The new tax bill is a treasure trove of credits and deductions for both businesses and individuals. Two of the most noteworthy are the Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals and the EITC Lookback period.
The Family First Response to Coronavirus Act was enacted in March 2020 to prevent employees from having to make the choice between feeding their families or ensuring their safety. The law required some employers to provide sick leave benefits to employees who were unable to work because of COVID-19-related circumstances. Employers can then claim a refundable credit on their business tax return of the leave benefit expenses. Since there are no stipulations as to which businesses cannot claim this credit, it applies to Cannabis companies as well.
The credit is also available to self-employed individuals who have been affected by COVID-19. The credit is calculated on IRS Form 7202 Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. This is a two-part form. One for the Sick leave credit and the other for the Family leave credit. The Sick leave credit pays a maximum of $511.00 per day for up to ten days, for a maximum of $5,111.00
The Family leave credit is based on the taxpayers’ net self-employment income. To qualify for the Family leave credit, the taxpayer must have been unable to work due to caring for a dependent under the age of 18 who was sick from COVID-19. The credit allows up to 50 days of care for up to $200 per day for a maximum possible credit of $10,000.00. The amount of this refund is directly related to the net income from self-employment. This means that taxpayers with higher net self-employment income will receive a bigger refund.
There is no doubt that these credits have tremendous potential for abuse and taxpayers must ensure that supporting documentation is available when requested.
Another substantial benefit of the Consolidated Appropriations Act of 2021 is the lookback provision. Millions of taxpayers lost their jobs in 2020. According to the Department of Labor, more than 13 million people are currently receiving unemployment benefits. Most taxpayers were unaware that unemployment income is taxable and either had no taxes withheld or the amount withheld was insufficient. This means that many taxpayers may have a tax liability when filing their tax returns this year.
While unemployment income is taxable and increases annual gross income, it is not earned income for the purposes of calculating the Earned Income Tax Credit. This means that in addition to perhaps having a tax liability, taxpayers who have received unemployment benefits will have reduced income to claim the EITC. The Additional Child Tax Credit is also calculated as a percentage of the taxpayer’s earned income over $2,500, meaning that the ACTC will be reduced as well. For low-income taxpayers, who depend on tax refunds this is a huge problem.
The Consolidated Appropriation Act of 2021 provides a boon to taxpayers to mitigate the impact of the unemployment benefits on EITC and ACTC through the lookback provision. The lookback provision is specifically for the EITC and ACTC credits. It allows taxpayers to use either their 2019 or 2020 AGI whichever will give the most favorable outcome, for EITC and ACTC. Married couples who file jointly and choose to use the lookback provision must use the income from the same year for both taxpayers. Using the lookback provision will not impact taxpayers’ 2020 AGI.
If you have questions about these credits or need help with individual or business tax preparation and planning reach out to us at firstname.lastname@example.org or schedule an appointment using this link https://victorandassociates.as.me/Free-Consultation.