Tax

In our files, we show that you have a self-employed business that you file on Schedule C of your Form 1040. 

As you likely know, in times of economic dislocation such as the COVID-19 pandemic, the self-employed get no special government help. For example, you generally do not receive benefits that employees get, such as unemployment and paid sick leave.

But this time it’s different. Because of the COVID-19 pandemic, you can qualify for the following seven benefits:

1. PPP monies. Self-employed individuals with no employees can obtain forgivable first- and second-draw PPP monies of up to $20,833 for each draw, or $41,666 in total. 

These monies are available through May 31. Apply now if you haven’t already done so. If you already received a PPP loan, you may qualify for a second-draw loan if your 2020 income for any quarter declined by 25 percent compared with the same 2019 quarter.

2. EIDLs. These 3.75 percent interest loans of up to $500,000 are available to the self-employed and are not forgivable. You can borrow up to $25,000 without any collateral.

3. Prior EIDL Advances. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted on December 27, 2020, eliminates the rules that required reducing your PPP forgiveness by the amount of your EIDL Advance and requires the SBA to refund your advance if your loan forgiveness has been previously reduced.

4. New Targeted EIDL Advances. You might qualify for a Targeted EIDL Advance of up to $10,000 if (a) your business is located in a low-income community, and (b) you suffered a 30 percent reduction in revenue during an eight-week period beginning March 2, 2020, or later. Unlike EIDLs, Targeted EIDL Advances need not be paid back. They are tax-free government grants.

5. Sick and family leave tax credits. If you’re unable to work due to COVID-19, or if you need to care for a family member, you can qualify for refundable sick leave and family leave tax credits of up to $15,511 in 2020 and $17,511 in 2021. You can get up to $511 per day for 10 days if you’re sick. You can get up to $200 per day for 70 days if you need to care for others. These credits last through September 30, 2021.

6. ACA premium tax credits. Congress removed the subsidy cliff (400 percent of the federal poverty level) for 2020 and 2021. During these years, you need pay no more than 8.5 percent of your household income for ACA coverage. You are entitled to premium tax credits to the extent midlevel silver ACA coverage exceeds this amount. 

7. Unemployment for the self-employed. For the first time ever, self-employed individuals may receive unemployment benefits. The Pandemic Unemployment Assistance program has been extended to September 6, 2021. You’ll qualify for unemployment only if you’re earning little or no income.

If you have any questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 11, 2021

The earned income tax credit (EITC) has been around for years. But for some folks, it’s never been worth as much as it will be for 2021. 

That’s thanks to liberalizations included in the American Rescue Plan Act of 2021 (ARPA). Some of the favorable changes are only for the 2021 tax year. Others are permanent. 

EITC Basics

The EITC is targeted at low-income and moderate-income individual taxpayers. Perhaps most important, it’s a refundable credit. 

That means you can collect it even if you don’t owe any federal income tax. In other words, it’s free money. 

If you’re an eligible individual, your tentative EITC (the maximum you can hope for) equals the applicable credit percentage of your earned income for the year. 

The tentative EITC is then reduced by the phaseout amount, if applicable, to arrive at your allowable EITC. 

Eligible Individual Defined

In general, you are an eligible individual if you have at least one qualifying child for the tax year in question. 

Earned Income Defined 

The term earned income generally means

• wages, salaries, tips, and other taxable employee compensation, and 
• any net earnings from self-employment reduced by the deduction for 50 percent of self-employment tax.

Qualifying Child Defined

The term qualifying child means your child; a descendant of your child (such as a grandchild); or your brother, sister, stepbrother, or stepsister (or a descendant of one of those persons). 

To be your qualifying child, the individual must also have the same principal residence as you have for over half of the year in question. The individual must be younger than you and

• under age 19 at the end of the year, or 
• a student who is under age 24 at the end of the year, or 
• permanently and totally disabled at any time during the year. 

Finally, the individual cannot have filed a joint Form 1040 for the year.

EITC Calculations in a Nutshell

Under the rules that apply for your 2020 Form 1040, tentative EITC equals 

• 7.65 percent of the first $7,030 of earned income if you don’t have a qualifying child, 
• 34 percent of the first $10,540 of earned income for one qualifying child, 
• 40 percent of the first $14,800 of earned income for two qualifying children, or 
• 45 percent of the first $14,800 of earned income for three or more qualifying children. 

If the couple’s adjusted gross income exceeds $47,646, their EITC is completely phased out. Use the table in the Form 1040 instructions to find the exact allowable EITC amounts.

For 2021, the inflation-adjusted earned income amounts are $7,100, $10,640, $14,950, and $14,950, respectively.

Finally, if you have certain types of investment income over the applicable annual inflation-adjusted threshold, you’re completely ineligible for the EITC. For 2020, the investment income cap was $3,650.

Thanks to the ARPA, you can have up to $10,000 of disqualified income without losing out on the EITC for 2021. For 2022 and later years, the $10,000 limit will be adjusted for inflation.

Calculate 2021 EITC Using Either Your 2019 or 2021 Earned Income (Whichever Offers the Bigger Credit)

To calculate your EITC for 2021, you can use either your 2019 earned income or your 2021 earned income. Use whichever number gives you the bigger 2021 credit.

While your income may be way too high to claim the EITC, you may have loved ones who are eligible. According to a report by the Treasury Inspector General for Tax Administration, about 5 million potentially eligible taxpayers fail to claim the EITC each year, resulting in about $7 billion in unclaimed credits each year. Don’t let a loved one fall into this category. 

There’s no IRS form dedicated to the EITC. You must use the worksheets provided in the Form 1040 instructions to calculate your allowable credit. Pack a lunch—it takes a while!

Sincerely,

P.S. If you would like to discuss the EITC, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 3, 2021

For tax year 2021, Congress is giving away billions of dollars in additional tax credits on your Form 1040 individual tax return.

These temporarily expanded tax credits include the child tax credit, the dependent care credit, and the health insurance premium tax credit.

With good planning on your end—which you have more control over than most do because you are in business for yourself—the various credits could easily put an additional $5,000 or more in your pocket for tax year 2021.

Child Tax Credit—Current Law

In tax year 2020, you received a $2,000 tax credit for qualifying children who had not reached age 17 by the end of the tax year. Up to $1,400 of the credit was refundable if you had earned income and had no overall tax liability.

If your modified adjusted gross income (MAGI) exceeded $200,000, or $400,000 on a married-filing-jointly return, then your 2020 credit decreased by $50 for each $1,000 (or fraction thereof) your MAGI was over the threshold.

Child Tax Credit—Tax Year 2021

For tax year 2021 only, the child tax credit amounts are

• $3,000 ($1,000 extra) per qualifying child, for qualifying children ages 6 through 17 at the end of the tax year; or
• $3,600 ($1,600 extra) if the qualifying child is 5 or under at the end of the tax year.

Planning point. The tax code measures your child’s age on December 31. For example, if your child turned 4 in July, your child is 4 on December 31.

Phaseout 1. You’ll reduce the 2021 credit amount that exceeds the $2,000 base credit by $50 for each $1,000 (or fraction) by which your modified adjusted gross income (MAGI) exceeds

• $150,000 for married, filing jointly, or for qualifying widower;
• $112,500 for head of household; or
• $75,000 for all other filing statuses.

Phaseout 2. Once your MAGI exceeds $200,000, or $400,000 on a married-filing-jointly return, then your $2,000 base credit decreases by $50 for each $1,000 (or fraction thereof) that your MAGI is over the thresholds.

In addition, the entire child tax credit is 100 percent refundable as long as either you or your spouse has a principal place of abode in the U.S. for more than one-half of the tax year.

Heads up. Here’s a new wrinkle you need to manage: the IRS will advance you 50 percent of your anticipated child tax credit based on your last filed tax return.

You’ll reconcile the advance payments received with your actual 2021 child tax credit, and if the advance payments exceed your actual credit, you have to pay back the excess with your 2021 tax return.

The IRS will make the advance payments in equal monthly amounts between July and December 2021. You will have access to an IRS online portal where you can opt out of the advance payments or can update your information to avoid having to repay any of the amounts on your 2021 tax return due to a change in circumstances.

Dependent Care Credit—Current Law

In tax year 2020, you could claim a tax credit if you paid someone to care for your under-age-13 dependent or for your spouse or dependent who isn’t able to care for himself or herself.

Your maximum expenses eligible for the credit were 

• $3,000 for one qualifying individual, or 
• $6,000 for more than one qualifying individual.

The credit rate was 35 percent up to an AGI of $15,000. Your credit rate then decreased by 1 percent for each additional $2,000 of AGI (or fraction thereof). Once your AGI was $43,000 or higher, you had a 20 percent credit rate.

Dependent Care Credit—Tax Year 2021

For tax year 2021 only, the maximum creditable expenses are

• $8,000 for one qualifying individual, or 
• $16,000 for more than one qualifying individual.

The credit rate is 50 percent up to an AGI of $125,000. Your credit rate then decreases by 1 percent for each additional $2,000 of AGI (or fraction thereof). Once your AGI is $185,000 or higher, you have a 20 percent credit rate.

However, there is a new upper limit: once your AGI reaches $400,000, you reduce your credit rate by 1 percent for each additional $2,000 (or fraction thereof) of AGI until the rate is 0.0 percent at an AGI of $440,000.

In addition, the dependent care credit is 100 percent refundable as long as either you or your spouse has a principal place of abode in the U.S. for more than one-half of the tax year.

Employer-Provided Dependent Care Assistance

For tax year 2021 only, the maximum employer-provided dependent care benefit excluded from your income as part of your cafeteria plan goes from $5,000 to $10,500 (or $5,250 for married filing separate).

Premium Tax Credit—Current Law

The Affordable Care Act (Obamacare) created the premium tax credit to help you afford insurance purchased on your state’s health insurance marketplace.

Your premium tax credit is equal to

• total monthly premiums for the tax year for the second-lowest silver health plan available on your state’s health insurance marketplace, less
• a certain percentage of your annual household income, with that percentage determined by your annual household income.

The percentage of your annual household income you must pay ranges from 2.06 to 9.78 percent in tax year 2020.

Once your household income exceeds 400 percent of the federal poverty level (FPL), you are no longer eligible for the premium tax credit. For example, the 400 percent thresholds outside of Alaska and Hawaii for tax year 2020 are

• $67,640 for a household of two,
• $85,320 for a household of three, and
• $103,000 for a household of four.

You can receive advances of the premium tax credit based on information you provide to the health insurance marketplace. On your tax return, you then compare your credit with the advance amounts and pay back any advance payments in excess of the actual credit, subject to limits.

New Law—Good Deal

The American Rescue Plan Act of 2021 (ARPA) retroactively removed the requirement to repay any excess advance premium tax credit payments for tax year 2020.

Premium Tax Credit—Tax Years 2021 and 2022

ARPA made several changes to expand access to the premium tax credit for tax years 2021 and 2022.

For tax year 2021 only, if you receive (or receive approval for) unemployment for any week beginning during tax year 2021, then

• you qualify for the premium tax credit (but if married, you must file a joint return with your spouse), and
• you will not take into account any of your household income in excess of 133 percent of the FPL for a family of the size involved.

The above provision creates larger premium tax credits for most anyone who receives unemployment during tax year 2021.

In addition, for tax years 2021 and 2022 only

• you can claim the premium tax credit even if your household income exceeds 400 percent of the FPL, and
• the amount of your household income you must contribute toward your health insurance to calculate your premium tax credit ranges from 0.0 percent to 8.5 percent based on your household income, which is a significant decrease over tax year 2020. The 0.0 percent rate goes up to 150 percent of the FPL.

As you can see, you have far more opportunities for tax credits in 2021. If you would like to discuss any of the credits, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 30, 2021