American Rescue Plan Act of 2021
On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law. Congress had passed the massive piece of legislation on March 10, when the House approved the measure by a 220-211 vote. This followed passage in the Senate by a 50-49 vote on March 6. The Act was originally passed by the House on February 27 but was amended in the Senate to appease some moderate Democrats and ensure passage in the evenly divided chamber.
The $1.9 trillion bill includes extensions of enhanced unemployment relief, increased funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools to help get students back into classrooms.
The Act also includes several tax provisions, including:
- A third round of direct stimulus payments.
- Enhancements of personal credits: the child tax credit, earned income credit, and dependent care credit meant to help lower income families with children.
- Extensions of payroll tax credits for certain employers impacted by the pandemic.
- Changes related to retirement plan funding to aid employer in meeting funding obligations for pension plans.
The Act includes a third round of direct stimulus payments for taxpayers of $1,400 for all persons with a social security number and includes children and non-child dependents. For example, an individual filer would receive $1,400, a married couple without dependents $2,800, and a family of four $5,600. However, unlike the previous two payments, this round phases out ratably, down to $0, for single filers with $80,000 or more of adjusted gross income, $120,000 for heads of households, and $160,000 or more for married filing joint taxpayers. Adjusted gross income amounts for the 2020 tax year are used in applying the phaseout, but 2019 amounts will be used in lieu of 2020 amounts for taxpayers who have not yet filed 2020 returns.
As with the last two stimulus payments, amounts to which taxpayers would have been entitled but did not receive will be creditable when preparing 2021 tax returns in 2022. Also, amounts received based on 2019 or 2020 returns that would have been lower when 2021 returns are prepared do not have to be repaid.
SPECIAL NOTE: Taxpayers who have an increase in adjusted gross income in 2020 as compared to 2019 may want to hold off filing 2020 returns for as long as possible. This will maximize the amount of stimulus payments receive because their stimulus payment will not be potentially reduced by the higher 2020 adjusted gross income.
Child Tax Credit
This Act includes a significant overhaul of the child tax credit, but only for the 2021 tax year. Under prior law, the amount of the child tax credit is equal to $2,000 per child under 17. The Act increases the amount to $3,000 per child (or $3,600 for a child under the age of 6) and increases the maximum age of qualifying children to include 17-year-old children. However, the excess of the amount of the credit over the present-law $2,000 is phased out by $50 for every $1,000 of modified adjusted gross income in excess of the threshold amount ($150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single filers). Once the excess amount is eliminated, the amount of the credit remains at $2,000 until the present law phaseout thresholds are reached ($400,000 for joint filers, $200,000 for all other filers).
The Treasury will issue advance periodic payments of half of the credit amount beginning July 1, 2021, although details remain unclear. This advance will reduce the amount of credit claimed on the 2021 tax return filed in 2022.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is temporarily expanded for workers without children by nearly tripling the maximum credit and extending eligibility (last year, more than 25 million filers received the credit with the average amount pocketed being over $2,400). The amount of the tax credit is significantly increased, the amount of income at which the tax credit is maximized increased, the phaseout threshold is increased, and the minimum age for childless claimants is reduced from 25 to age 19 (except in the case of full-time students).
Dependent Care Assistance
The amount of the child and dependent care credit is significantly enhanced under the Act, but only for tax year 2021. The percentage of tax credit on eligible dependent care expenses is increased, and ranges from 20% to now 50% depending on income. Also, the amount of qualifying expenses changes from $3,000 for one dependent up to $8,000; and from $6,000 for two or more dependents up to $16,000. Finally, the credit is fully refundable.
In addition to the changes to the credit, the maximum tax-free portion of employer provided dependent care assistance is roughly doubled.
The Act includes an extension of enhanced $300 weekly unemployment relief through early September. The notable tax change is that the first $10,200 of unemployment relief received in 2020 is tax exempt for household with less than $150,000 of income.
Exclusion of Forgiven Student Loans
The Act includes an expanded exclusion of forgiven student loan amounts to applicable loans discharged after 2020 and before 2026. This provision seems to tee up some sort of action in the future for possible government forgiveness of certain student debt, by making the forgiveness tax free.
Employer Tax Relief
The payroll tax credit for employers, and self-employed, providing paid sick and family leave is extended. The amount of eligible wages is increased, and the number of days for which the credit can be claimed is increased.
The ten-day per employee limitation on claiming the credit is reset, effective after March 31, 2021. It also expands allowable time off to include the Covid-19 vaccine or to recover from a vaccine-related illness or injury.
The employee retention credit is also extended, through the end of 2021.
Other Miscellaneous Relief
- Retirement plan funding changes enacted, intended to help employers meet funding obligations for pension plans.
- COBRA coverage assistance, including premium assistance through September 30, 2021, calls for a 100% reduction in COBRA premiums for eligible individuals, by reimbursing the employer. The premium reductions are also excluded from income, and employers must provide adequate notice to former employees whose COBRA continuation period has lapsed or face penalties.
- Affordable Care Act (ACA) health insurance premium tax credits for 2021 and 2022 affordability percentage is modified for advance premium tax credits. The Act makes the credit available for individuals receiving unemployment compensation and eliminates the recapture provisions from 2020 for taxpayers receiving excess premium tax credits.
- Economic Injury Disaster Loans (EIDL) and Restaurant Revitalization Grants from the Small Business Association (SBA) will not be subject to income tax.