The $1.9 trillion American Rescue Plan Act (ARPA) is the third stimulus package to make its way out of Congress in an attempt to revitalize the economy. It was signed into law on Thursday, March 11, 2021. The Act is meant to ease the financial burden that individuals and businesses have experienced as a result of the COVID-19 pandemic. The most notable provisions of the bill can be found below.
The section of the Act that has garnered the most media attention and will affect the most individuals are the “Recovery Rebates,” also referred to as stimulus checks. Similar to the CARES Act, the rebate is structured as an advanced tax credit to be used against income in 2021 and is not treated as taxable income. Taxpayers will get $1,400 for themselves as well as for each dependent including college students up to age 24 and elderly dependents. It is no longer limited to just qualifying children. It should also be noted that anyone who is claimed as a dependent will not receive their own stimulus check.
The rebate is available for taxpayers that fall below certain income thresholds and eligibility is determined by up to three “checkpoints” created by the IRS. The most recent tax return on file is what the IRS uses for checkpoint 1 regardless of whether it is a 2019 or 2020 return. They will provide the full rebate amount if the tax return shows an AGI equal to or lower than the threshold amount relative to the taxpayer’s filing status. If the 2019 tax return results in an individual receiving a lower rebate or it excludes them altogether, they could still get a rebate this year via the second checkpoint. The second checkpoint will examine the 2020 tax returns to determine the rebate amount of all those whose 2019 tax returns were used to calculate their original rebate. If the rebate calculated using the 2020 tax return is higher than the rebate already credited to the individual, they will receive an additional payment that will make up the difference as long as the 2020 return is filed before the Additional Payment Determination Date. The Additional Payment Determination Date is the earlier of 90 days after the 2020 tax filing deadline, or September 1st, 2021. The third and final checkpoint will come in the form of a tax credit on a taxpayer’s 2021 tax return. The Recovery Rebate will be calculated based on the taxpayer’s 2021 AGI potentially resulting in a larger rebate or allowing those who were previously not eligible due to 2020 income to claim the credit.
It is important to note that the IRS checkpoints are a one-way determination of eligibility for rebates. This means that if an individual is eligible based on their 2019 earned income and receives a rebate but would be phased out based on their 2020 earned income, they are not required to return any of the rebates they received.
A single taxpayer with income under $75,000 will receive $1,400, with an almost immediate phaseout from $75,000 to $80,000. A married couple filing jointly with income under $150,000 will receive $2,800, accompanied by a similarly steep phaseout schedule from $150,000 to $160,000. For Head of Household filers, the phaseout begins at incomes of $112,000 and drops off at incomes higher than $120,000.
If an individual is not normally required to file a tax return because they only receive Social Security benefits, they will likely still receive the rebate because the IRS will use their most recent Form SSA-1099 to determine eligibility. If they did not receive Form SSA-1099 in 2019, it is recommended that they file a 2019 tax return, even if they do not have taxable income, to ensure they receive the rebate. The rebate checks are expected to be disbursed as soon as possible, with some taxpayers reporting having received theirs already. They will be direct-deposited to the account that was recorded with the filing of a taxpayer’s most recent tax return. If the IRS does not have a bank account on file, checks or pre-paid debit cards will be sent to the last known address the IRS has on file.
Temporary Expansion to the Child Tax Credit for 2021
Under the American Rescue Plan Act, there is also a temporary expansion of the Child Tax Credit. The Act increases the maximum amount of credit available per child to $3,000 for children between the ages of 6 and 17, and $3,600 for children under the age of 6. Unfortunately, there are stricter rules when qualifying for these additional amounts. Joint filers begin phasing out above $150,000 in AGI, with Head of Households phasing out above incomes of $112,500, and single filers phasing out with incomes above $75,000. The credit will be reduced by $50 for each $1,000 over the phase-out threshold. These phaseout thresholds only apply to the amounts of the credit above and beyond the normal $2,000 benefit. The temporary measure increases the maximum age of children who qualify for the tax credit from under 17 to under 18 years old and also makes the credit fully refundable.
Some individuals may be eligible for advance payment of their Child Tax Credit as the Act instructs the IRS to pay 50% of the estimated Child Tax Credit amount for 2021 in equal installments from July 1st, 2021 to December 31st, 2021. The IRS will determine this estimated amount by using the taxpayer’s 2020 filing status, income, and the ages and number of children. If the 2020 tax return is not available on the date of distribution, they will use the 2019 tax return. Once the 2020 tax return becomes available, the IRS may use that information to update the amount of the advanced payment.
It is important to note that while the advanced payment of the Child Tax Credit is in some ways similar to the rebate payment, the advanced Child Tax Credit may be subject to a clawback if the 2021 amount they end up qualifying for is less than the amount estimated from the most recent tax return on file. If a taxpayer’s 2021 tax return results in a lower Child Tax Credit than was calculated and sent as an advanced payment, some or all of that credit may be recouped by the IRS in the form of additional tax liability on the 2021 tax return. There is some reprieve from the clawback for taxpayers within newly defined “safe harbor” thresholds. Taxpayers that fall within the following ranges will be allowed to keep up to $2,000 of erroneously paid Child Tax Credit advances. The $2,000 safe harbor amount is phased out between $40,000-$80,000 for single filers, $50,000-$100,000 for Head of Household filers, and $60,000-$120,000 for joint filers.
Child and Dependent Care Credit
The Child and Dependent Care Credit have also been altered for the 2021 tax year only, via the ARPA. The credit is fully refundable and the maximum amount of qualifying expenses has been raised to $8,000 for one qualifying child and $16,000 for two or more qualifying children for the 2021 tax year. A qualified child is one under the age of 13 at year-end. The credit is calculated by multiplying the maximum eligible expenses by the IRS set “applicable percentage”. The normal applicable percentage is 35% and that can drop down to 20% quickly based on a taxpayer’s AGI. The ARPA has increased the applicable percentage to 50% and there is no phase-out for any taxpayer regardless of filing status who has less than $125,000 of AGI.
There is some bad news, however, for high-earning taxpayers because under the Act they can be entirely phased out of the Child and Dependent Care Credit for 2021. Before 2021, the Child and Dependent Care Credit normally came with a 20% minimum applicable percentage. Therefore, no matter what income was earned, taxpayers would be at least eligible for 20% of their qualifying Child and Dependent Care Credit. For earners making over $400,000, the Act eliminates the 20% floor and reduces the applicable percentage by 1% for every $2,000 over $400,000. This means that any individual with an income of over $440,000 will not be eligible for any amount of the Child and Dependent Care Credit.
Federal Support for Health Insurance
For those who have lost their jobs, the ARPA contains a provision that allows former employees to maintain their COBRA coverage from April through September of 2021 at a cost of zero dollars. The premiums for the coverage will be paid by the former employer, and the premiums will be reimbursable to the employer via a refundable payroll tax credit.
The ARPA has also modified the amount a taxpayer is required to pay for state health insurance before qualifying for Premium Assistance Tax Credits. In addition, there are no clawbacks for Premium Assistance Tax Credits paid out in 2020. Taxpayers who are on unemployment for a minimum of a week during 2021 are automatically considered under the 133% household income above the poverty line which makes them eligible for Premium Assistance Tax Credits equal to the entire cost of the second least expensive Silver Plan in their state.
Unemployment Compensation Changes
With some businesses still unable to open at full capacity, unemployment remains a pressing issue. The American Rescue Plan Act extends many of the benefits that were previously in place through the CARES Act, as well as making up to $10,200 of the unemployment benefit received in 2020 untaxable for those who earn under $150,000. It is important to note that unemployment compensation earned does factor into the $150,000 AGI limit. In the case of joint filers, each member will be eligible for up to $10,200 of tax-free unemployment income raising the total for those households to $20,400. The IRS plans to provide more guidance on whether or not filing an amended return is necessary to reflect this change on 2020 tax returns. Additionally, the Act extends Federal subsidies to states providing unemployment benefits to individuals out of work through September 6th, 2021. The Pandemic Unemployment Assistance program that allows for certain workers not normally eligible for unemployment benefits to claim them, as well as the Federal Pandemic Unemployment Compensation program which increases unemployment benefits by $300 per week, are also being extended through September 6th, 2021.
Small Business Relief
The ARPA extends many of the existing relief benefits for small businesses outlined in the CARES Act. Small businesses that meet eligibility requirements may be able to receive targeted Economic Injury Disaster Loan advances from the Small Business Administration which would not be included in taxable income. These advance loans remain eligible for deduction or basis increase. Restaurants that are eligible can receive restaurant revitalization grants through the Small Business Administration which are also not included in taxable income. Similarly to the advance loans mentioned previously, the grants remain eligible for deduction or basis increase.
The Act also authorized another $7.25 billion for the Paycheck Protection Program offering forgivable loans to qualifying small businesses. The program, however, has not been extended and is still set to expire on March 31, 2021.
What the American Rescue Plan Does Not Include
- Unlike the CARES Act, there is no relief for Require Minimum Distributions for 2021.
- Although including a Federal minimum wage hike was debated, it was not ultimately included in the ARPA.
- Another element debated on that did not make its way into the bill was student loan forgiveness.
Other Miscellaneous Details
- Under normal circumstances, some student loan debt is taxable income in the year that it is forgiven or discharged. A temporary provision in the ARPA excludes such debt from income between 2021 and 2025.
- The ARPA has also extended the Employee Retention Credit through the end of 2021.
- The Earned Income Tax Credit (EITC) has been permanently adjusted to allow many taxpayers with children who do not meet the requirements to claim the childless EITC. The Act also lowers the age of those that can claim the EITC from 25 to 19.
The ARPA of 2021 is another massive bill with numerous provisions affecting individuals and businesses. The new rules and changes are complicated and may change as the year progresses. Please contact IIS Financial Services with any questions you may have.