On Thursday afternoon, President Biden signed the American Rescue Plan Act of 2021, making it into law. The Act 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.
Several tax provisions are also included, such as the third round of stimulus payments, enhancements of many personal credits meant to benefit people with lower incomes and children, extensions of payroll tax credits for employers first instituted at the beginning of the pandemic, and changes related to retirement plan funding. Here are some key takeaways:
Individual Tax Relief
The American rescue Plan Act of 2021 provides a $1,400 stimulus payment. This third round of stimulus payments is subject to income limitations, such as phase-outs for single filers with adjusted gross income over $75,000, $112,500 for heads of households, and $150,000 for joint filers. The payment will phase down to $0 for single filers with $80,000 of adjusted gross income, $120,000 for heads of households, and $160,000 for joint filers. Adjusted gross income amounts for the 2020 tax year will be used in applying the phase-out, but 2019 amounts will be issued in lieu of 2020 amounts for taxpayers who have not yet filed 2020 returns.
Amounts to which taxpayers would have been entitled but did not receive will be creditable when preparing 2021 tax returns in 2022. In addition, amounts received based on 2019 or 2020 returns that would have been lower when 2021 returns are prepared do not have to be repaid. The $1,400 is available for all persons for whom a Social Security Number is associated, and is $1,400 for taxpayers, children, and non-child dependents. The Treasury and IRS have been granted authority to provide payments to nonfilers based on available information.
Advanced Child Tax Credit
The American Rescue Plan increases the Child Tax Credit to $3,000 per child (or $3,600 for a child under the age of six) and makes the credit amount fully refundable. It also increases the maximum age of qualifying children to include 17-year old children. The excess of the amount of the credit over the present-law $2,000 amount 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 phase-out thresholds are reached ($400,000 for joint filers, $200,000 for all other filers).
Advance payments of half of the credit amount will be issued beginning on July 1, 2021. The advance payments are to be issued monthly, if feasible, or as frequently as possible if monthly payments are not feasible. The remaining half of the credit not paid in advance is received when filing 2021 returns, as the full amount is claimed on the return but reduced by the aggregate amount received in advance.
In the case of a taxpayer who received advance payments in error (for example, where a 2019 or 2020 return indicated a dependent child who is no longer a dependent in 2021), the American Rescue Plan provides a “hold-harmless” provision, protecting taxpayers from having to pay back overpayments of up to $2,000 per child. The full $2,000 amount is ratably reduced for taxpayers with income above a threshold amount ($40,000 for single filers, $50,000 for head of household filers, and $60,000 for joint filers). The $2,000 is completely eliminated for taxpayers with income double the applicable threshold amounts, and the entirety of the overpayment must be paid back.
Earned Income Tax Credit
For 2021 only, the amount of the Earned Income Tax Credit (EITC) is increased for filers without children. The American Rescue Plan increases the childless EITC amount for 2021 from $543 to $1,502, increases the amount of income at which the credit is maximized to $9,820 (currently set at $7,100), and increases the threshold for the phase-out of the credit for non-joint filers to $11,610 (currently set at $8,880). The minimum age for childless claimants of the EITC is also reduced from 25 to 19 (age 24 in the case of full-time students) with special rules for foster and homeless youth. There is no maximum age for claiming the EITC in 2021. The American Rescue Plan also allows taxpayers to substitute 2019 earned income for 2021 earned income in claiming the EITC on 2021 returns if 2021 earned income was less than 2019 earned income.
Other changes to the EITC are made permanent after December 31, 2020. This includes the elimination of the prohibition against filers claiming the childless EITC solely because they are unable to claim the EITC for filers with children due to the lack of identification requirements. Additionally, a married but separated individual can claim the EITC as an unmarried person if certain requirements relating to children are satisfied. Finally, the amount of disqualifying investment income for purposes of the EITC is increased to $10,000, adjusted for inflation after 2021. The current amount of disqualifying investment income is $3,650 for 2021.
Dependent Care Assistance
The American Rescue Plan increases the child and dependent care tax credit to 50 percent of qualified expenses and reduces the credit percentage by one point for each $2,000 of adjusted gross income in excess of $125,000. The credit percentage will then not be further reduced below 20 percent until adjusted gross income reaches $400,000, at which point the reduction of credit percentage continues until reaching zero. Additionally, the amount of eligible expenses qualifying for the credit are increased to $8,000 for one individual and $16,000 for two or more individuals. Finally, the credit is made fully refundable. In addition to the changes to the credit, the maximum exclusion of employer-provided dependent care assistance is also increased for 2021 to $10,500, or $5,250 in the case of a married taxpayer filing separately. These changes are applicable to 2021 only.
The Act includes an extension of enhanced $300 weekly unemployment relief first made available in the early pandemic relief bills. The extension would run through early September under the Act, but with some changes. The notable change for tax purposes makes the first $10,200 of unemployment relief received in 2020 exempt from tax for households with less than $150,000 of income.
Exclusion of Forgiven Student Loans
The Act includes an expanded exclusion of forgiven student loan amounts applicable to loans discharged after 2020 and before 2026. Under prior law, forgiven student loans are only excludable given certain conditions (such as the death or disability of the borrower). However, this expansion allows the exclusion to apply to any discharge of student loans for any reason during the period. The exclusion also applies to private student loans, as long as there is no required provision of services to the discharging lender.
Premium Tax Credits
The Act makes changes to the premium tax credit. For 2021 and 2022, the Act modifies affordability percentages used in calculating the premium tax credit to make credits available for individuals with incomes above 400 percent of the federal poverty line and increases credit amounts for those already qualified. For 2021, the Act makes advance premium tax credits available for individuals receiving unemployment compensation. In addition, the Act eliminates the recapture provisions applicable to 2020 for taxpayers receiving excess premium tax credits.
Employer Tax Relief
The Act extends the applicable period for Paid Sick and Family Leave credits to September 30, 2021. It also increases the limit on applicable wages for which the family leave credit can be claimed to $12,000 from $10,000, effective after March 31, 2021. The leave for which a credit can be claimed is also expanded to include time off to receive a COVID-19 vaccine, or to recover from a vaccine-related illness or injury. However, the Act makes the credit applicable to the hospital insurance (HI) tax, not old age, survivors, and disability insurance (OASDI) taxes, effective March 31, 2021. The Act also resets the ten-day per employee limitation on claiming the credit. For self-employed persons looking to claim the credit, the number of days for which the credit can be claimed is increased to 60 days (from 50 days) under the Act, retroactively effective after December 31, 2020. The Employee Retention credit has also been extended through the end of 2021, and it will be made available to apply to HI taxes, not OASDI taxes, after June 30, 2021.
Retirement Plan Funding
The Act includes several changes meant to help employers meet funding obligations for pension plans. For multiemployer plans, it provides delays in having to apply changes to funding plans or schedules, as well as providing extended improvement and rehabilitation periods for plans that entered critical or endangered status in 2020 or 2021. The Act also provides a longer investment loss amortization period for multiemployer plans, effective for plan years ending on or after February 29, 2020. For single-employer plans, the Act provides a longer period for amortizing funding shortfalls, effective for plan years beginning after December 31, 2019. Under the new law, the amortization period is extended to 15 years. The Act also provides for an extension of funding stabilization measures for single-employer plans, also effective for plan years beginning after December 31, 2019.
If you have any questions on how you might benefit from the American Rescue Plan, please don’t hesitate to contact us.