The American Rescue Plan Act of 2021 was signed into law by President Biden on March 11, 2021. The sweeping $1.9 trillion coronavirus relief package authorizes a multitude of new and expanded economic aid programs to offer assistance to individuals, families, and businesses struggling amidst the pandemic.
The following is a high-level overview of certain tax provisions that may directly affect individual taxpayers:
Arguably the most significant component of the bill, stimulus payments of $1,400 have been authorized for individuals who qualify. Officially known as the 2021 Recovery Rebate, the stimulus payments will be structured as a pre-payment of a 2021 income tax credit. Although this is the third round of payments, it is the most restrictive in terms of eligibility, and the phaseout ranges are significantly more narrow than previous payments. Those phaseout ranges, based off a taxpayer’s adjusted gross income (AGI), are as follows:
- Single Filers and Married Filing Separate: $75,000 – $80,000
- Head of Household: $112,500 – $120,000
- Married Filing Joint: $150,000 – $160,000
A taxpayer’s payment is reduced proportionally when their AGI falls within the above ranges, and is eliminated when their AGI exceeds the range. These thresholds will be calculated based on the taxpayer’s most recent AGI on file with the IRS. This could have several implications. To determine eligibility, the IRS would first look to a taxpayer’s 2020 income tax return. If the 2020 return has not yet been filed, it would then use their 2019 tax return.
For taxpayers who have yet to file their 2020 return and experienced a lower AGI in 2020 (likely in part due to the pandemic), they may qualify based on the Additional Payment Determination date. The Additional Payment Determination Date is slated to be the earlier of 1) 90 days after the 2020 calendar filing deadline; or 2) September 1, 2021. The odd wording of this provision was intentional – only days after the bill’s passing, the IRS extended the tax filing date for individuals to May 17, 2021. If a taxpayer files prior to this date, their stimulus payment will be recalculated based on the newly updated AGI, which may grant eligibility or provide an increased payment.
In light of this deadline, there is great incentive to file early for those taxpayers who recognized lower income in 2020 due to the pandemic (especially those with larger 2019 incomes). Although October 15th is the extended filing deadline, it may be worthwhile to file prior to April 15th for those taxpayers who are eligible for stimulus payments based on their 2020 AGI.
Finally, as this stimulus payment is an advance on a 2021 tax rebate, even if a taxpayer doesn’t qualify based on their 2019 or 2020 income level, they can technically be eligible for some portion of the payment if their 2021 AGI (determined in 2022) is within the threshold. However, if a taxpayer depends on their 2021 filing for eligibility, they won’t receive a check or direct deposit in 2021, but rather will receive the stimulus “payment” in the form of a tax credit when the 2021 tax return is filed.
With that in mind, one could attempt to qualify for stimulus payments by avoiding the recognition of income or otherwise reducing their AGI in 2021. Waiting to receive Social Security benefits, contributing to an IRA, and delaying the triggering of any capital gains until the following year would all help.
In terms of timing, taxpayers have already begun to receive payments via direct deposit. However, taxpayers can expect a delay in receiving their payment if they depend on their 2020 return for eligibility and have not yet filed, or if they expect to be eligible next year, based on their 2021 return. Thankfully, there is no clawback associated with this payment. That is, a taxpayer will not be required to repay any portion of the payment if they qualified based on their 2019 or 2020 AGI, even if their 2021 AGI ends of exceeding the phaseout amounts.
The definition of eligible individuals has been expanded in this bill to not only include the taxpayer, but any dependent of the taxpayer. Previously, only the taxpayer and their children could qualify for a stimulus payment. Now, that definition can include older dependent children (above the age of 16), or elderly and infirm family members.
Child Tax Credit
The bill also provides several changes to the 2021 Child Tax Credit. First, the maximum amount of credit available per child (under the age of 17) has been increased to $3,000 (from $2,000) per qualifying child. Additionally, the maximum credit is enhanced to $3,600 per qualifying child under the age of six. It is also worth noting that the credit has been deemed refundable for the 2021 tax year. I.e., the credit amount could be refunded to the taxpayer if it makes a taxpayer’s tax liability negative.
In line with the theme from earlier, the higher credit is subject to more restrictive phase out schedules. Keep in mind these phaseouts only apply to the enhanced credit amount (dollars in excess of $2,000) and are reduced by $50 for every $1,000 above the threshold. Applicable thresholds are as follows:
- Joint Filers: $150,000
- Head of Household: $112,500
- Remaining filers: $75,000
Roughly 50% of the credit will be paid in 2021, exact dates pending. However, unlike the stimulus payments described above, any portion of the credit in excess of a taxpayer’s actual credit amount is subject to clawback.
Those taxpayers who have been involuntarily terminated from employment will be able to maintain their existing health insurance through COBRA between April and September 2021 at no cost. Premiums will be paid to the taxpayer’s former employer and are reimbursed via a refundable payroll tax credit.
Supplemental unemployment benefits enacted through the last two coronavirus relief bills (FFCRA and CARES) have been extended through September 2021. Like the CARES Act, the supplement provides $300 in weekly unemployment compensation.
What else is included
- Approximately $93 billion in funding for COVID-19 public health focused activities which include vaccine distribution and education, improved contact tracing and virus mitigation at the State and local levels, modernization of CDC data and forecasting, aide for community health centers, and an enhancement of PPE supply.
- Allocation of approximately $50 billion in funding to benefit small business through a variety of programs.
- $170 billion in funding for K-12 and higher education institutions to upgrade their ability to support students in a pandemic environment.
- Student loans discharged between 1/31/20 and 1/1/26 will not be included in gross income (alluding to the fact that legislation proposing some amount of student debt forgiveness could be on the horizon).
- Extension of the Employee Retention Credit originally set to expire in June 2021.
- Expansion of Paycheck Protection Program funding to include a wider range of Section 501(c) nonprofit organizations.
What is not included
- Although a minimum wage increase from $7.25 to $15 per hour was proposed, it did not garner sufficient support to be signed into law.
- No Required Minimum Distribution relief is included, contrary to previous coronavirus support legislation.