American Rescue Plan Provides Additional Tax Benefits
On Thursday March 11, 2021 President Biden signed the American Rescue Plan Act of 2021, H.R. 1319. This is the third major relief package to help Americans who are struggling with losses and setbacks from COVID-19 related government lockdowns and countermeasures.
Following the $1.7 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) of March 2020, and the $900 billion Consolidated Appropriations Act (CAA) of December 2020, the $1.9 trillion American Rescue Plan Act “the Act” provides several tax benefits for individuals and businesses alike.
Assistance for Individual Taxpayers
The Act provides several benefits to individual taxpayers, some of which are expansions and continuations of prior relief packages.
- Recovery Rebate Credit for 2021: This is similar to the economic stimulus payments that were authorized in the CARES Act and CAA. The Act provides for direct payments of $1,400 for taxpayers and each of their qualifying dependents. However, this credit has a much faster phase-out than the two stimulus payments of 2020:
- For joint filers, the credit begins phasing out at adjusted gross income (AGI) of $150,000 and is reduced to zero at AGI of $160,000.
- For heads of household, the credit phases out from AGI of $112,500 to $120,000.
- For all other taxpayers, from $75,000 to $80,000.
- Exclusion of Unemployment Benefits from Income: The Act provides that, for all taxpayers with a modified AGI of less than $150,000, the first $10,200 of unemployment insurance (UI) benefits are excluded from the taxpayer’s gross income. The $150,000 figure is the ceiling; there is no phase-out range. While there is no increased limitation on joint-filed returns, the $10,200 exclusion does apply separately to each spouse. This is a great benefit to taxpayers with dependents who were unemployed in 2020, as it removes the need to apply the “kiddie tax” on certain unearned income of minors. (Yes, unemployment is considered unearned income and subject to the kiddie tax). Since this rule change is retroactive to 2020, taxpayers who have already filed their 2020 tax returns to include UI benefits in income will want to file Form 1040-X to amend their tax returns. The IRS recently began accepting e-filed amended returns, so this process will be much smoother than in the past.
- Child Tax Credit Expanded: Under the Act, beginning in 2021, the child tax credit is increased from $2,000 to $3000 ($3,600 for children under six years old), with the maximum age increased to 17 for 2021. However, there is a phase-out of the increase after the taxpayer’s AGI increases past the limits for the Recovery Rebate Credit (See Recovery Rebate phase outs above). In addition, the IRS has been directed to (1) make advance payments of a portion of the taxpayer’s child tax credit starting July 1, 2021, through December 31, 2021 and (2) to set up an online portal whereby taxpayers can opt out or enter modified information to increase their advance payment amounts. Lastly, taxpayers will reconcile their advanced credits on their tax returns and would be required to repay any excess advanced payments.
- Major expansion of the Earned Income Credit: The Earned Income Credit (EIC) is a refundable tax credit for families at or near the poverty line who have earned income. The Act greatly expands the eligibility of taxpayers who can claim this credit for 2021.
- Child and Dependent Care Credit expanded: Beginning in 2021, the Child and Dependent Care credit has been made refundable for US-based taxpayers. In addition, the amount of expenses for child and dependent care eligible for the credit has been increased from $3,000 to $8,000 per child or dependent.
- Increased premium tax credit in 2021 and 2022: The new stimulus package increases both the eligibility and credit amount for taxpayers who have purchased health insurance through a government-sponsored health insurance exchange (“Obamacare”).
- Exclusion of student debt forgiveness from taxable income: President Biden and congressional Democrats have long discussed the prospect of a student-loan forgiveness aid package in the future. Tax analysts noted that such a forgiveness would be taxable income to the debtor and could cause a financial hardship. Under the Act, forgiveness of certain loans for post-secondary education, if the discharge of loan obligations takes place from 2021 to 2025, is excluded from taxable income.
Assistance for Business Taxpayers
The Act provides some new benefits to business taxpayers.
- Restaurant Revitalization Grants: A new program instituted through the Small Business Administration (SBA) provides grants to eligible restaurants, food trucks, and other dining establishments to assist them in recovering from the business shutdowns related to the COVID-19 pandemic. These grants are tax-exempt income and expenses paid with these proceeds are fully deductible by the recipient taxpayers. The grant amount is based on revenue loss by comparing 2020 revenue to 2019 revenue. The amount of calculated revenue loss is reduced by the amount of any PPP loans received (both first and second draw loans).
- EIDL Advances: Under the Act, eligible small businesses may receive economic injury disaster loan (EIDL) advances from the SBA. Like the restaurant grants above, the EIDL advances are tax-exempt, and expenditures funded by these advances are fully deductible by the recipients.
- Employee Retention Credits: The Employee retention credit has been extended from its current expiration date of June 30, 2021 to December 31, 2021. This will increase the maximum credit for 2021 from potentially $14,000 per employee to $28,000 per employee ($7,000 per employee per quarter).
The new stimulus package has many provisions, only some of which are mentioned here. Navigating the new COVID-19 reality for taxes can be a daunting task. We at MRPR stand ready to assist you. Please contact us to learn more.