On March 11, President Biden signed the American Rescue Plan Act (ARPA). Below are the highlights of the ARPA. If you have any questions about how these provisions impact you, please contact us today.
Individual Stimulus Checks
Another round of economic impact payments (also known as stimulus checks) for people who meet certain income eligibility requirements is provided under the ARPA. Single taxpayers who earn less than $75,000 will receive $1,400 and married taxpayers filing jointly who earn less than $150,000 will receive $2,800. The payments phase out at an adjusted gross income of $80,000 for single filers and $160,000 for joint filers. The bill also includes a $1,400 payment per dependent. Payment amounts will be determined using 2020 tax returns, if already processed by the IRS, or 2019 returns.
Like rounds one and two of the stimulus payments, if a taxpayer receives more of a payment than they are entitled to based on their tax filing, the excess is not required to be repaid.
Federal Unemployment Assistance
The ARPA makes the first $10,200 of unemployment insurance benefits for households with incomes at or below $150,000 non-taxable. Interestingly, the income limit applies regardless of filing status – the same limit applies for single taxpayers and married filing jointly taxpayers. For those taxpayers that have already filed their 2020 tax returns, it is unclear if the IRS will require amended returns or will have an internal mechanism to correct already filed returns. If you have not already filed your tax return and would qualify for this benefit, we recommend not filing until tax forms for 2020 have been updated.
Additionally, the bill renews federal unemployment benefits at a lower level—$300 per month—through September 6, 2021.
Child Tax Credit
The existing child tax credit is greatly enhanced under the ARPA. These changes include:
- Making the credit fully refundable for 2021
- Including 17-year-olds in the definition of qualifying children
- Increasing the amount of the credit for children over 7 years old to $3,000
- Increasing the amount of the credit for children between 0 and 6 years old to $3,600
- Directing the IRS to estimate each taxpayers’ child tax credit and pay it in advance monthly from July through December 2021
Clearly, the ARPA is favoring those taxpayers with children; the credit prior to the ARPA was a maximum of $2,000 per child. The increased credit amounts phase out at certain income levels ($75,000 for singles, $150,000 for married couples filing jointly, and $112,500 for heads of household).
To distribute the monthly estimated child tax credit payments, the IRS will create an online portal where taxpayers can both opt out of advance payments and provide information that modifies the amount of their payments.
Child and Dependent Care Credit
The ARPA again favors taxpayers with children in that the credit for working parents is expanded and will be refundable in 2021. Under the old law, income at much lower levels reduced the credit to 20% of the maximum paid ($3,000 for one child, $6,000 for two or more children). For 2021, the maximum credit is 50%, and does not phase out unless taxpayers have more than $125,000 of adjusted gross income. Taxpayers with higher incomes will still be eligible for a 20% credit. The maximum amounts eligible for credit are increased to $8,000 for one child and $16,000 for two or more children.
It is important to note that this credit is only available to those taxpayers with earned income (a married couple would need to show earned income for both husband and wife).
Exclusion for Employer-Provided Dependent Care Assistance
The ARPA increases the exclusion for employer-provided dependent care assistance for 2021 to $10,500. Employees with existing elections to exclude dependent care assistance from their wages should check with their payroll department if they choose to change their election.
Additional Tax Credits
- COBRA Continuation Coverage – On top of the extended unemployment benefits, the ARPA includes a 100% subsidy of COBRA health insurance premiums. This means that laid-off workers can maintain health insurance through their former employer’s plan at no cost. The subsidy covers the period from April 1, 2021, through September 30, 2021. Employers will claim a credit on their 2021 payroll tax returns to reimburse for the cost of the subsidy.
- Employee Retention Credit – The bill extends this credit, which was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, through the end of 2021. Additionally, it allows the credit to be claimed by eligible employers for paying qualified wages to employees.
- Family and Sick Leave Credits – The ARPA extends these credits, which were established by the Families First Coronavirus Response Act (FFCRA), through September 30, 2021. Additionally, it increases the limit on the credit for paid family leave, increases the number of leave days a self-employed individual can take, makes leave taken due to a COVID-19 vaccination qualify, and creates a reset date for counting paid sick leave (March 31, 2021).
- Premium Tax Credit – The ARPA expands the premium tax credit for both 2021 and 2022 and adjusts the definition of an applicable taxpayer to include those who received, or have been approved to receive, unemployment compensation anytime in 2021.
- Earned Income Tax Credit – For 2021, the ARPA expands the EITC by making it available to taxpayers without children.
The American Rescue Plan Act demonstrates that the government is continuing to provide support through tax and other incentives during the COVID-19 pandemic. At Cray Kaiser we are committed to educating our clients and friends as changes continue to occur at a rapid pace. If you’d like to discuss how any of the ARPA changes may affect you, please call us at (630) 953-4900.
Please note that this blog is based on tax laws effective in March 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.