Recently, there have been several tax changes that may affect your tax bill, and making sure you’re aware of these adjustments is always in your best interest.. The majority of these changes were created to help relieve the financial hardship caused by COVID-19, that affected people both personally and in their businesses.
Last year there were millions of people who became unemployed or claimed unemployment benefits, but the good news is that as a result of recent tax changes, many of these people may qualify for a tax break. Whether you are a small business owner or an employee, the changes to the tax rules may affect you.
These changes include long-term and short-term breaks from filing postponements to tax credits that will benefit businesses and individuals alike.
Let’s take a look at two of the major changes that may result in tax savings on your 2020 or 2021 tax return.
A Breakdown on the $10,200 Tax Break for Unemployment Compensation
A portion of your unemployment compensation from last year is tax-free.
Due to the pandemic and its resultant lockdowns and business closures, many lost their jobs or were forced to close their businesses for an extended time. The American Rescue Plan Act (ARPA), enacted on March 11, 2021, allows for up to $10,200 of unemployment compensation to be excluded from your federal gross income on your 2020 federal returns for all taxpayers who have an adjusted gross income (AGI) under $150,000.
The Internal Revenue Service (IRS) will begin to automatically correct tax returns of those who qualified for the tax break and filed for unemployment in 2020. Unemployment benefits are usually fully taxable by the IRS and must be declared on your tax return.
Thanks to the American Rescue Plan, millions of Americans who lost their job during the coronavirus pandemic will receive much-needed relief from the amount of tax they would typically owe on their tax return.
Whether you are an employee, small business owner, entrepreneur, or working on a freelance or temporary basis, you may benefit from these changes.
The IRS will be starting with the most straightforward returns first, such as single taxpayers who may qualify for the tax break, and then begin the process for those who file as joint taxpayers, followed by more complex tax returns. For any taxes that are owed, the IRS will adjust the amount to cover any outstanding taxes.
You should always double check what your state’s specific rules are with regard to these changes, as some states’ tax unemployment compensation is exempt from federal income tax under ARPA.
Suppose you have already filed your 2020 individual tax return and you didn’t take advantage of the 2020 unemployment benefit exclusion. In that case, you don’t need to file an amended return, as all overpayments of tax will either be refunded or applied to outstanding taxes owed.
A Breakdown on the Premium Tax Credit
There will also be more taxpayers who may qualify for a tax credit for buying health insurance.
The Premium Tax Credit (PTC) is a refundable credit available to assist individuals and families in paying for health insurance obtained through the Health Insurance Marketplace, also known as the Exchange, which was established under the Affordable Care Act.
The amount of your credit is based upon your income and operates on a sliding scale. The credit is “refundable,” so if the amount of the credit is larger than your tax liability, you will receive the difference as a refund. However, if the credit is paid in advance and your actual allowable credit on your return is smaller, then the difference will be subtracted from your refund or added to the amount you owe.
You must meet specific qualifications to be eligible for the premium tax credit.
An example of how the ARPA has enhanced this credit can be seen in that now it is available to individuals with an income above 400% of the federal poverty line. Previously, the credit was only available to individuals whose household income was below 400% of the federal poverty line.
Payroll Tax Credits
The Families First Coronavirus Response Act, P.L. 116-127, a general relief bill, includes many provisions and tax credits for employers who provide paid sick leave, medical or family leave for their employees who have missed work due to coronavirus-related reasons.
The tax credit equals 100% of the qualified family leave wages paid by the employer under the section known as the Emergency Family and Medical Leave Expansion Act (FMLA), P.L. 103-3.
Let the Experts at Lloyd & Hodge Help You
On top of these adjustments, there have been a number of other favorable changes that could benefit you as an individual or your small business. If you would like to know more about how the many recent tax changes could benefit you, contact us at Lloyd & Hodge, and we will help you get the most out of your tax return. We specialize in Individual and Small Business Tax and Accounting and we would be delighted to work with you and help you and your business.