In recent months, there have been several tax changes that may affect your individual tax bill. Many of these changes were enacted to help mitigate the financial damage caused by COVID-19.
Some unemployment compensation from last year is tax free.
Generally, unemployment compensation is included in gross income for federal tax purposes. The American Rescue Plan Act (ARPA), enacted on March 11, 2021, allows for up to $10,200 of unemployment compensation to be excluded from federal gross income on 2020 federal returns. Taxpayers must have an adjusted gross income (AGI) under $150,000. In the case of a joint return, the first $10,200 per spouse is not included in gross income, for up to a $20,400 exclusion.
The IRS has announced that taxpayers who already filed their 2020 individual tax returns without taking advantage of the 2020 unemployment benefit exclusion, should not file an amended return.
The IRS will take steps in the spring and summer to make the appropriate change to the returns, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.
Some states tax unemployment compensation that is exempt from federal income tax under the ARPA. Wisconsin is one of the states who has not adopted this exclusion, although the state’s subtraction for unemployment benefits is still available.
More taxpayers may qualify for a tax credit for buying health insurance.
The premium tax credit (PTC) is a refundable credit that assists individuals and families in paying for health insurance obtained through a Marketplace established under the Affordable Care Act. The ARPA made several significant enhancements to this credit.
Under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) were not eligible for the PTC. But under the new law, for 2021 and 2022, the premium tax credit is available to taxpayers with household incomes that exceed 400% of the FPL. This change increases the number of people who are eligible for the credit.
For tax year 2020, no repayments of advance payments of the credit are required.
Many more changes.
The 2020 unemployment benefit exclusion and the enhanced premium tax credit are just two of the many recent tax changes that may be beneficial to you. Contact us if you have questions about your situation.