Congress passed the American Rescue Plan Act of 2021 on March 10, 2021 and it was signed into law by President Joe Biden on March 11, 2021. In addition to the tax provisions, the American Rescue Plan includes many non-tax provisions to help address the continuing pandemic. These include support for unemployed workers, funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools to permit returning to the classroom safely.
The tax provisions primarily expand upon current provisions of the Tax Code with a few enhancements. Some of the tax provisions have implications for 2020 tax returns, even though it was enacted almost a month after the start of the tax filing season.
The legislation calls for an additional $1,400 stimulus payment to individuals ($2,800 for joint filers) and including payments for child and adult dependents. Eligibility phaseout starts at $75,000 for individual filers and $150,000 for joint filers. The phase-out ends at $80,000 for individual filers and $160,000 for joint filers. The payments are to be based on 2019 return information unless the 2020 return has been filed at the time the IRS is making the payments. In a new feature in this provision, if the IRS has made an advance payment based on the 2019 tax return and, after the 2020 return is filed, the taxpayer is entitled to an additional amount, the IRS is to also send the additional amount. For this to apply, the 2020 return must be filed within the earlier of 90 days after the tax filing deadline or September 1, 2021. The IRS must make the payments by December 31, 2021.
Taxpayers could do some planning to determine whether it is better to file a 2020 tax return early to make sure that it is the basis for the advance payments.
Exclusion for Unemployment Benefits
The legislation adds an exclusion for 2020 of up to $10,200 of unemployment benefits. Taxpayers who have already filed 2020 tax returns should await IRS guidance on how to recoup those taxes.
Child Tax Credit
The legislation raises the Child Tax Credit from $2,000 (up to $1,400 refundable) to $3,000 ($3,600 for children under the age of six) for 2021 only. It is also fully refundable. The legislation calls for advance payments as frequently as monthly starting July 1, 2021 and ending December 31, 2021. Monthly payments are to equal one twelfth of the annual advance amount. The reference year for the payments is the prior year if a return was filed or the second preceding year if no return was filed in the prior year, again permitting the taxpayer to possibly influence the size of the advance payments through the timing of the filing of the 2020 tax return. The IRS is to project the ages of the children for the 2021 year. The amounts can be adjusted based on filed returns or other information obtained by the IRS. The IRS is given the option of reducing the frequency of the distributions if monthly distributions prove administratively unfeasible. The taxpayer can also elect out of the advance distributions though an online portal to be set up by the IRS. The excess amount of the credit over $2,000 phases out at the rate of $50 for each $1,000 over $75,000 of adjusted gross income for single filers and $150,000 for joint filers. The remaining $2,000 does not start to phaseout until adjusted gross incomes of $400,000 for joint filers and $200,000 for other filers are reached. There is also a recapture provision if payments exceed the credit, although there is also a safe harbor amount for certain adjusted gross income thresholds of $2,000 times the number of children.
Earned Income Tax Credit
The earned income tax credit was expanded by decreasing the minimum age for childless claimants from 25 to age 19 or for a student age 24 or age 18 for a qualified former foster youth or a qualified homeless youth. The maximum age is eliminated. The maximum credit is increased for a childless claimant, the amount of the income at which the credit is maximized is increased, and the phaseout amount is increased. These changes are for 2021 only.
There are also several of changes that are permanent. If the children of the individual fail to qualify, the individual can qualify for the childless credit. The credit is also allowed for separated spouses. The investment income test is increased to $10,000 and is adjusted for inflation after 2021. Taxpayers can choose to use 2019 income rather than 2021 income if 2021 earned income was less than 2019 earned income.
Child and Dependent Care Credit
The legislation increases the expenses that can qualify for the child and dependent care credit to $8,000 for one qualifying child and to $16,000 for two or more qualifying children, and the maximum percentage would increase to 50 percent. The income limit increases $125,000.
The maximum exclusion for employer-provided dependent care assistance is also increased to $10,500.
These changes apply for 2021 only.
ACA Premium Tax Credits
The legislation enhances the premium tax credits under the Affordable Care Act for 2021 and 2022. They are available to more individuals and in larger amounts. For 2021, the advance premium tax credits are available for individuals receiving unemployment compensation. The legislation also eliminates the recapture provisions applicable to 2020 for taxpayers receiving excess premium tax credits.
Exclusion for Forgiven Student Loans
The legislation added an expanded exclusion of forgiven student loans that applies to loans discharged after 2020 and before 2026.
Paid Sick and Family Leave
The tax credits for paid sick and family leave are extended to September 30, 2021. There is also an expansion of what constitutes qualified leave, including for Coronavirus vaccinations, and expansion for self-employed persons. The number of qualifying days is also reset as of March 31, 2021.
Employee Retention Credit
The employee retention credit, originally enacted under the CARES Act, is extended to December 31, 2021.
An expanded COBRA credit provides a 100 percent reduction of COBRA premiums for eligible individuals for COBRA continuation coverage through September 31, 2021. The employer is entitled to a credit against certain payroll taxes for the premiums not received from the ex-employee.
Also included in the legislation are provisions to repeal the election for multinational businesses to allocate interest on a worldwide basis. Other changes provide that Economic Injury Disaster Loan (EIDL) advances under the CARES Act and restaurant revitalization grants are not taxable.