Top COVID-Related Tax Breaks
What You Need to Know About Coronavirus Tax Relief, Stimulus Checks, and More
There is a good deal of tax help available for individuals, families, and businesses that have been affected by the Coronavirus pandemic.
The American Rescue Plan Act (ARPA) of 2021, the most recent major COVID-related stimulus bill, provides a number of tax breaks for struggling Americans. Here’s a roundup of tax credits, tax deductions, tax exclusions, and other financial assistance that may be available to you.
Economic Impact Payments (a.k.a. Stimulus Checks)
The American Rescue Plan authorized a $1,400 stimulus check for each eligible person. This was the third round of stimulus payments that the federal government has distributed. For a single filer, the maximum amount they can receive is $1,400. For a married couple that files jointly, the maximum amount they can receive together is $2,800. Furthermore, if you have a qualified dependent, you can qualify for an additional $1,400 per dependent.
(Remember that the first stimulus check was worth up to $1,200 per person and the second stimulus check was worth up to $600 per person.)
Recovery Rebate Credit
If you were eligible for a stimulus check (either the first, second, or third round), but you didn’t receive the money, you can claim it on your 1040 income tax return. The Recovery Rebate Credit is designed for any eligible individual who did not get the full amount of their Economic Impact Payment (a.k.a. stimulus check). This tax credit can be claimed on your Form 1040 or Form 1040-SR for the 2020 tax year. Similar to other federal tax credits, the Recovery Rebate Credit will either lower the amount of tax you owe or it will increase the amount of your tax refund.
Earned Income Tax Credit (EITC)
For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC). This is a fully refundable tax benefit that helps many low- and moderate-income workers and working families. The maximum credit has been nearly tripled for these taxpayers and is, for the first time, made available to both younger workers and senior citizens. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.
In 2021, the maximum EITC for those with no dependents is $1,502 (up from $538 in 2020). The EITC is available to filers with an AGI below $27,380 in 2021 and it can be claimed by eligible workers who are at least 19 years of age. Note that full-time students under age 24 don’t qualify.
Another change to the EITC is that it’s available to both childless workers and families with dependents. For 2021, you can choose to figure the EITC using your 2019 income, as long as it was higher than your 2021 income. In some instances, this option will give you a larger tax credit.
Additional changes expanding the EITC for 2021 and future years include the following:
- Singles and couples who have Social Security numbers can claim the credit, even if their children don’t have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for the credit.
- More workers and working families who also have investment income can get the credit. Starting in 2021, the limit on investment income is increased to $10,000. After 2021, the $10,000 limit is indexed for inflation. The current limit is $3,650.
- Married spouses who are separated can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year and must have a qualifying child living with them for more than half the year.
Child Tax Credit (CTC)
The new law increases the amount of the Child Tax Credit, makes it available for 17-year-old dependents, and makes it fully refundable. It also makes it possible for families to receive up to half of the credit in advance during the last half of 2021. Moreover, families can qualify for this tax credit even if they have little or no income from a job, business, or other source.
Prior to tax year 2021, the credit was worth up to $2,000 per eligible child. The new law increases it to as much as $3,000 per child for dependents ages 6 through 17, and $3,600 for dependents ages 5 and under.
The maximum credit is available to taxpayers with a modified AGI of:
- $75,000 or less for Single filers
- $112,500 or less for Heads of Household
- $150,000 or less for Married Couples Filing Jointly and Qualified Widows/Widowers
Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI.
Furthermore, the Child Tax Credit is fully refundable for 2021. Before this year, the refundable portion was limited to $1,400 per child.
Tax Exclusion for Unemployment Compensation
For tax year 2020 only, the first $10,200 of unemployment compensation is not taxable for most households. This tax benefit is only available to those whose MAGI (modified adjusted gross income) is below $150,000 during 2020. The same income cap applies to all filing statuses. For couples where both spouses received unemployment compensation, each spouse can subtract $10,200.
Many eligible taxpayers have already filed and reported their compensation as fully taxable, therefore, the IRS is automatically adjusting their returns and providing them this tax benefit. Tax refunds, based on this adjustment, are being issued throughout the summer of 2021.
Premium Tax Credit
According to the IRS, taxpayers who purchased health insurance for 2020 through a federal or state Health Insurance Marketplace and have excess advance payments of the Premium Tax Credit (excess APTC) are required to report the excess APTC repayment when they file their 2020 tax return.
Generally, taxpayers use Form 8962 to figure the amount of the Premium Tax Credit (PTC) they are allowed and reconcile it with any advance payments of the premium tax credit (APTC) made for their health insurance through the Marketplace. If the APTC is less than the PTC, they claim a net Premium Tax Credit (net PTC). The process remains unchanged for taxpayers claiming a net PTC for 2020. They must file Form 8962 when they file their 2020 tax return. However, if a taxpayer’s APTC was more than his or her allowable PTC, the taxpayer has the excess APTC.
The new law suspends the requirement to repay 2020 excess APTC. This means that taxpayers with excess APTC for 2020 do not need to report the excess APTC or file Form 8962. The IRS will automatically reduce the repayment amount to zero. In addition, the agency will automatically reimburse anyone who has already repaid their 2020 excess APTC.