A few weeks ago I shared with you a two-part piece featuring 20 tax myths that was written by Kelly Erb Smith, a tax journalist at Bloomberg Tax. American Rescue Plan Act.
I enjoyed her piece so much that I reached out to Kelly to suggest that she write one about US expat tax myths, since there are plenty of those also and the potential consequences of falling for them, given offshore tax penalties, can be quite severe.
Her response?
“Do you think you can write the article and we will consider it for publishing?”
I thought I could, so I did.
Bloomberg Tax ran the first part on Tuesday and the second Part on Thursday. You can read them here.
Let me know if you think I missed any myths worth you have encountered that I should add to the list.
We have now arrived at the section of the post where we touch on current tax issues.
And guess what?
We have a new law full of tax provisions this week!
Again!
If it feels like we have been discussing a new tax laws every other month, it’s because that’s is precisely what has been happening since the pandemic started.
The last time we had done this was between Christmas and New Year’s, when we discussed the second coronavirus stimulus law under President Trump, which he signed on December 27th 2020.
This time, we are going to talk about the American Rescue Plan Act (ARPA) that was signed by President Biden yesterday.
We’ll get back to the Foreign Earned Income Exclusion FAQs – Part 2 in the next issue of CBP. Unless there is another new law we may need to discuss, that is…..
Anything is possible!
ARPA is the first significant piece of legislation under the new US administration and it’s a pretty big deal.
1.9 trillion dollars big. Some people worry that it may stimulate the economy too much, leading to inflation if supply is unable to meet the sudden growth in demand that is expected. But that’s a topic for a different newsletter…..
According to the Tax Policy Center, a joint venture think tank between the Urban Institute and the Brookings Institution, 50% of the individual relief measures in this law is targeted at families with incomes lower than $50,000 and the remaining 50% to families with up to $200,000 of income. 75% of the benefits go to families with children making $91,000 a year or less.
The Biden administration calls this package a relief package, not a stimulus package. The law’s main goal is to provide relief to those most negatively impacted by the pandemic: lower and middle income households, particularly those with young children and multiple dependents.
The more targeted focus of this law means that some of our higher income readers who had benefited from the first and second stimulus individual payments may not receive any additional relief under ARPA.
Before we start discussing the provisions, a disclaimer:
The text of the law was published a few hours ago on Congress’ website, (I’m writing this on Thursday afternoon, US EST), so I haven’t had a chance yet to read its language in detail.
As you know, I like to explore how tax measures impact US expats and immigrants. This time though, given the timing of the signing of the law and the publication schedule for this newsletter, and the fact that it is tax season and I have tax returns to prepare, I will rely on third party reports to share the key provisions.
A more detailed analysis from the perspective of US expats and immigrants’ benefits will come in the near future, once I have a chance to read and analyze the text of the law itself.
Since I am relying on third party analyses, it is possible that some provisions shared below may be inaccurate, or not applicable to Americans living overseas or to immigrants without social security numbers, even though the reports I have read do not specifically mention this. Wherever I anticipate restrictions for US expats or immigrants, I will mention it below.
With that disclaimer out of the way, let’s begin.
What relief provisions for individuals and families are included in this law?
- A portion of 2020 unemployment payments are made non-taxable.
How much? The first $10,200 of benefits are tax free. Implications – If you received unemployment compensation in 2020 and:
- If you have already filed your 2020 tax return: you may need to file an amended tax return to get a refund for the income tax you paid on unemployment benefits that are now tax free. This may also impact your state tax return if you live in a state with an income tax.
- If you have not yet filed your 2020 tax return: you may need to wait a little longer to file, until tax preparation software programmers update the tax software to properly calculate this new tax exemption. They may require input from the IRS before they can begin working on the changes. It could take a while……
- Providing new relief payments to individuals and their dependents. How much? $1,400. These are the checks everyone has been talking about and it’s probably the provision people are most aware of. Dependents over age 17 are also eligible for relief this time, and the income phaseouts to qualify for the payments have been narrowed. You can use this calculator to determine if you are eligible:
- INSERTAR BOTON DE CALCULATOR: https://www.kiplinger.com/kiplinger-tools/taxes/third-stimulus-check-calculator/index.php
- Expanding the child tax credit and making it fully refundable. The child tax credit is expanded from the current $2,000 per child to $3,600 for qualified children under 6 and $3,000 for qualified children between 6 and 17. The credit is fully refundable, which means it’s available as a tax refund when the recipient does not owe any income tax. Normally, credits can be used to reduce income tax all the way to zero but not below zero. A refundable credit allows reducing income tax below zero and generates a payment from the IRS to the beneficiary.
- ALERT FOR AMERICANS ABROAD: the refundable portion of the credit may require living within the USA. This is something I have heard informally but I have not seen published, so I need to further explore it to confirm. I am also curious to find out how the expanded credit interacts with the existing credit, which is partially refundable even for foreign resident US taxpayers when they do not use the foreign earned income exclusion. I will report back on this shortly.
- Expanding the eligibility for the earned income tax credit. This credit is available only to taxpayers working in the USA. It never applied to Americans overseas and this hasn’t changed, that I am aware. The expansion applies to permit coverage of individuals without dependent children who would not have qualified under the old rules.
- Enhancing the child and dependent care tax credit. This expansion dramatically increases the subsidy for child and dependent care costs for families with income below $125,000. For those above $125,000, the credit begins to phase-out. It is a one-time credit for 2021 and it can be worth up to 50% of child and dependent care costs, capped at $4,000 for individuals and $8,000 for married couples.
- Providing more generous health insurance subsidies for coverage obtained through the healthcare marketplace or COBRA continuation coverage. This provision is aimed at making affordable health care available to those who lost their jobs due to the pandemic, whether they were receiving health care benefits at work (the COBRA provision) or not (the healthcare market place provision). This change is also temporary and the relief is only available to US based individuals.
- Doubling the amount of tax-free dependent care benefits. Employees with employers offering dependent care benefits through a cafeteria plan in the USA are allowed to double the deductible amount they contribute for dependent care expenses, to a new maximum of $10,500. This benefit is only available to US based employees.
All right folks, we have arrived at the end.
We will be back in two weeks with additional information about ARPA and the Foreign Earned Income Exclusion.
Take good care of one another and see you soon.
Un abrazo y buena onda. Much love,
Marina