Important Tax Changes in the New COVID Relief Law for Individuals
The most recent COVID-19 relief legislation passed by Congress (American Rescue Plan Act of 2021) provides several substantial new tax breaks that will favour the vast majority of American taxpayers in 2021:
Approximately 90% of Americans will receive a second stimulus check.
The child tax credit will be expanded for most families with children, as well as a greater credit for childcare expenses, and individuals who earned unemployment insurance in 2020 will not be taxed on a portion of their benefits.
As a result of these changes, the IRS will begin paying you money on a monthly basis in 2021.
10,200 in 2020 Unemployment Payments Are Tax Free
Due to the mass layoffs triggered by the COVID-19 pandemic, nearly 40 million Americans will be unemployed in 2020. Normally, all unemployment benefit benefits you collect from the state unemployment agency are subject to income tax. You may request that the state unemployment agency deduct 10% of your pay checks for certain taxes, but few people do so. As a result, many unemployed people obtain an unexpected tax bill when they file their taxes the next year.
Unemployment contributions of up to $10,200 are tax-free under the new legislation, but only for 2020. Simply put, you don't declare them as revenue on your tax return. This will save you up to $1,020 even though you pay income tax at the lowest rate of 10%. If you and your partner have lost their jobs in 2020, you will each earn $10,200 tax-free, for a total of up to $20,400.
This tax-free advantage, however, is only available if your household income (adjusted gross income) is less than $150,000 (not including up to $10,200 in unemployment benefits or $20,400 for spouses).
Child Dependent Care Credit
This is a tax credit intended to assist families with the costs of childcare, such as daycare, babysitting, and nursery school. To get the credit, you must pay for these expenses. The credit is equivalent to 35 percent of childcare costs up to $3,000 for one child or $6,000 for two or more children under the standard laws. However, the credit is decreased by 1% for every $2,000 in household income above $15,000, up to a maximum of 20%
The child dependent care credit will be increased to 50% of childcare costs up to $8,000 for one child and $16,000 for two or more under the new legislation, but only for 2021. In addition, for every $2,000 of household income above $125,000, the credit is decreased by 1%. Until the household income exceeds $400,000, the credit percentage cannot be reduced below 20%.
Expansion of Earned Income Tax Credit
The EITC (earned income tax credit) is a financial aid program for the working poor. The value of this completely refundable credit is determined by the size of your family and your wages. When a family's income reaches $21,920 for joint filers and $14,820 for most other taxpayers, the credit is completely phased out.
The new legislation expands the EITC by allowing recipients to receive up to $10,000 in investment income while still being eligible for the credit. It also extends credit for adults without children in a scientific way. The childless EITC sum rises from $543 to $1,502 in 2021. In addition, childless persons as young as 19 will apply for the EITC for the year 2021.
Forgiven Student Loans Are Tax-Exempt
Taxpayers who have their student loans forgiven for whatever reason will not have to pay income tax on the forgiven sum (the amount they don't have to pay back) from 2020 to 2025. Previously, forgiven student loans were taxable income unless they were forgiven for specific circumstances, such as the borrower's death or disability. The new law extends to both privately and publicly subsidized student loans