American Rescue Plan Act of 2021 Summary

The American Rescue Plan Act of 2021, signed into law March 11, 2021, is a $1.9 trillion economic stimulus bill which includes many tax provisions.  While there are additional relief provisions in this law, we will focus on the tax provisions only, a summary of which is below.  We are continuing to learn about these provisions and receive guidance & interpretation from various government entities and will update this information as more information become available.

Tax Year 2020 – Individuals

Unemployment Benefit Exclusion

Effective for 2020 only, the first $10,200 of unemployment compensation, per taxpayer, is excluded from taxable income if modified adjusted gross income is $150,000 or less.

Suspension of Premium Tax Credit Payback

Effective for 2020 only, if you purchased health insurance through the Marketplace and received an excess Advanced Premium Tax Credit (premium subsidy), the repayment requirement is suspended.  This suspension applies to all taxpayers regardless of income level.

Tax filing notes:

• If you have already filed your returns for 2020, and are impacted by these changes, the IRS is asking taxpayers to NOT file amended returns at this time.  They will release further guidance on how taxpayers who are due a refund related to the above changes should proceed. Update 3/31/2021: The IRS has announced they will automatically adjust returns for taxpayers who were impacted by the unemployment income exemption and had already filed their returns beginning in late May through the summer.  Some taxpayers may still need to file amended returns if the reduction in income qualifies them for credits that were NOT originally claimed on the return.  See the IRS announcement for more information: IRS News Release  We are still waiting on guidance for taxpayers who were impacted by the suspension of the Premium Tax Credit and had already filed their returns.
• We are waiting on guidance from state authorities on whether they will also exempt the first $10,200 of unemployment benefits.  Update 3/17/2021: CT has confirmed they will conform with federal law regarding unemployment taxation (meaning unemployment compensation excluded from federal taxable income will also be excluded from CT taxable income).

Tax Year 2021 – Individuals

Round 3 Economic Impact Payments (EIP)

Eligible individuals will receive an EIP of up to $1,400 per taxpayer ($2,800 MFJ), plus $1,400 per dependent.  Unlike prior payments, this stimulus payment for dependents is not limited to dependents who are under age 17.  Taxpayers with income over certain thresholds will have their payments partially or completely phased out.

Income threshold phaseouts by filing status are:

• $75,000 – $80,000 for Single (S) and Married Filing Separate (MFS)
• $112,500 – $120,000 for Head of Household (HOH)
• $150,000 – $160,000 for Married Filing Joint (MFJ) and Qualifying Widow(er) (QW)

The IRS will use the most recent tax return on file to determine the amount of stimulus payments.  There will be a second “income review” approx. 90 days after the 2020 tax filing deadline.  If your EIP was based on your 2019 return and you qualify for a higher payment based on your 2020 tax return, a supplemental payment will be sent.  Note: the upper limit is lower than previous stimulus payments, so some taxpayers that received the prior payments will not receive this one.

You can check the status of your EIP by using the IRS Get My Payment tool.  If the status is “Payment Status – Not Available”, this does NOT necessarily mean that you are not getting an EIP.  If you think you are entitled to a payment, you should continue to occasionally check the status.

Tax planning note:

Since the IRS will use the most recent tax return on file to determine the amount of stimulus payments, if your income has increased in 2020 to above the thresholds but was below the thresholds in 2019, you should consider waiting to file your 2020 tax return until after you have received your stimulus payment.

Unemployment Benefits Extended

The enhanced $300 per week of Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation is extended to September 6, 2021.

Increased Child Tax Credit

Effective for 2021 only, the Child Tax Credit (CTC):

• Is increased to $3,000 per qualifying child,
• Is $3,600 in the case of a qualifying child age five or younger as of December 31, 2021,
• Age limitation is increased from age 16 to age 17, and
• Is fully refundable.

The increased CTC (over the $2,000 prior amount) phases out when modified AGI exceeds $75,000 (S, MFS), $150,000 (MFJ, QW), and $112,500 (HOH).  Once the increased CTC is phased-out, the $2,000 per qualifying child still applies until modified AGI reaches the previous thresholds.

Advance Payment of the Child Tax Credit

The IRS will establish a program for making periodic payments to taxpayers for the advance payment of the Child Tax Credit.  The advance amount will be estimated by the IRS based on prior tax return filings.  The IRS will establish an on-line portal which allows taxpayers to elect not to receive advance payments, or to update relevant information to calculate the advance payment.  Advance payments will be made during the period July 1, 2021 through December 31, 2021.  The advanced payments will be reconciled on 2021 tax returns and any excess received will be added to the taxpayers’ 2021 tax liability, with certain exceptions for lower income taxpayers.

Earned Income Credit (EIC)

Changes to the Earned Income Credit, effective for 2021 only, include:

• The minimum age for taxpayers with no dependents to qualify is reduced from 25 to 24 if a student or 19 if not a student.
• The upper age limit of 65 for taxpayers with no dependents has been eliminated.
• If earned income for 2021 is less than 2019 earned income, the taxpayer may elect to used 2019 earned income when calculating the 2021 EIC.

Changes to the Earned Income Credit, effective for all years starting with 2021, include:

• Investment income limitation is increased from $3,650 to $10,000 (indexed for inflation in future years).
• Taxpayers who file as Married Filing Separate will now qualify for EIC if the meet the following requirements:
  • The taxpayer resides with a qualifying child for more than half of the tax year, and
  • During the last six months of the year, the taxpayer does not reside with their spouse OR has a decree, instrument, or agreement (other than a decree of divorce) with respect to his or her spouse and is not a member of the same household with their spouse by the end of the tax year.

Marketplace Subsidy Expansion

Premium subsidies for health insurance purchased through the Marketplace have been expanded for 2021 and 2022.  The table below shows the % of household income that premiums (after subsidies) will now fall into for tax years 2021-2022 compared to prior tax law.

Notably, taxpayers whose household income is over 400% of the federal poverty line will now qualify for subsidies to keep health insurance premiums at no more than 8.5% of their household income.

Additionally, taxpayers who are eligible to receive insurance through the Marketplace and receive Unemployment Compensation at any point in 2021, will qualify for a fully subsidized ($0 premium) silver level plan regardless of household income.

Dependent Care Expense Credit

Effective for 2021 only, the Child and Dependent Care Expense Credit is refundable.  The dollar limitation on expenses paid for a qualifying person is increased from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying persons.  The maximum percentage of 35% is increased to 50% for AGI up to $125,000 with the credit percentage phasing out and reduced to zero when AGI reaches $438,000.

Dependent Care Assistance Program

Effective for 2021 only, the $5,000 maximum exclusion in increased to $10,500 ($5,250 MFS).

Student Loan Forgiveness Exclusion

For tax years 2021 through 2025, any discharge of student loan debt for any reason, including private student loans, may be excluded from taxable income, as long as there is no provision for the student to provide services to the discharging lender.

Tax Year 2021 – Businesses

Payroll Tax Credits Extensions & Expansions

Employee Retention Tax Credit has been adjusted as follows:

• Applicable wage period has been extended from June 30, 2021 to Dec 31, 2021.
• The credit can now be claimed by new businesses which started after February 15, 2020, with average annual receipts of under $1,000,000.  Eligible new businesses will not be subject to the business shut-down or gross receipts requirements.  For such businesses, the amount of the credit may not exceed $50,000 per quarter.
• Severely financially stressed employers, defined as employers having gross receipts less than 10% of the corresponding 2019 quarter, would be able to treat all wages as qualified wages.

Paid Sick and Family Leave Tax Credit has been adjusted as follows:

• Applicable wage period has been extended from March 31, 2021 to Sept 30, 2021.
• The 10-day overall limit has been reset as of April 1, 2021. So, an employee that met the 10-day limit prior to April 1st, will now be eligible for an additional 10 days of leave between April 1, 2021 and Sept 30, 2021 (with corresponding credit to the employer).
• Eligibility for sick leave has been expanded to include:
  • The employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and such employee has been exposed to COVID-19 or the employee’s employer has requested such test or diagnosis.
  • The employee is obtaining immunization related to COVID-19 or recovering from any injury, disability, illness, or condition related to such immunization.

Note: providing Paid Sick and/or Family Leave continues to be voluntary for employers (as of Jan 1, 2021).

Restaurant Revitalization Grants

The new law appropriates $28.6 billion for the SBA to issue Restaurant Revitalization Grants to qualified restaurants, food trucks, bars & similar establishments.  Entities applying for grants must certify that the uncertainty of current economic conditions makes necessary the grant request to support the ongoing operations of the eligible entity and that the entity has not applied for or received a grant under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.  Grant funds can be used for payroll, mortgage payments, rent, utilities, maintenance, supplies, food and beverages, supplier costs, operational expenses, paid sick leave, and any other expenses the SBA determines to be essential.  These funds are non-taxable and there are no repayment requirements as long as funds are used for eligible expenses.

Additional Funding for Existing SBA Relief Programs

Additional funds, as follows, have been appropriated to existing SBA Programs:

• Shuttered Venue Operator Grants: $1.25 billion
• Economic Injury Disaster Loans & Grants (EIDL): $15 billion
• Paycheck Protection Program (PPP): $7.25 billion