More Pandemic Relief from the American Rescue Plan
Deep into the 2020 tax return filing season, we find ourselves combing through the pages of the $1.9 trillion American Rescue Plan Act. Signed into law by President Biden on March 11, 2021, this Act includes several provisions that provide some much-needed relief to the American people. Here are our highlights on a few of these provisions that we think may be of interest.
Yet Another Round of Stimulus Payments
Probably the most advertised part of the American Rescue Plan has been the third round of stimulus payments. This round calls for payments of $1,400 per taxpayer and dependent, and has some tweaks new to this round of payments, including lower income phase out thresholds.
For a single taxpayer, phase out starts at $75,000 and gets fully phased out at $80,000.
For married filing joint taxpayers, phase out starts at $150,000 and gets fully phased out at $160,000.
For a head of household taxpayer, phase out starts at $112,500 and gets fully phased out at $120,000.
This round, the payment will be based off of 2020 adjusted gross income, or 2019 adjusted gross income if 2020 tax returns have not yet been processed by the IRS.
The $1,400 is extended to all dependents, including non-child dependents, which is new to this round of payments as well.
Payments will be automatically sent out by the IRS via direct deposit (if direct deposit information is on file with the IRS), via paper checks, or via debit card. You can calculate how much your stimulus payment will be via this online calculator put together by Kiplinger. You can also check on the status of your stimulus payment via the IRS website.
Unemployment Benefits with More Benefits
Unemployment benefits were set to expire on March 14th, however those benefits are extended through September 6 under this Act. The enhanced benefits of $300 per week (in addition to state benefits) are still in play as well.
Under this Act, the first $10,200 of unemployment compensation received in 2020 is exempt from federal taxation if your adjusted gross income is less than $150,000. Yes, tax law has changed for last year nearly a month away from the tax return due date. The $150,000 adjusted gross income is a cliff – there is no phaseout range with this provision. The $150,000 adjusted gross income threshold is also the same for all tax returns, whether you are filing single or married filing jointly. If you have already filed your 2020 tax returns, the IRS has currently requested that you not file an amended return to claim the $10,200 exemption. We are awaiting guidance from the IRS on how to recoup any taxes paid on filed tax returns on exempted unemployment benefits – it’s possible the IRS may automatically adjust those filed returns on their end and issue refunds. We’ll also need to watch out for any state conformity to this last-minute tax law change as well.
Expanded Child Tax Credit
In 2020, taxpayers with a child under the age of 17 would generally receive a Child Tax Credit of $2,000. The American Rescue Plan expands this credit to $3,000 per child (or $3,600 if the child is under the age of 6) for 2021.
The IRS will be paying these credits in advance on a monthly basis from July 2021 through December 2021 at a rate of $250 per month (or $300 per month if the child is under the age of 6).
The expanded Child Tax Credit gets phased out, similar to the stimulus payments.
For a single taxpayer with a child, phase out starts at $75,000 and gets fully phased out at $95,000.
For married filing joint taxpayers with a child, phase out starts at $150,000 and gets fully phased out at $170,000.
For a head of household taxpayer with a child, phase out starts at $112,500 and gets fully phased out at $132,500.
If phased out of the expanded Child Tax Credit, taxpayers would still be eligible for the current regular Child Tax Credit of $2,000 under current phaseout rules.
Enhanced Child and Dependent Care Tax Credit
A credit has generally been available to those who pay for the care of their child or dependent. Exclusive to 2021, the child and dependent care tax was changed under the Act to increase the amount of the credit to 50% (up from 35%) of qualified expenses, and increases the amount of eligible expenses to $8,000 (up from $3,000). The phaseout range has been expanded as well to allow for greater utilization of this credit. In addition, the credit is changed to be fully refundable for 2021.
For 2021 only, the maximum exclusion of employer-provided dependent care assistance was increased to $10,500, approximately double the previous exclusion amount.
A Boost to the Earned Income Tax Credit
The earned income tax credit was designed to benefit lower-income individuals with earned income, and is calculated based on a taxpayer’s earned income and the number of qualifying children the taxpayer has. For 2021, the Act increases the earned income tax credit to $1,502 for taxpayers without children (up from $543 previously), and increases the income phaseout threshold as well. The minimum age for the earned income tax credit was reduced to 19 (down from 25 previously), and allows taxpayers to utilize 2019 earned income for purposes of the tax credit in 2021 if more beneficial for purposes of calculating the credit.
Conclusion
Our goal is to disseminate highlights of what we think is pertinent information so that those in need can find the help they deserve. We are available as a resource and are happy to help – reach out if you have any questions regarding the American Rescue Plan and how it may affect your tax situation.
While the information in this post is considered to be true at the date of publication, changes in tax laws and other circumstances after the time of publication may impact its accuracy. Please consult a professional for the latest information.