The American Rescue Plan of 2021 was signed into law today. Here’s a summary of what’s included.
Round 3 of Stimulus Payments
Subject to the below limits, individuals will receive a $1,400 payment, couples $2,800. Also, in this round dependents receive $1,400, including adult dependents. Similar to the last two rounds of stimulus, payments begin to phase-out when adjusted gross income exceeds $75,000 for singles, $112,500 for head of households and $150,000 married filing jointly.
However, the total phase-out on round 3 stimulus payments comes much sooner. The benefit disappears entirely once adjusted gross income reaches $80,000, $120,000 or $160,000 for single, heads of household or married filing jointly couples.
Like the prior round, the stimulus payments (EIPs) will be based on your 2019 tax return (or 2020 if filed). If you don’t receive a payment but are eligible for 2021, you will claim the credit on your 2021 tax return.
Currently, the $300 weekly federal supplement to states unemployment benefits is set to expire on March 14. This is being extended at the current $300 per week level with an expiration date of Labor Day (September 6, 2021). The number of eligible weeks is expanded to 73 weeks.
Additionally, the first $10,200 of unemployment compensation received in 2020 is not taxable if your AGI is under $150,000. The AGI limit applies to all filing statuses: joint, head of household or single.
If you are married and both spouses received unemployment, each may exclude up to $10,200 of their own unemployment compensation but only if AGI does not exceed the $150,000 level. There is no phase-out above the $150,000 – if your income is $150,001 then all unemployment compensation is taxable.
If you have already filed for 2020 and you qualify for the unemployment benefit exclusion, you may choose to amend or wait to see if the IRS can make an automatic correction for this. This exclusion does not apply to unemployment compensation received in 2021.
Child Tax Credit
The child tax credit (CTC) will have two sets of rules for 2021 tax returns. For taxpayers with modified AGI of $150,000 for married filing jointly, $75,000 for single and $112,500 for heads of household, the CTC amounts increase to $3,000 per child and to $3,600 for children under the age of six, up from the current credit of $2,000 per child. Taxpayers who qualify for child tax credits under the prior rules with the much higher income phaseouts, will continue to receive the $2,000 per child credit. Additionally, 17-year-old teenagers now qualify for the credit.
Advance payments of 50% of the child tax credit will also be available. These will be in the form of equal periodic payments. An online portal is being created to allow taxpayers to opt out of the advance payment or to report a change in circumstances. By January 31 of the following year, reporting will be sent to the taxpayers that includes the amount of these advance payments.
Child and Dependent Care Credit
Again, for 2021 this would become a refundable credit, with increased dollar amounts available, as well. The maximum credit is raised to $4,000 per child, with a maximum of $8,000 for multiple dependents. The credit is completely phased out when adjusted gross income exceeds $440,000.
Earned Income Credit
Additional changes made to allow taxpayers to utilize 2019 income instead of 2021 income to earn this credit. Because of the phase-in of income, this would enable those who lost wages to receive a larger credit.
Aid to state and local governments
The bill designates $350 billion for states, tribal governments and U.S. territories. These governments are facing deep budget shortfalls and have shed an estimated 1 in 20 jobs.
Employee Retention Credit
The ERC gives eligible employers a tax credit for a certain percentage of qualified wages. The credit is extended through the end of 2021. This expansion also includes credits against Medicare tax.
Family and Sick Leave Credit
The limit on the credit for paid family leave is extended until September 30. The refundable tax credit is available to cover 100% of the cost for employers with less than 500 employees and reimbursing state and local governments.
Excess Business Loss extension
While the CARES Act suspended this rule for taxable years beginning in 2018, 2019 or 2020, the provision brought in by TCJA was set to expire at the end of 2025.This has been extended to the end of 2026.
Gross income exclusion for forgiven student loan indebtedness
The amounts of student loan debt forgiven after December 31, 2020 and before January 1, 2026 would not be included in gross income. Please note that there has not been any legislation enacted yet regarding student loan indebtedness forgiveness.
ACA Health plans
Dramatically lowers premiums with a cap at 8% of income and no premiums for anyone at 150% of poverty or below. Repayment of excess advance premium tax credits is waived for 2020.
Additional funds for COVID-19 testing and contact tracing by increasing the size of the public health workforce and funding vaccine distribution and supply chains.
Increase in Minimum Wage
While a minimum wage increase to $15/hour was included in the original bill, it did not make the final version.
Donna Laubscher, CPA