 and $80,000; joint filers with AGI between $150,000 and $160,000; and head of household filers with AGI between $112,500 and $120,000. Since the IRS is making these payments based on prior year information, in many situations, the amount of the advance payment (based in many cases on 2019 tax filings) will be different from the calculated amount on filing of the 2021 tax return. Child Tax Credit: A number of significant changes were made to the Child Tax Credit, concerning both the amount of the payment and how a taxpayer can receive the benefit. However, these changes currently apply solely to the 2021 tax year. Extension of these provisions are part of the Build Back Better Act. The Tax Cuts and Jobs Act (TCJA), enacted in 2017, increased the credit for a child under 17 from $1,000 to $2,000, with phase-outs for Modified Adjusted Gross Income (MAGI) starting at $400,000 for joint filers and $200,000 for other filers. The phase-out is 5% (i.e., $50) for each $1,000 (or fraction thereof) by which MAGI exceeds the threshold. For one child, the credit is completely phased out at $40,000 above the threshold amount. The credit offsets tax, and the excess may be refundable up to $1,400 (70% of the $2,000 credit), which refundable amount is termed the Additional Child Tax Credit. ARP makes three significant changes to the Child Tax Credit: i. The amount of the credit increases from $2,000 to $3,000 for each child up to age 17 (one year older than under the original credit) and to $3,600 for each child under age six. ii. The resulting credit is bifurcated into two components: i) the old credit up to $2,000; and ii) the excess amounts ($1,600 for child up to age five or $1,000 for others between ages of 6-17). The increased credit is subject to phase-out at lower MAGI levels $150,000 for joint filers, $75,000 single and $112,500 for head of household) iii. The benefit of the credit includes advance payments. The credit is distributed to the taxpayer through a monthly payment from Treasury, which started in July 2021.

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