Add together a newly elected president, a change in the majority party, attempts to recover from a pandemic, and many other issues, and you get job security as a tax preparer. Several new tax plans were put into place in 2020, we have had one plan put into place to date in 2021, and many more being discussed. I want to update you on what has passed, some of what is being discussed, and some guidance on what you might do to maximize the benefit of these changes.
The Secure Act and the Cares Act passed in 2020 provided stimulus payments of $1,200 per person in April 2020 and $600 per person in December 2020. These stimulus checks have all been issued. IRS announced recently that over $1.2 million stimulus payments have not been cashed and/or debit cards have not been used. If you are unsure if you received a check or lost your debit card, please contact the IRS to obtain a replacement.
The third stimulus payment was issued as a result of the American Rescue Plan passed in March 2021. Most of these payments have been issued at this time. If you were not eligible for the first two payments and became eligible for the 3rd payment and have filed a tax return after March 1st, your payment may still be on its way. If you were in the phase-out range for either payment one or two and your 2021 is still showing as having a “pending status,” you may not receive your stimulus payment until your tax return is processed. Use the “Get my Payment” button on IRS.gov to determine the status of your stimulus payment.
If you are waiting on a tax refund and your status on IRS.gov is reflected as pending, it will require patience. If you filed your tax return more than 3 weeks ago and the status is pending on the IRS website, IRS will likely tell you that your tax return has been pulled for a manual review. Initially, IRS was saying to wait at least 10 weeks from the filing date for that return to be processed. When I contacted them last week, I was told they have been unable to meet the 10-week timeframe, and more likely, that is now going to be a 15- to a 20-week timeframe. I know how frustrating this can be; the only option right now is patience. If you call the IRS, they will tell you to call back in 30 days to check on your refund if the status is still reflected as pending on the website.
If you receive a letter from IRS, you should respond to a letter as soon as you can. The likelihood is any response will be acknowledged with another IRS letter that tells you it will take 90 days for them to reply to your correspondence. This means your refund may be coming in time for holiday spending.
The Cares Act of 2020 also changed beneficiary IRA distributions and required minimum distributions.
Required minimum distributions (RMDs) now begin at age 72 – no more ½ year to worry about! If you were age 70½ before 2020, you are still required to follow the age 70½-year schedule. If you were not age 70½, you could now wait until age 72 to begin distributions.
The proposed Secure Act 2.0, expected to go up for a vote in the next few weeks, increases the RMD age to 75. The anticipation is still for those that turn 72 before the passing will have to follow the age 72 rules. Stay tuned to determine when you must start taking distributions and how those distribution amounts will be calculated. If you turn age 72 during 2021 and do not need the funds, it might be advantageous to plan distributions later in the year after seeing if the Secure Act 2.0 raises the age.
Consider if delaying taking distributions from your IRA is good tax planning for you. Delaying distributions to take advantage of doing more Roth conversions might make sense. Or – taking retirement distributions earlier to delay collecting Social Security until either full retirement age to avoid lifetime penalties or even to age 70 to see the 8% annual increase in benefits may be a better option for you. Reviewing your finances and your tax situation is essential to make the best decisions for yourself.
With retirement plan distributions, you will need to determine your company’s rules within its 401(k), 403(b), or 457 plans. It might make sense to move these funds to an IRA when you reach RMD age if you want to delay payments beyond what the plan allows. With Roth employer retirement plans, most will require you to start taking distributions at your RMD age. If you do not want to use those funds yet, it might be beneficial to move them to a Roth IRA. Remember, Roth IRAs have no RMD requirements, and you can defer distributions from those plans as long as you want.
The American Rescue Plan of March 2021 increases the dollar amount of the child tax credit. Starting in July, individuals are eligible to receive a portion of that increase as a monthly payment. The monthly payments are anticipated to be $300 for each child under the age of 6 and $250 for each child ages 6 to 17. Only ½ of the anticipated $3600 credit (child under age 6) or $3000 credit (child between ages of 6 and 17) is payable in advance, with the balance being refunded as part of your 2021 tax return.
There will be a tool on the website for those with new dependents to add a dependent that did not appear on your 2020 tax return because you had or adopted a child. Divorced parents may also need to use the tool found at IRS.gov to get or stop payments for dependents if there is a change on which tax return dependents are claimed each year.
Individuals can also choose to opt out of the advance payment and receive the entire credit as part of filing their 2021 tax return. Again, this will be an option on the IRS website tool. The website tool will also allow you to input direct deposit information to receive your payment as quickly as possible if that information is not on record with IRS currently.
Make sure you decide what works for you and your family and follow through to get your payments monthly or delay the payment until you file your 2021 tax return.
The American Rescue Plan also extended the higher unemployment amount of $300 through September 6th. Many states are now stopping this incentive, attempting to get individuals back to work sooner. NYS has yet to change the payments, and currently, those benefits will be paid through September 6th.
Today, Congress is working on finalizing the American Families Plan. This bill has not yet passed, and we cannot be sure of what the final law will look like once it is completed. We all know what is often proposed is not what happens in the end. Included in this bill is:
- providing free universal preschool to all 3- and 4-year-old children
- two free years of community college for all Americans
- support to help families pay for childcare with the goal of it not exceeding more than 7% of a family’s income and providing access to high-quality childcare
- tax credits for working families that boost child academic and economic performance over time
- increasing the Pell Educational Grant to an annual maximum of $1,400
- creation of a national comprehensive paid family and medical leave program
- expansion of healthy in-school and summer meals
- modernizing the unemployment insurance system to reduce fraud and improve efficiency
- extend the ACA-premium tax credits that were part of the American Rescue Plan
- make the higher American Rescue Plan child tax credit available through 2025 and make it permanently fully refundable
- changes to the capital gains rates for higher-income individuals.
The American Families Plan has its goal to improve the financial lives of low- and middle-income families. What passes in the final version of this bill remains to be seen. We, at Planning with Purpose, are carefully watching and listening to these discussions. We will update you as new laws are created and passed, including a discussion of the impact.
