Author: Adam O’Feeney, Tax Manager, CironeFriedberg, LLP

President Joe Biden has already announced the American Rescue Plan in early March 2021 followed by the American Jobs Plan (AJP) later that month.  The third leg of Biden’s road to recovery is the American Families Plan (AFP), announced on April 28, 2021, at an estimated cost of $1.8 trillion.             

Part of the Build Back Better initiative, the AFP aims to boost the U.S. economy by investing heavily in infrastructure, jobs, education, healthcare and other programs for millions of Americans and would be funded through a number of tax hikes including the elimination of long-standing tax breaks such as the carried interest preferential tax treatment.

The White House breaks down the $1.8 trillion AFP into three main parts:

• Add at least four years of free public education through quality universal pre-kindergarten and free community college; close equity gaps by training teachers and making college more affordable for low- and middle-income students.
• Provide direct support to children and low- and middle-income families by increasing access to quality child care; create a national paid family and medical leave program; and provide nutritional assistance and health programs aimed at reducing childhood hunger.
• Extend tax cuts for low- and middle-income families with children and American workers through the child tax credit, the earned income credit, and the child and dependent care tax credit.

President Biden describes his Build Back Better plans as “fiscally responsible”, because they rely on tax revenue to pay for spending programs and credits.  While the AJP plans to be funded by corporate tax increases, the AFP will be paid for by higher individual taxes on the wealthy. 

The White House breaks down the major individual tax impacts as follows:

• An increase to the top individual federal income tax bracket from 37% to 39.6% for income $509,300 (married joint) and $452,700 (single).
• To the extent their income exceeds $1 million, taxpayers would see their capital gains taxed at a rate of 39.6% (nearly double the current capital gains tax rate of 20%).
• Consistent application of the 3.8% Medicare tax on earnings over $400,000.
• An investment in IRS enforcement through increased funding for IRS audits. A White House representative estimates that the top 1% of individual taxpayers failed to report 20% of their income, resulting in $175 billion owed in taxes.

Under current law, private equity money managers and others can lower their tax bills by paying as low as 20% on carried interest profits. President Biden and his administration are pushing to eliminate this preferential treatment, and are proposing the income be subject to the same rates as their other income (up to 39.6% as outlined above).

Whatever your current family and/or financial situation may be, it is important to understand how these changes can impact you. With such a large amount of sweeping changes being proposed in a relatively short amount of time, it goes without saying that the money has to come from somewhere.

Adam O’Feeney, CPA, is a Tax Manager serving high-net-worth individuals and privately held family owned businesses in the manufacturing, distribution, hospitality, and construction/real estate industries. Contact Adam at aofeeney@cironefriedberg.com, and connect with him on LinkedIn.

If you need assistance or have any questions related to the American Families Plan, or any other potential tax law changes, please call your CironeFriedberg professional. You can reach us by phone at 203-798-2721 (Bethel), 203-366-5876 (Shelton), or 203-359-1100 (Stamford), or email us at info@cironefriedberg.com.

Today President Biden signed the $1.9 Trillion “American Rescue Plan Act of 2021” into law. The bill contains relief for both individual taxpayers and businesses. To help sift through the information most pertinent to you, we have separated the following into two sections — Individual Relief and Employer Tax Relief.

Individual Relief

Please note some of the provisions will impact taxpayers’ 2020 tax return filings.

Stimulus Payment

• 3rd round of stimulus payment in the amount of $1,400 for single taxpayers and $2,800 for married filing jointly, plus $1,400 for each dependent for 2021.
• The payment is a credit against 2021 taxes.
• Subject to adjusted gross income limitations with an ultimate phase out. Phase out begins:
  • Single at $75,000 to full phase out at $80,000.
  • Head of household at $112,500 to full phase out at $120,000.
  • Joint filers at $150,000 to full phase out at $160,000.

2020 adjusted gross income amounts are used when determining the phase out. For taxpayers who have not yet filed their 2020 return, 2019 will be used. Similar to prior stimulus checks, if the 2019 return resulted in a lower credit than what the taxpayer was entitled to once the 2020 return was filed, the amount not received will be a credit on the taxpayer’s 2021 return. In contrast, if the taxpayer received more than they were entitled to by using the 2019 return, they will not be required to repay the excess.

Unemployment Relief

• Enhanced $300 weekly unemployment that was scheduled to expire in March will extend through September 6, 2021.
• For tax year 2020, the first $10,200 of unemployment relief is tax exempt for households up to $150,000 of income.

Child Tax Credit

• The child tax credit will increase in the 2021 tax year from $2,000 to $3,000 per child, $3,600 under the age of 6, and the maximum age of a qualifying child increases to include 17-year old children.
• The eligible credit above $2,000 will begin to be phased out by $50 for every $1,000 of adjusted gross income in excess of $75,000 for single filers, $112,500 for head of household, and $150,000 for joint filers. Once the excess is totally phased out, the credit remains at $2,000 until adjusted gross income reaches $400,000 for joint filers and $200,000 for all other filers.
  • An advance equal to the taxpayer’s estimated child tax credit for 2021 will be paid one-twelfth of the annual estimate amount from July 1, 2021 to December 31, 2021. The total payments by the end of the year will equal half of the estimated 2021 credit.
  • The remainder of the credit will be received when the 2021 tax return is filed. The full credit will be claimed on the 2021 return but reduced by the aggregate amount received in advance.
  • Taxable income will be increased by any credit received in excess of the eligible credit claimed for 2021.

Earned Income Credit

For 2021:

• The credit is increased for taxpayers without children from $543 to $1,502.
• Income at which the credit is maximized increased from $7,100 to $9,820.
• Increased the threshold for the phase-out of the credit for non-joint filers from $8,880 to $11,610.
• The minimum age for childless claimants is reduced from 25 to 19.
• A taxpayer can substitute 2019 earned income for 2021 earned income when claiming the credit.

Permanent Changes:

• Elimination to prohibit filers for claiming the credit due to lack of identification requirements.
• Married and separated individuals can claim the earned income credit as an unmarried person as long as certain requirements relating to children are satisfied.
• The amount of disqualifying investment income is increased to $10,000.

Dependent Care Assistance (for 2021 only)

• The bill increases the credit for qualified expenses from 35% of expenses to 50%.
• The amount of eligible expenses increases from $3,000 for one individual and $6,000 for two or more qualifying individuals to $8,000 for one individual and $16,000 for two or more individuals.
• 50% of the qualifying expenses would be a credit of $4,000 for one child and $8,000 for two or more children.
• The credit is reduced by one percentage point for each $2,000 over $125,000 to a floor of 20% until the adjusted gross income reaches $400,000. At that point, the reduction of credit percentages continues until reaching zero.
• Maximum exclusion of employer-provided dependent care assistance increased to $10,500 or $5,250 for married filing separately.

Exclusion for Forgiven Student Loans

• Income exclusion for student loans forgiven after 2020 but before 2026 is no longer limited to death or disability, but can be for any reason.
• The exclusion is not applicable for loan discharged by private lenders.

COBRA Continuation Coverage

• COBRA continuation coverage through September 30, 2021; not included in recipient’s gross income.
• Credit is allowed against Medicare tax.
• Credit is refundable and the IRS may make advance payments to taxpayers of the credit.
• Credit applies to premiums paid after April 1, 2021, through September 30, 2021.

Employer Tax Relief

Paid Sick and Family Leave Credits

• Extended to September 30, 2021.
• The limit for applicable wages is increased from $10,000 to $12,000 effective March 31, 2021.
• Credit is expanded to include time off to receive COVID-19 vaccine or recover from a vaccine-related illness or injury.
• Effective March 31, 2021, a new ten-day period for each eligible employee begins. Therefore, if an employer has taken credit for ten sick and family leave days for an employee prior to March 31, 2021 and after March 31, 2021, the same employee is out two days for the COVID-19 vaccine and to recover, those two days are eligible for the credit.
• For self-employed individuals the number of days the credit can be claimed is increased from 50 days to 60 days.
  • This change will be retroactive to December 31, 2020.

Employee Retention Credit

• Extended to December 31, 2021.

Retirement Plan Funding

Multi-employer plans:

• Effective for plan years ending on or after February 29, 2020, plans will have a longer investment loss amortization period.
• Delays in having to apply changes to funding plans or schedules.
• Extended improvement and rehabilitation periods for plans that entered critical or endangered status in 2020 or 2021.

Single-employer plan:

• Effective for plan years beginning after December 31, 2019, plans will have 15 years as opposed to 7 years to amortize funding shortfalls.
• Annual contribution, annual defined benefit, and maximum compensation limits will be frozen until 2030 at $58,000, $230,000, and $290,000, respectively.

Paycheck Protection Program

• $7.25B in new funding to allow more nonprofits to apply as well as allow larger nonprofits to be eligible.

EIDL

• Will not be subject to income tax.

Industry Relief

• $25B will be set aside for a new grant program for “restaurants and other food and drinking establishments”.
• Grants will be up to $10M per entity and $5M per physical location with a maximum of 20 locations.
• $30B is set aside for transit costs; $8B for airports; $3B for temporary help to support the aerospace manufacturing industry, and $1.5B to recall and pay Amtrak employees who were furloughed because of the pandemic and to restore various daily routes.

If you have any questions about the American Rescue Plan Act, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford), or email us at info@cironefriedberg.com.

The Consolidated Appropriations Act, 2021 signed into law on December 27, 2020, has made some key changes to the Employee Retention Credit (ERC). One key change to the program is employers who received Paycheck Protection Program (PPP) loans are now eligible for the credit. The same wages cannot be used for both programs; if wages are used for forgiveness under PPP they are not eligible for credit and vice versa. This change is retroactive; therefore, if a company received a PPP loan in 2020 and paid qualified wages in excess of the amount of wages used for PPP forgiveness, the company can claim the credit retroactively under the rules in effect for 2020 (as long as other eligibility requirements are met).

Eligibility

The credit has been extended through July 1, 2021, to include the first 2 quarters of 2021.

To be eligible, as of January 1, 2021:

• The operation of your trade or business is fully or partially suspended during a calendar quarter due to orders from a government authority to COVID-19; or
• Gross receipts show a decline of at least 20% for the same quarter in 2019.
• To be eligible in 2020, gross receipts for a calendar quarter need to be less than 50% of the gross receipts for the same calendar quarter 2019.  A business is no longer eligible if, in the calendar quarter immediately following, their gross receipts exceed 80% compared to the same calendar quarter in 2019.
• If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because you were not in business yet.
• An employer can amend their Form 941 if they determine later that they qualify for the credit.
• CironeFriedberg suggestion:  Determine if your business has experienced a decrease in revenue of more than 50% in any calendar quarter during 2020.  Work with your financial advisor to help you through the process of determining the eligible wages for the 2020 credit.  This can be complex to work through in coordination with the PPP forgiveness calculations.

Credit Available

For 2020, the credit can be claimed against 50% of qualified wages paid up to $10,000 per employee for wages paid between March 13 and December 31, 2020.  This applies to business previously exempt from the program due to taking a PPP loan and claiming a retroactive credit.

Employers qualifying in 2021 can claim 70% of qualified wages, up to a maximum of $10,000 of wages per employee per quarter.  The amount of credit is limited to $14,000 per employee during the first two calendar quarters.  In other words, the maximum credit that can be claimed for an employee is $7,000 ($10,000 eligible wages * 70%) per quarter.  The 2021 credit is available even if the employer received the $5,000 maximum credit for an employee during 2020.

Wages Available

The definition of qualified wages (wages plus qualified health expenses) depends on the number of employees.

• If the employer has over 500 (100 prior to 1/1/2021) full-time employees, qualified wages are defined as wages paid to an employee while the employee was not providing services because of suspension or decline in business (vacation and sick pay are excluded from wages). Essentially the credit is available only for employees not working.
• If an employer has less than 500 (100 prior to 1/1/2021) full-time employees, any wages paid during the period of economic hardship are considered qualified wages (cannot take credit on the same wages for paid family medical leave).
• When calculating the 500 employee threshold, the employees of all affiliated companies sharing more than 50% common ownership are aggregated.

Claiming the Credit

The calculated credit is taken against the employer’s share of Social Security taxes and is fully refundable. Therefore, if the credit exceeds the employer’s total liability of the portion of Social Security in any calendar quarter, the excess is refunded to the employer. At the end of the quarter, the amounts of these credits will be reconciled to the employer’s Form 941. Your payroll provider will be able to help you through filing amended 941s.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford), or email us at info@cironefriedberg.com.