Cutting through a bonkers tax season: Here are the biggest new changes

The American Rescue Plan Act of 2021 is the most extensive relief bill yet — and includes several new tax provisions helping individuals and families with children.

The measure has so many changes that updates still have to be made to commercial tax software and even the IRS website. It could take the federal tax agency 30 to 45 days to reprogram computers to account for the new law.

It is not surprising that the IRS on Wednesday pushed back the tax season filing date to Monday, May 17, from April 15. So did the states of Pennsylvania and New Jersey.

Here’s a checklist of some important tax changes:

How has the child tax credit changed?

Before, the child tax credit was $2,000 per child. Under this new law, the credit increases to $3,000 per child ($3,600 for children under age 6 as of the end of this year). The credit phases out at $75,000 for singles, $150,000 for joint filers, and $112,500 for heads of households.

Before, a child was defined as under age 17. The new law includes any child who hasn’t turned 18 by the end of this year.

How are parents going to receive direct payments of the child tax credit this year?

Unlike in the past, this money will be paid out to parents directly.

Payments will start in July through December 2021, according to Bala Cynwyd accounting firm Isdaner & Co.

The IRS must now establish an online portal for taxpayers to receive money or opt out, said Jennifer Burdick, supervising attorney at Community Legal Services of Philadelphia. But the portal doesn’t exist yet.

Still, this expansion is “life changing. It will reduce child poverty by half, particularly significant in a city like Philadelphia. It’s a direct cash benefit,” Burdick said. CLS recommends that all clients file taxes this year, “especially those who do not normally file, and have no earnings. Filing will help these folks recover any missing stimulus payments, and may make it easier to get the child tax credit.

This expansion is “life changing. It will reduce child poverty by half, particularly significant in a city like Philadelphia. It’s a direct cash benefit,” Burdick said.

The new amounts will be paid monthly at $250 (age 6 or older) or $300 (under age 6), starting in July.

Any money not paid by Dec. 31, 2021, can be taken as a credit on 2021 tax returns, similar to the stimulus/EIP advances.

Grandparents raising children also qualify The law expands the child tax credit so that qualifying families include many grandparents who are raising grandchildren, according to Justice in Aging.

Families First Coronavirus Response Act (FFCRA) Credits: The act extends tax credits for employers’ paid sick and family leave through Sept. 30, 2021.

The wage amount increased from $10,000 to $12,000 per employee. The credit also applies to the self-employed.

Medical expense deduction

The 2020 threshold for deducting medical expenses is 7.5% of adjusted gross income; it was slated to jump from 7.5% to 10% after 2018, but coronavirus relief legislation in 2020 made the 7.5% figure permanent.

Expanded access to health-care subsidies

The act expands eligibility for Affordable Care Act premium tax credits and subsidies.

The biggest subsidy is for people buying health insurance, including some higher earners who didn’t previously qualify. The act expands subsidies above 400% of the poverty line (those making up to $106,000 for a family of four) and also increases subsidies for those making 100% to 400% of the poverty level, for two years (2021 and 2022), according to the Kaiser Family Foundation.

The changes are expected to extend coverage to about 2.5 million uninsured Americans through 2022.

Four out of five enrollees will be able to find a plan for $10 or less a month after tax credits, and more than 50% will be able to find a Silver plan for $10 or less, according to trade publication MedCityNews.

The act also covers 100% of premiums for COBRA — an often expensive continuation of health-care coverage for laid-off workers who received insurance through work — for those who lost jobs in the last year through September 2021.

Philadelphia school income tax

The city will not extend its April 15 deadline for paying or filing. Also, the city will not mail out paper returns or coupons for the 2020 School Income Tax.

Go to www.phila.gov/pay and select “School Income.” You will be asked for your Social Security number and a unique PIN.

You can also download the form and print it out, then mail your payment. Go to www.phila.gov/revenue/tax-forms and select “2020 tax forms.” If you lack computer access, call the Department of Revenue to request a paper return: 215-686-6600 and ask for a paper return.

Then mail the forms with payment to Philadelphia Department of Revenue, Box 389, Philadelphia, Pa. 19105.

Home office deduction

Want the deduction? The home office has to be a business, not just you working as an employee for someone else.

“Is it work you are doing as an employee? If yes, then no deduction. If you have a side business, and it’s your principal place of business, then you get the deduction,” said Center City tax expert and attorney Phyllis Horn Epstein.

Despite there being no deduction on federal taxes, state treatment may vary, said tax advisors Drucker & Scaccetti.

Pennsylvania allows deductions on its state tax form PA Schedule UE as unreimbursed business expenses. These expenses must be reasonable, necessary, a condition of employment, directly related to the business, and not reimbursed. Examples include union dues, professional license fees, and office work area expenses (must be the principal place of work). Pennsylvania allows deductions for any type of compensation and is not limited to self-employed individuals.

Philadelphia does not have its own form to report expenses, but uses Pennsylvania’s Schedule UE. You attach this form to any refund claim you submit to Philadelphia and mark “Philadelphia – Deductions for Expenses Directly Connected with Employment” on the top of the schedule.

Student loan and debt

Other adjustments allow for all taxpayers to deduct student loan interest up to $2,500.

Separately, the IRS normally treats a student loan as income when it is forgiven. But this law changes that; A discharged student loan can’t be taxed. This applies to student loan discharged between Dec. 31, 2020 and Jan. 1, 2026.

That’s a hint that the Biden administration may push for student debt discharge in the coming years, as the new law effectively allows discharges tax-free — until 2026. Stay tuned.

Stimulus payments

The third stimulus payment will be larger for most people, said accountant Mitch Gerstein. Most families will get $1,400 a person, including all dependents claimed on their tax return. Typically, this means a single person with no dependents will get $1,400, while a family of four will get $5,600.

Unlike the first two payments, the third stimulus payment is not restricted to children under 17. Eligible families will get a payment based on all qualifying dependents claimed on their return, including relatives such as college students, adults with disabilities, parents and grandparents.

The IRS has sent out $1,800 to most people so far: $1,200 in 2020 and $600 at the beginning of 2021. It will soon send out $1,400, plus more money for children and dependent adults.

If you’re still awaiting payment

The IRS has a Get My Payment tool. The online tool lets you check the status of your stimulus payment; confirm your payment type (paper check or direct deposit); and get a direct deposit or paper check delivery date (or find out if a payment hasn’t been scheduled).