What the $1.9 Trillion American Rescue Plan Means for Taxpayers
President Biden signed the American Rescue Plan (ARP) Act of 2021, the newest economic relief package into law, on Thursday, March 11, 2021. The 242 page, $1.9T bill brings a surge of new stimulus funds and legislation to revive the economy after a slow recovery due to the COVID-19 pandemic, which happened a year ago this month.
In addition to allocating $350B to state and local governments, the ARP includes multiple provisions relevant to individuals and businesses. Below we have highlighted some of the more noteworthy provisions of the new law.
Provisions Impacting Individuals
Most of the new provisions in the ARP were written to benefit individual taxpayers.
Stimulus Payments
Individuals with adjusted gross income (AGI) less than $75,000 ($150,000 joint filers) will receive a $1,400 stimulus payment in their bank account in the coming days. Some have already noted pending payments deposited as early as Friday afternoon, March 12th. Payment amounts are set to gradually phase out as AGI reaches $80,000 for single filers ($160,000 for joint filers) and will be determined based on their most recently filed tax return. Unfortunately, taxpayers with AGI over these amounts won’t receive the stimulus payment.
One key change in the ARP is that every dependent is eligible for a stimulus check. Under previous relief packages, taxpayers only received a stimulus check for dependents under the age of 16. However, the latest legislation includes a $1,400 stimulus check for all dependents, including 17-year-olds, college students, and elderly and disabled adult dependents.
Child Tax Credit
The ARP also introduced significant changes to the child tax credit by increasing the total credit amount, making the credit fully refundable for 2021, and including 17-year-old dependent children.
Under the ARP, some families could see their tax credit increase from $2,000 per child to $3,000 for children ages 6 to 17 and $3,600 for children 6 and under. The eligibility threshold starts to phase out for individuals with AGI of $75,000 ($150,000 for joint filers) and caps when AGI reaches $95,000 ($170,000 for joint filers). High earners who do not qualify under the expanded credit threshold may still be eligible for the standard $2,000 credit if their AGI is less than $200,000 ($400,000 for joint filers).
Congress intends for half of the credit to be distributed in advance through monthly payments starting as early as July and running through December of this year. The remaining balance would then be claimed as a credit on taxpayers’ 2021 returns. The IRS is still finalizing details on how the payments will be issued.
Child and Dependent Care
The child and dependent care tax credit saw a welcome boost in the ARP. Not only is the tax credit refundable in 2021, but the ARP also increased the number of qualifying expenses that can be considered. In 2021, the credit is calculated at 50% of up to $8,000 of qualifying expenses for one child and $16,000 for two or more children (up from $3,000 and $6,000, respectively).
Also, taxpayers who contribute to a dependent care flexible spending account through their employer can now contribute more than double the standard annual maximum. The new limit has jumped from $5,000 in 2020 to $10,500 in 2021 for families and from $2,500 in 2020 to $5,250 in 2021 for single filers. This type of account allows taxpayers to allocate pre-tax income to pay for services such as preschool, a nanny, or in-home senior care.
Unemployment Benefits
With unemployment benefits previously at risk of expiring mid-March, the ARP implemented an uninterrupted extension of benefits, offering unemployed workers impacted by the pandemic an extension until September 6, 2021. The law also retains the federal $300 per week supplement to state unemployment benefits.
Households that report modified AGI under $150,000 can also receive a federal tax exemption from the first $10,200 in unemployment benefits collected in 2020. States must now decide if they will also exempt unemployment benefits from taxation.
Earned Income Tax Credit
The recent legislation introduced several new facets to the Earned Income Tax Credit (EITC). Workers who do not have children will see the maximum credit in 2021 raised to $1,502 from $543. Additionally, the maximum age limit was eliminated, and individuals can start claiming the credit at age 19.
Depending on the tax-filing status, the number of children, and AGI, some families may see a refundable EITC of up to $6,728 in 2021. Because the credit is based on earned income, taxpayers can temporarily elect to look back to 2019 income to calculate their credit amount.
Housing Provisions
The ARP injected $50B in housing and homelessness assistance. This includes emergency rental assistance, housing vouchers, financial support for homeowners, renters struggling to pay for heating and cooling, housing counseling services, and housing assistance dedicated to tribal nations and Native Hawaiians.
COBRA Health Care Coverage
The ARP covers 100% of COBRA premiums for taxpayers who lost health coverage because of an involuntary termination for the period beginning April 1, 2021, through September 30, 2021.
Provisions Impacting Businesses
While employers will not see dramatic shifts in legislative changes, the ARP does address the continued support for some of the hardest-hit industries that continue to face economic challenges.
Paid Sick and Family Leave
Most notably, the ARP renewed the optional federal emergency paid sick and family leave, extending the tax credit provisions through September 30, 2021. As of January 1, 2021, employers are not required to provide paid leave but will receive tax credits to cover the cost of providing the emergency benefit if they choose.
As of April 1, 2021, the ARP:
- Expands the covered reasons for sick leave to include time off for getting a vaccine or awaiting test results.
- Resets the paid sick leave time so that employees can take another ten days of leave.
- Increases the cumulative cap on paid leave from $10,000 to $12,000.
Employee Retention Credit
Previously set to expire on June 30, 2021, the ARP extends the employee retention credit (ERC) until the end of 2021. The ARP keeps many of the same provisions changed as a part of the Consolidated Appropriations Act, 2021. Under the changes made by the ARP, employers use the Medicare tax to determine the ERC. The ARP also expanded the credit to apply to “recovery start-up businesses,” which are defined as an employer who began carrying on a trade or business after February 15, 2020, with average annual gross receipts under $1M. The act also expands the ERC to include companies that are considered “severely financially distressed,” which is employers whose gross receipts are less than 10% of what they were in the same calendar quarter for 2019.
Small Business Assistance and Support
The ARP provides an additional $7.25 billion in funding for the Small Business Administration to support the demand for PPP loans and broadens the applicant base to include nonprofits and digital news services.
Also, targeted funds have now been allocated to support shuttered venue operators, restaurants, and businesses in low-income communities. Businesses with fewer than 11 employees that experienced a 50% decrease in business can also qualify for a tax-free $5,000 advance of the Economic Injury Disaster Loan.
Contact Us
Many of the provisions outlined in this post expire in 2020 or 2021, so it is important to maximize the tax planning opportunities while leveraging the stimulus funds available to you. If you have any questions regarding any component of the American Rescue Plan, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.