How the American Rescue Plan Act Affects You
OUR TAKE: Check out this video for a summary of the changes to 2020 unemployment.
BIGGEST TAKEAWAY: Unemployment Compensation
- As of March 11, 2021, the American Rescue Plan Act (ARPA) has put into place a $10,200 unemployment exclusion per taxpayer for your 2020 taxes. This means that taxpayers can exclude up to $10,200 in unemployment compensation.
- This exclusion will take effect provided that your Modified Adjusted Gross Income (MAGI) is less than $150,000. In this case, MAGI is your Adjusted Gross Income (AGI) minus your unemployment compensation.
- The timing of the ARPA places taxpayers in an awkward position. This is mainly because taxpayers have already begun to file their taxes and this new change will leave future taxpayers with questions on how to properly file with unemployment compensation.
THE CHANGES:
- Schedule 1 line 7 and 8 is where you will find the biggest change.
- If eligible, you will see the Unemployment Compensation Exclusion (UCE) on line 8. If you see UCE on the side of line 8, there will be some element on Line 8 that is Unemployment Compensation.
- IF that line is left blank, that could mean 1 of two things:
- Their MAGI is not under $150,000 and do not qualify
- They did qualify and have excluded unemployment compensation.
HOLISTIPLAN ACTIONS:
- If there is anything registered on Schedule 1 Line 7, the software will immediately fail that return so our OCR support can review the return and ensure everything is correct with unemployment compensation.
- You, the advisor, will be notified if the taxpayer is eligible for the unemployment compensation and we will provide our best educated guess on what the amount could be. That educated guess could be as simple as Line 7 being $5000, less than the $10,200. It gets more complicated when a MFJ return has $12,000 of unemployment since it's impossible for us to tell if that was claimed by one individual or both.
- Scenario Analysis will also capture and react depending on if UCE was claimed (top) or if it was an educated guess (bottom):
RECOMMENDED ACTION PLAN:
- Find a way to make a running list of every client who had unemployment compensation.
- Do not remove anyone off this list until they have amended their return, received any refund, or that tax calculation has incorporated the unemployment compensation properly.
- Take them off the list when UCE is on their tax return, their AGI is over the $150,000 threshold
- Getting AGI Down:
- Filing Status - Would the taxpayer be able to take advantage of the Married Filed Separately versus Married Filed Jointly?
- IRA, HSA, SEP IRA contributions - Is taxpayer still able to make contributions before filing the tax return?
- Accelerated Business Income - If there is business income, is there a way to accelerate bonus depreciation within the year?
- Itemized to Standard Deduction - If the threshold is only a couple hundred dollars away, maybe consider switching to the standard deduction to get the $300 above the line charitable deduction.