How The American Rescue Plan May Affect You

The American Rescue Plan Act of 2021 was signed into law earlier today. Here is a brief look at how the new act may affect you.

STIMULUS CHECKS 3.0

One of the most notable parts of the American Rescue Plan for individual taxpayers is a third round of stimulus checks. Officially called 2021 Recovery Rebates, these stimulus checks share some similarities with the 2020 counterparts that were authorized by the CARES Act and the Consolidated Appropriations Act, but there are also some differences.

The amount of a taxpayer’s 2021 Recovery Rebate is determined by multiplying $1,400 by the total number of eligible individuals in a household, which includes the taxpayers themselves and any dependents claimed on the taxpayer’s tax return. So a family of four (two parents and two children) may receive a $5,600 stimulus check ($1,400 times 4).

Notably, the criteria has changed from “child” in the earlier acts to “dependent” in this new act, allowing for potentially larger stimulus checks per household since children older than 17 may now be included, as well as elderly and/or infirm family members.

The Recovery Rebates authorized by the American Rescue Plan are phased out at specific adjusted gross income ranges as follows:

• Single Filers and Married Filing Separate: $75,000 – $80,000
• Head of Household: $112,500 – $120,000
• Married Filing Jointly: $150,000 – $160,000

If your adjusted gross income on file with the IRS is above those ranges you will not receive a Recovery Rebate. These Recovery Rebates being sent now are based on prior years’ adjusted gross income (2019 or 2020 if you’ve already filed for 2020), but it is a 2021 tax credit.

If you have not filed your 2020 tax return yet, your Recovery Rebate will be based on your 2019 adjusted gross income. Once you file your 2020 tax return, your Recovery Rebate will be recalculated and you may receive an additional rebate if your income has decreased and you are below the phase out. That would be determined 90 days after the 2020 tax return filing or September 1, 2021, whichever is earlier. If your 2020 income qualifies you for a larger Recovery Rebate than your 2019 income.

The Recovery Rebate will again be calculated based on your 2021 adjusted gross income. If your adjusted gross income is lower in 2021 than previous years, you may receive an additional stimulus payment if you didn’t receive the full amount already.

Of particular importance is the fact that the stimulus payments do not need to be paid back. If you qualify based on your 2019 adjusted gross income and have not filed your 2020 tax return and would not have qualified based on your 2020 adjusted gross income, you may delay filing your 2020 tax filing until October 15th by filing for an extension so that you receive the Recovery Rebate. Likewise, if you qualify based on your 2020 adjusted gross income, but won’t qualify based on your 2021 adjusted gross income, you will still receive a Recovery Rebate and will not have to pay the money back if you file prior to September 1st.

INCREASE OF CHILD TAX CREDIT

Effective for 2021 is an increase in the maximum amount of enhanced Child Tax Credit available per child. The amount increases to $3,000 from $2,000 per qualifying child between the ages of 6 and 17. The maximum amount increases to $3,600 for qualifying children under the age of 6 as of December 31, 2021.

These increased Child Tax Credits are also subject to phase outs. The enhanced Child Tax Credit now phases out by $50 for each $1,000 of income over the following thresholds:

• Married Filing Jointly: $150,000
• Head of Household: $112,500
• All Others: $75,000

These thresholds only apply to the 2021 enhancements. The normal Child Tax Credit of $2,000 per child is still available to households with income above those thresholds, subject to the regular thresholds of $400,000 for joint filers and $200,000 for single filers.

For 2021, children age 17 as of December 31, 2021 do qualify for the Child Tax Credit. Normally, children must be under 17, but for 2021, children under 18 qualify.

Previously, per the Tax Cuts and Jobs Act of 2017, the credit was refundable only up to $1,400. The Child Tax Credit is now fully refundable for 2021. That means even if you somehow ended up owing no tax for the tax year, you can still receive a refund for the entire enhanced Child Tax Credit, making your tax liability for the year potentially negative.

CHILD TAX CREDIT MONTHLY PAYMENTS

The IRS is instructed per the American Rescue Plan to pay taxpayers 50% of their estimated Child Tax Credit as equal installments between July 1, 2021 and December 31, 2021. The payments will be based on the latest adjusted gross income on file with the IRS (2019 or 2020, depending on your actual filing date), but ultimately the Child Tax Credit will be determined by your 2021 adjusted gross income. So be careful. If your 2021 income will limit or eliminate a credit that you receive payments on because of your lower 2019 or 2020 income, you may have to pay those credits back as a tax liability with your 2021 tax return. There is a safe harbor for up to $2,000 of the credit per child for the following income level phase outs:

• Single Filers: $40,000 – $80,000
• Head of Household: $50,000 – $100,000
• Married Filing Jointly: $60,000 – $120,000

CHILD AND DEPENDENT CARE TAX CREDIT INCREASES

Prior to the American Rescue Plan, the Child and Dependent Care Tax Credit provided a maximum credit for up to $3,000 in expenses with one qualifying child under the age of 13 and $6,000 with two or more qualifying children under the age of 13. This amount has now more than doubled to $8,000 in expenses with one qualifying child under the age of 13 and $16,000 with two or more qualifying children under the age of 13.

Prior to 2021, the percentage of expenses that could be received as a tax credit was 35%, with the percentage decreasing by 1% to as low as 20% for every $2,000 the adjusted gross income exceeds $15,000. Now, with the American Rescue Plan, the percentage is increased to 50% and the phaseout doesn’t begin until $125,000 regardless of filing status. This will allow more taxpayers to receive the Child and Dependent Care Tax Credit, as well as a larger credit, for 2021 than in previous years.

The Child and Dependent Care Tax Credit is subject to additional phaseouts. For those with income over $400,000, regardless of filing status, the 20% of credit is decreased by 1% for every $2,000 in income over $400,000.

UNEMPLOYMENT INSURANCE COMPENSATION ENHANCEMENTS

The American Rescue Plan extends Federal subsidies to states providing unemployment compensation to individuals through September 6, 2021.

The American Rescue Plan extends the Pandemic Unemployment Assistant program under the CARES Act that provides unemployment compensation to self-employed individuals through September 6, 2021.

Under the Federal Pandemic Unemployment Compensation (FPUC) within the American Rescue Plan, the weekly unemployment compensation amounts received by an individual will continue to be increased by an additional $300 through September 6, 2021.

The American Rescue Plan also extends a full Federal reimbursement for the first week of Unemployment Compensation benefits for states with no elimination period and a 50% subsidy for certain temporary short-time compensation programs for workers who have seen a reduction in hours.

UP TO $10,200 OF UNEMPLOYMENT INSURANCE COMPENSATION MAY BE TAX-FREE

If a taxpayer’s adjusted gross income is less than $150,000, up to $10,200 of unemployment compensation received in 2020 will be tax free. This applies to all filing statuses, but up to $10,200 for each individual, even in a married filing jointly situation, may be tax-free. That means a married couple filing jointly may receive up to $20,400 ($10,200 each) of unemployment compensation tax-free for the household.

COBRA SUBSIDIES FOR TERMINATED EMPLOYEES

For those who have been involuntarily terminated from employment, the American Rescue Plan allows them to maintain their existing health insurance via COBRA from April through September 2021 at no cost. This eliminates the typical 102% of cost of coverage that would normally need to be paid through COBRA. The premiums are paid by the former employer, who is reimbursed through a refundable payroll tax credit.

TEMPORARY ENHANCEMENT TO THE PREMIUM ASSISTANCE TAX CREDIT

The Premium Assistance Tax Credits have been enhanced under the American Rescue Plan for 2021 and 2022, allowing taxpayers with household income up to 150% of the poverty line to have the entire cost of eligible coverage covered by Premium Assistance Tax Credits. Those with household income from 150% to 400% have increased Premium Assistance Tax Credits, and those households over 400% of the poverty line may now temporarily receive Premium Assistance Tax Credits, whereas they were previously not eligible.

Those receiving unemployment compensation for at least one week during 2021 will automatically be treated as though their household income does not exceed 133% of the poverty line.

STUDENT DEBT FORGIVEN FROM 2021 THROUGH 2025 WILL BE TAX-FREE

Although the American Rescue Plan doesn’t include any form of student loan forgiveness, it does contain a provision that makes any future student loan forgiveness from 2021 through 2025 income tax-free. This may allude to future student loan forgiveness on the horizon. President Biden has indicated the possibility of an Executive Order that would forgive up to $10,000 of student loan debt per borrower, and a larger student loan debt through legislative action may also be possible.

THERE MAY BE MORE THAT COULD AFFECT YOU

These were the most significant features of the new American Rescue Plan Act of 2021. There may be more in the bill that could have a direct affect on you and your finances and taxes, and it’s recommended you talk to your financial and tax professional about your specific situation.

If you have any questions, feel free to...