American Rescue Plan Act– Key Tax Provisions

To Our Valued Clients and Friends,

On Thursday March 11, 2021 President Joe Biden signed into law the $1.9 trillion American Rescue Act of 2021. Among the act’s many provisions are several tax items that will be impactful. Here are some of the key provisions of the act:

Recovery rebates

The act creates a new round of economic impact payments to be sent to qualifying individuals. Like last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. The act provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.

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 an AGI of $160,000. And for heads of household, the phase out will begin at an AGI of $112,500 and be complete at an AGI of $120,000. The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.

Unemployment benefits

The first $10,200 of the unemployment benefits is excluded from 2020 taxable income for people with Adjusted Gross Income (AGI) of less than $150,000. There is no phase out. If AGI is $150,000 or greater, no exclusion is available. Also, the $150,000 limit applies to returns filed jointly, as head of household or with single status. However, if both spouses receive unemployment benefits, each spouse may exclude up to $10,200 each. Those who have already filed their 2020 tax returns reporting unemployment benefits will likely have to file an amended return.

In addition, the $300 enhanced unemployment payments are extended to September 6, 2021. The maximum number of weeks enhanced unemployment benefits may be received is increased to 79.

Child tax credit

The act expands 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. The IRS must also set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount. A taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase taxable income by the excess of the advance payment amount over the actual credit allowed.

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 September 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 September 30, 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 (age 24) and qualified former foster youth or homeless youth (age 18). Also, the maximum age is eliminated. Some additional changes to the earned income tax credit are the following:

Child and dependent care credit

The act makes various changes to the child and dependent care credit, effective for 2021 only, including making the credit 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.

Family and sick leave credits

The act extends the credit for the provision of paid qualified sick and family leave established in the Families First Act through September 30, 2021. Leave is not mandated but a credit is available if paid leave is provided. 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 also increases the limit on the credit for paid family leave to $12,000. In addition, 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 days. Another change is the paid leave credits will be applicable for leave that is due to a COVID-19 vaccination and the limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.

Employee retention credit

The Employee Retention Credit is extended through the end of 2021 and expanded to startup firms that opened a trade or business after February 15, 2020, with average annual gross receipts that do not exceed $1 million.

Premium tax credit

The act expands the premium tax credit for 2021 and 2022 by changing the applicable percentage amounts. Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.

Student loans

Under the act student loan defaults for taxable years 2021 through 2025 would not be included in gross income. This provision includes “any loan provided expressly for postsecondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower”.

Miscellaneous tax provisions

The act extends the limitation on excess business losses of non-corporate taxpayers for one year, through 2027.

The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded for SBA restaurant revitalization grants.

If you wish to discuss the impact of the law on your particular situation or if you have any questions, please give us a call.

The Clausen & Company Team


©2022 Clausen & Company | All Rights Reserved