President Biden signed the $1.9 trillion COVID-19 relief package called the American Rescue Plan Act (The Act hereafter) of 2021 Thursday afternoon. This will send direct Economic Impact Payments of up to $1,400 to qualifying Americans. The bill includes several tax breaks for stimulating the economy.

Unemployment benefits

The Act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year, which could prompt many taxpayers to submit revised tax returns. This is tax-free for Federal taxes.

A new round of economic impact payments

The Act offers the full $1,400 to those with adjusted gross income (AGI) of up to $75,000 for individuals, $112,500 for heads of household and $150,000 for married couples who file a joint tax return. For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phase out will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phase out will begin at an AGI of $112,500 and be complete at AGI of $120,000. The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return. Adult dependents such as college students and qualifying relatives who are claimed as dependents are eligible for this round of stimulus payments. The White House press secretary, Jen Psaki, said that direct deposits will start hitting many bank accounts as soon as this weekend.

An Update on Stimulus Payments and Your Tax Return (3-15-21)

It the taxpayer’s 2020 tax return is not completed, the IRS will look back at the taxpayer’s 2019 income tax return and send a check based off of that.

If the taxpayer’s income was too high in 2019, but would qualify based on their 2020 income, you have until July 15th to get your 2020 tax return submitted to get the third round of stimulus. If the return isn’t done by then, the IRS will determine the stimulus as a credit on the taxpayer’s 2021 tax return.

Child tax credit

The act expands the Child Tax Credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The Act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.

The Act increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits. The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.

Earned income tax credit

The Act also makes several changes to the Earned Income Tax Credit. It introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.

  • The credit’s phase out percentage is increased to 15.3%, and the phase out amounts are increased.
  • The credit would be allowed for certain separated spouses.
  • The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
  • Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.

Child and dependent care credit

The Act makes various changes to the Child and Dependent Care Credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.

The Act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Employee retention credit and PPP

The bill also extends the employee retention credit through the end of 2021 and adds more money to the Paycheck Protection Program. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and it allows eligible employers to claim a credit for paying qualified wages to employees. The extension of the employee retention credit could provide an extra potential $14,000 per employee.

Family and sick leave credits

The Act enacts the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, as Secs. 3131 (credit for paid sick leave), 3132 (credit for paid family leave), and 3133 (special rule related to tax on employers). The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.

  • The Act increases the limit on the credit for paid family leave to $12,000.
  • The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
  • The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.
  • The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
  • The credits are expanded to allow 501(c)(1) governmental organizations to take them.

COBRA continuation coverage

The Act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The act creates a new COBRA continuation coverage premium assistance credit to taxpayers. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount. The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30.

Questions or want to discuss how this bill affects your individual situation? Contact one of our tax and business consulting experts at (888) 388-1040.

Source: Journal of Accountancy