American Rescue Plan Act of 2021
By Daniel Packard, CPA, CFE, CVA
Today, Congress passed the American Rescue Plan Act of 2021. The bill is now headed to President Biden’s desk for signature. The bill largely aligns with the framework put forth by President Biden, as it includes extensions of enhanced unemployment relief, increased funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools to help get students back in classrooms.
The bill also includes a number of tax provisions, including a third round of direct stimulus payments, enhancements of many personal credits meant to benefit people with lower incomes and children, extensions of payroll tax credits to employers first instituted at the beginning of the pandemic, and changes related to retirement plan funding.
A summary of these relief provisions is found below:
- The bill provides a $1,400 stimulus payment for each taxpayer and qualifying dependent. The payments are credits against 2021 taxes and subject to income limitations. Payment phases out for single filers with adjusted gross income over $75,000 ($150,000 for joint filers), based on the 2019 or 2020 income tax return. The stimulus amount phases down to $0 for single filers with $80,000 of adjusted gross income ($160,000 for joint filers).
- The bill includes a significant overhaul of the child tax credit, but only for the 2021 tax year. Under the current law, the amount of child tax credit is equal to $2,000 per child, with $1,400 of that amount being refundable (meaning that the taxpayer receives the credit even if there is an insufficient amount of taxes to be credited against). The bill increases the amount to $3,000 per child (or $3,600 for a child under the age of six) and makes the credit fully refundable. The bill also increases the maximum age of qualifying children to include 17-year-old children. The enhanced credit is subject to phase out for single taxpayers with modified adjusted gross incomes in excess of $75,000 ($150,000 for joint filers). The IRS has been directed to issue advance payments of half the credit to qualifying taxpayers starting on July 1, 2021.
- The bill includes several enhancements to the earned income tax credit (EITC) for the 2021 tax year.
- The amount of the child and dependent care credit is significantly enhanced under the bill for 2021 only. The bill increases the credit to 50% of qualified dependent care expenses up to $8,000 for single filers ($16,000 for joint filers), subject to phaseout limitations.
- The bill includes an extension of the enhanced $300 weekly unemployment relief. The relief was set to expire in March. The bill extends the relief through early September.
- The bill makes the first $10,200 of unemployment relief received in 2020 exempt from tax for households with up to $150,000 of income. At this point, it is unclear how the IRS will handle this change in taxation for taxpayers who have already filed their 2020 tax returns. We will keep you apprised of any issued guidance.
- The bill includes an expanded exclusion of forgiven student loan amounts applicable to loans discharged after 2020 and before 2026.
- The bill extends the applicable period for employers to claim payroll tax credits for providing paid sick and family leave. The bill extends the applicable period to September 30, 2021 and increases the limit on applicable wages for which the credit can be claimed to $12,000 from $10,000. The leave for which a credit can be claimed is also expanded by the bill to include time off to receive a COVID-19 vaccine, or to recover from a vaccine-related illness or injury.
- A popular provision of the original COVID-19 relief legislation is the payroll credit for employee retention. The credit has been extended through the end of 2021.
The bill contains other miscellaneous provisions related to employer retirement funding, changes to the calculation of taxable health insurance subsidies, and the tax treatment of certain COVID relief initiatives. If you have any questions, please reach out to your Cooper Norman representative.