As 2021 draws to a close, a number of tax breaks are set to expire. Tax preparers need to be aware of which tax breaks will be going away—but also keep in mind the possibility that they could come back. The expiring provisions could be renewed through legislation.
Also expiring is the temporary provision allowing more taxpayers to deduct charitable donations on their federal income tax return. Tax preparers can encourage their clients to give more to charity before Dec. 31, 2021! Until then, taxpayers will be able to claim a deduction for gifts to qualifying charitable organizations—even if they take the standard deduction.
The Recovery Rebate Credit
In 2021, many taxpayers benefited from stimulus payments that they received as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The initial payment directed by the CARES Act reached taxpayers in mid-2020.
After that, two more rounds of stimulus payments went out to taxpayers. The IRS refers to these payments as Economic Impact Payments. If you are preparing a 2021 federal income tax return, ask your client if they received a third Economic Impact Payment in 2021. If the client received the full payment amount, they are not required to include information about the subsidy in the tax return.
Now, if the client did not receive the full amount, or did not receive any payment, then they may be eligible to claim a Recovery Rebate Credit. Check whether the client is eligible, then file a 2021 tax return—this is mandatory even for clients who do not usually file for a tax return, if they are to receive the Recovery Rebate Credit.
The client is eligible for credit to the amount they did not receive in the third Economic Impact Payment. That is, if they received the third payment, their eligible Recovery Rebate Credit is reduced by the amount they received. Tax preparation software can assist you with determining the correct amount of credit the client is due.
The Recovery Rebate Credit expires at the end of 2021. Financial analysts do not expect the credit provision to receive any extensions. Although the provision was created in response to the COVID-19 situation, and the USA is experiencing a surge with the Omicron variant, taxpayers shouldn’t be expecting a fourth stimulus payment. That’s what the experts are saying, at least.
The Enhanced Child Tax Credit
Many American families experienced relief in the form of monthly child tax credit payments this year. Providing them with additional cash for each qualifying dependent child, the enhanced Child Tax Credit provided a boost that struggling parents needed.
As a tax credit that was aimed at less affluent taxpayers, the Child Tax Credit may not seem to be a big concern for tax preparers. But you may very well have a client who is experiencing temporary job loss due to illness or some other financial setback. So be sure to bring this up with your clients and see if anyone has been getting this relief.
One thing to note as a tax preparer: Child Tax Credit recipients are required to pay back any amount in excess of what they qualify to receive. (This is in contrast to the Recovery Rebate Credit, for which taxpayers do not have to pay back any amount that was given in excess.)
The enhanced Child Tax Credit will be ending when 2021 ends. But it may not be dead, exactly. The Build Back Better bill in Congress contains extensions for the credit provision.
The Enhanced Earned Income Tax Credit for Childless Individuals
Earned Income Tax Credit is another subsidy that is aimed at low to moderate income earners. Ordinarily, it provides little benefit to childless workers, but the American Rescue Plan Act of 2021 changed that. ARPA enhanced the credit for such workers until the end of 2021. They enjoyed a maximum credit roughly three times its prior amount.
This is another expiring tax break that could get a renewal. The Build Back Better bill includes a provision for its extension, which is likely to happen if the bill does get passed.
The Paid Qualified Leave Credit
This tax break comes from the Families First Coronavirus Response Act (FFCRA). As the title of the act suggests, this was part of the government response to the COVID-19 outbreak. This provision was aimed at getting sick employees to take leave while offering support to employers that offered paid leave.
FFCRA stipulates a 100% refundable tax credit for these employers, initially through 2020. Then ARPA allowed for an extension until Sept. 31, 2021. ARPA also changed the requirement to provide emergency paid sick leave, making this a voluntary option for employers.
Either way, employers could be eligible for a full refund of paid sick leave to employees as a result of quarantining at home, experiencing symptoms of COVID-19 or even recovering from an illness after getting the COVID-19 vaccine.
The 100% refund also applies to emergency paid family and medical leave. Many employers had to deal with such leaves as a result of employees needing to stay at home due to their child’s school being closed.
Since the tax credit has been renewed a couple of times, could it come back after it expires in 2021? At present, no proposal for extension is on the table. But some financial analysts think there is a possibility of renewal. Congress might still legislate its return. At the moment, an extension should be seen as possible but highly uncertain.
Other Expiring Tax Breaks Worth Noting
Several other tax breaks appear to be expiring for certain. Financial advisors think that these particular tax breaks are less likely to receive an extension.
- The Employee Retention Tax Credit – The ERTC was aimed at getting companies to keep their employees on payroll even if operations had been suspended due to pandemic restrictions. This tax credit had been extended to the end of 2021, but the extension was later terminated. The ERTC now has a retroactive expiration date of Sept. 31, 2021.
- Other ARPA Tax Credits – The American Rescue Plan expanded a number of tax credits. Some of the expanded tax credits are likely to receive an extension under the Build Back Better bill. But a couple of them are not included in the bill at all: the enhanced child and dependent care credit, and the enhanced employer-provided dependent care assistance exclusion.
- Limit increases on Eligible Charity Contributions – Tax preparers should be encouraging their clients to take advantage of the current 100% limit on charitable cash donations for those filing itemized deductions. Financial experts don’t see this limit increase getting a renewal! Corporations also saw a limit increase, from 15% to 25% of gross taxable income on an itemized charitable deduction. This, too, is unlikely to receive any extension.