Up until now, if a student borrowed funds for college and couldn’t repay them, that student would be taxed on the amount of any student-loan debt that was forgiven. This tax-treatment of debt discharge follows a long-standing general tax principal: taxpayers should pay tax on any realized wealth increases, including those caused by an elimination of personal liabilities (i.e. if a taxpayer borrowed funds and didn’t repay them, that taxpayer was enriched and should pay tax as a result). The American Rescue Plan Act of 2021 allowed for an exception to this general tax principal and will exclude from income any wealth increase caused by forgiveness of student-loan debt for discharges before 1/1/2026.
Received a Health Insurance Subsidy AND Unemployment in 2021?
For 2021 only! Any family which receives unemployment income in 2021 will effectively get free health insurance if they purchased their 2021 health insurance through Healthcare.gov (the Federal Health Insurance Marketplace). A special rule effective for only the 2021 tax year provides that any taxpayer who has received, or been approved to receive, unemployment compensation for any week beginning during 2021 will be deemed to have total 2021 household income of 133% of the Federal Poverty Level for purposes of calculating the Premium Tax Credit. This, in effect, gives that family the largest health insurance subsidy allowed under the Obamacare rules for 2021 (i.e. the Federal government will pay all of their health insurance for the year).
Great News For Those With Health Insurance Through the Health Insurance Exchange
Recent legislation has eliminated a dreaded Premium Tax Credit subsidy bright-line. In previous-years, if an individual or family received health insurance subsidies by purchasing health insurance through Healthcare.gov, they had to repay ALL of the subsidies if they unexpectedly had income totaling more than 400% of the Federal Poverty Level (about 106K for a family of 4). This strange law often led to crazy and counterintuitive results on a tax return. As an illustration, if that family earned $106,001 of income in a given year, then they triggered that bright-line repayment and might have to repay $4K of subsidy (which is an effective tax rate of 400,000% on that $1 of extra earnings!). For 2021 and 2022, Congress has eliminated this cliff and now any income over this 400% of Federal Poverty Level bright-line will cause that same family to repay their subsidy at a rate of 8.5% (which is an 8.5% tax…much more sensible). Thank you Congress!
Special Earned Income Credit Rules for 2021
A lot of our small-business owners often are eligible for the Earned Income Credit in some of their low-profit years (caused by large equipment purchases or other one-time expenditures of their business). In determining the Earned Income Credit for 2021, taxpayers can use their 2019 earned income if that amount is higher than their 2021 earned income to use in calculating the Earned Income Credit. For self-employed small-business owners there is often a conflict between taxable income and earned income on the tax return (they want a small taxable income BUT a large earned income). In order to get a decent Earned Income Credit in normal years, the small-business owner needs decent taxable income, which causes the small-business owner to pay self-employment tax, which reduces the owner’s overall refund. By taking advantage of this special rule for 2021, the small-business owner can now have low taxable income in 2021 and pay no self-employment tax and still get a large Earned Income Credit, and thereby a larger refund.