Marcum 2021 Year-End Tax Guide

by 1% for each $2,000 the taxpayer’s AGI exceeds $400,000. For high earners, this can cause the credit to be less than 20% and be completely phased out. Employer-provided Dependent Care Assistance: For 2021, the employer-provided dependent care assistance benefits are increased from $5,000 ($2,500 for married filing separate; limited to the lower of the taxpayer’s or spouse’s earned income, if less) to $10,000 ($5,000 for a married filing separate taxpayer). An increase in the employer benefit may not be provided for under current plan documents. ARP permits a retroactive amendment to the employer benefit plan where: (i) such amendment is adopted no later than the last day of the plan year following the plan year in which the amendment is effective (i.e., by December 31, 2022, for a December 31, 2021, plan year); and (ii) the plan is operated consistently with this change as of the effective date of the amendment. Exclusion of up to $10,200 of Unemployment Compensation (UC) Benefits for 2020: ARP made up to $10,200 in UC benefits nontaxable for taxpayers with Modified Adjusted Gross Income (MAGI) of up to $149,999. However, at MAGI of $150,000 or more, 100% of the unemployment compensation benefits are taxable. The same threshold applies regardless of the filing status of the taxpayer. However, joint filers can both exclude $10,200, assuming that each filer has at least $10,200 of benefits paid to them. Voluntary Extension of Families First Coronavirus Response Act (FFCRA) Sick and Family Leave Benefit: The Consolidated Appropriations Act of 2021 (CCA) permitted an employer that was subject to the FFCRA Sick Pay and Family Leave pay rules to elect to extend these benefits through March 31, 2021, and to use the federal payroll tax credit to fund these payments. ARP allowed employers to elect this program past March 31, 2021, by: i. Extending these benefits to September 30, 2021. ii. Increasing the cap on payments to 10 weeks for family leave (from $10,000 to $12,000). iii. Making paid sick leave and family leave subject to non-discrimination rules under which the credit will not be allowed if the wages discriminate in favor of highly compensated employees or full-time employees, or on the basis of employment tenure. iv. Resetting the rules so that the number of days for which pay was provided in 2020 will not reduce the days allowed in 2021.

The credit advanced must be reconciled with the credits actually allowable on the 2021 tax return. If the advance payment exceeds the amount of credit actually allowed for the tax year, the tax for the year is increased by such excess. That means that any excess advance payment MAY have to be paid back. The law contains a safe harbor which provides that if a taxpayer mak es les s than $40,000 per year ($60,000 for a joint filer), any excess advance payment received would not need to be repaid to the government. Taxpayers can elect to opt out of the advance payment regime and/or to provide information to the IRS on its website to adjust the amount of the advance payment. Earned Income Tax Credit (EITC) : The EITC is a refundable credit for low to moderate income workers. EITC exceeding the filer’s tax liability can be received in the form of a tax refund. ARP makes several changes to the EITC solely for 2021: 1. The credit amount for taxpayers without children (“childless workers”) is almost tripled from $543 to $1,502 2. The ages of eligible taxpayers is broadened from 24 to 65 under prior law to those 19 or older. However, the credit does not apply to full-time students. 3. The maximum Adjusted Gross Income limits for which the credit applies have been increased. 4. An election to use earned income from 2019 in computing the 2021 credit is allowed. Child and Dependent Care Assistance: A number of changes were made to this credit for the 2021 tax year. The credit was previously nonrefundable and was based on up to $3,000 of certain eligible child and dependent care costs for one dependent or $6,000 for two or more dependents. The credit was 35% of the costs subject to a reduction of 1% for each $2,000 of AGI over a $15,000 threshold down to a minimum credit of 20%. i. The credit is made refundable. ii. Costs on which credit is based are significantly raised from $3,000 for one child and dependent to $8,000; and from $6,000 for two or more children to $16,000. iii. The initial credit percentage is increased from 35% to 50%. iv. The $15,000 initial threshold is increased to $125,000. v. The 20% credit minimum amount is replaced by the term “phase-out percentage,” which is 20% reduced Under ARP:

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