Highlights of the
American Rescue Plan Act of 2021
On March 11, 2021, the American Rescue Plan Act of 2021 became law, with provisions addressing stimulus payments, unemployment benefits, health care, state and local funding, and many other tax law changes. Most of the tax changes are geared toward individual taxpayers and here is a list of those highlights:
Economic Impact Payments
A third round of stimulus payments. Eligible individuals and their qualifying dependents may receive up to $1,400 each. Married filing joint taxpayers could receive up to $2,800. Any payments received will not constitute taxable income to the recipient, but will be treated as a tax refund.
The phase-out range is much narrower than with prior stimulus payments. Phase-outs for taxpayers who file joint returns begin at adjusted gross income of $150,000 and are completely phased out at $160,000. For those filing as head of household, the phase-out range is $112,500 to $120,000. For all others, the range is $75,000 to $80,000. The IRS will use the most recently filed tax return to determine these amounts.
Unlike prior stimulus payments, eligible taxpayers may also receive up to $1,400 for all qualifying dependents, which includes a qualifying child and a qualifying relative. Prior payments were not available for dependents age 17 and older at year-end.
Extended federal supplemental unemployment benefits expired on March 14th. The new law extends the period eligible individuals may receive an additional $300 of benefits until September 6, 2021. Self-employed and gig economy workers are eligible as well.
A retroactive provision that applies to individuals who received unemployment benefits in 2020. For taxpayers with a modified adjusted gross income of less than $150,000 in 2020, up to $10,200 of unemployment benefits may be excluded from income. In households where both spouses received benefits, they may each exclude up to $10,200, or $20,400 in total. For example, if the taxpayer received $25,000 in benefits and the spouse received $7,000, they could exclude $17,200 of unemployment benefits on their joint 2020 return.
To qualify for this exclusion, adjusted gross income includes taxable Social Security and railroad retirement benefits, excludes U.S. savings bond interest and the nontaxable portion of qualified adoption assistance, and deducts qualified retirement plan contributions, student loan interest, and qualified tuition and related expenses.
What should you do if you are eligible for the exclusion and have already filed a 2020 return? The IRS issued a statement on March 12th advising taxpayers to not file an amended return yet and has stated that further guidance is coming.
Expanded Child Tax Credits
Increased the Child Tax Credit for 2021 and makes it fully refundable for eligible taxpayers. The prior-year $2,000 credit for qualifying children has been increased. Children ages 6 through 17 will qualify for a $3,000 credit, a change from prior law when kids older than 16 didn't qualify. Children under age 6 qualify for a credit of $3,600. There is an income limitation threshold depending on your filing status.
Advance payments of these 2021 credits will be sent out beginning in July 2021. Once the available credit has been determined using the most recent tax return data on file with the IRS, 50% of the total 2021 credit will be sent to eligible taxpayers. The payments are set to begin in July and will be made periodically through December. The remaining 50% of the credit will be claimed on the 2021 return when it is filed.
Child and Dependent Care Tax Credits
Expanded the Child and Dependent Care Tax Credit. This credit is available to taxpayers who must pay for child care (for children under age 13) to allow them to work. The act makes this credit fully refundable for eligible taxpayers in 2021 and increases allowable expenses from $3,000 to $8,000 for taxpayers with one qualifying child and up to $16,000 for two or more children. This credit is also subject to income limitations and phase-outs.
Student Loan Debt Forgiveness
Changed existing law to allow for qualified student loan debt that is forgiven after December 31, 2020, and before January 1, 2026, to be excluded from gross income. Eligible loans include:
Earned Income Tax Credit
Expanded the earned income tax credit in 2021. Under prior law, taxpayers had to be between the ages of 25 and 65 to qualify for the credit. For 2021, the upper age limit has been removed and taxpayers as young as age 19 (age 18 for a qualified former foster youth or a qualified homeless youth) can qualify. Taxpayers will also have the option to use their 2019 earned income rather than their 2021 earned income if doing so results in a larger credit.
A new incentive for employers to help employees who were let go during the pandemic. For the period beginning on 4/1/21 and ending on 9/30/21, the cost of COBRA premiums can be subsidized. To be eligible, the former employee must have been terminated or had his or her hours reduced involuntarily. Employees who leave on their own do not qualify. Employers who opt to cover the cost of COBRA for former employees are able to claim a credit to offset their Medicare payroll tax.
Increased Exclusion for Employer-provided Dependent Care Assistance
Increased Qualified Dependent Care Assistance Program income exclusion. For 2021, employees may exclude from income up to $10,500 in employer-provided assistance, or up to $5,250 for employees who are married filing separately. This is up from $5,000 and $2,500 under prior law.
Targeted Economic Injury Disaster Loan Advances
Economic Injury Disaster Loan advances from the Small Business Administration. Amounts received as targeted advances are not included in the gross income of the person who receives them.
Restaurant Revitalization Grants
Restaurants, food trucks, and similar businesses revitalization grants from the Small Business Administration. Amounts received as restaurant revitalization grants are not included in the gross income of the person who receives them.