The American Rescue Plan Act of 2021 (ARP) was enacted on March 11, 2021. The bill includes provisions intended to stimulate the economy and provide relief to those still struggling due to the pandemic.
Recovery Rebate Credits
The ARP makes recovery rebate credits available for individuals with Social Security Numbers, subject to phase-out limitations based on 2020 AGI (or 2019 AGI if your 2020 return has not been filed).
Single taxpayers will receive a $1,400 recovery rebate credit and an additional $1,400 recovery rebate credit for each qualifying dependent.
- Phase-out begins at AGI of $75,000.
- The credit phases out completely at AGI of $80,000.
Married couples filing jointly will receive a $2,800 recovery rebate credit and an additional $1,400 recovery rebate credit for each qualifying dependent.
- Phase-out begins at AGI of $150,000.
- The credit phases out completely at AGI of $160,000.
Taxpayers filing as head of household will receive a $1,400 recovery rebate credit and a $1,400 recovery rebate credit for each qualifying dependent.
- Phase-out begins at AGI of $112,500.
- The credit phases out completely at AGI of $120,000.
Eligible individuals will receive direct advance payments of the recovery rebate credit. Taxpayers will receive a credit against their 2021 taxes when they file their 2021 income tax return if they were eligible for a direct payment but did not receive one.
Unemployment Insurance Provisions
For households with AGI less than $150,000, the first $10,200 in 2020 unemployment benefits is now tax-free for federal income tax purposes. For married couples, each spouse may apply their first $10,200 separately. The ARP also extends the following unemployment insurance programs and extends each through September 6, 2021:
- Federal Pandemic Unemployment Compensation (FPUC)
- The ARP provides $300 a week in supplemental federal unemployment benefits.
- Pandemic Emergency Unemployment Compensation (PEUC)
- Under the ARP, PEUC now provides 53 weeks of federal unemployment insurance benefits after state benefits have ended.
- Pandemic Unemployment Assistance (PUA)
- Under the ARP, benefits are now available for up to 79 weeks (or, in states with high levels of unemployment, up to 86 weeks).
Child Tax Credit (CTC)
The CTC is generally equal to $2,000 per child, and $1,400 of that amount is refundable. Under the ARP, for 2021 only, the credit amount increases to $3,000 per child ($3,600 for a child under six) and is fully refundable. The maximum age for a child to qualify has been increased to 17. The excess amount (over $2,000) is subject to phase-out rules that reduce the expanded portion of the credit by $50 for each $1,000 of income over:
- $75,000 for single taxpayers,
- $150,000 for married taxpayers filing jointly, and
- $112,500 for taxpayers filing as head of household.
The Treasury and IRS will begin issuing advance payments on July 1, 2021, and will continue to issue periodic payments through the end of the year, of up to half the anticipated credit for 2021. The IRS and Treasury will create a website for taxpayers to update their information and opt out of advance payments.
Taxpayers are responsible for reconciling advance payments with the actual credit amount when filing their 2021 returns. However, the ARP provides a safe harbor of up to $2,000 per child if modified AGI is:
- $80,000 or less for single taxpayers,
- $120,000 or less for married taxpayers filing jointly, and
- $100,000 or less for taxpayers filing as head of household.
Earned Income Tax Credit (EITC)
The ARP allows taxpayers to use their 2019 or 2020 income, whichever is lower, to calculate the EITC for 2020. To calculate the credit for 2021, taxpayers may use their 2019 or 2021 income. The ARP establishes special rules for 2021 specific to individuals without qualifying dependents, including:
- an increased credit phase-in rate of 15.3%,
- an increased maximum earned income amount of $9,820,
- an increased phase-out threshold for non-joint filers of $11,610,
- the maximum age is eliminated, and
- the applicable minimum age is reduced to 19 in general, 24 for full-time students, and 18 for qualified former foster or homeless youth.
Premium Tax Credit (PTC)
The PTC is a refundable tax credit available to help individuals and families enrolled in health coverage through the Healthcare Marketplace pay their premiums. The ARP provides enhanced marketplace subsidies for 2021 for taxpayers who received or were approved for unemployment compensation during 2021. The ARP also eliminates the 2020 recapture provisions affecting taxpayers who receive excess PTCs. In addition, the ARP modifies the affordability percentages for 2021 and 2022, so:
- taxpayers with incomes between 100% and 400% of the federal poverty level (FPL) receive increased subsidies;
- taxpayers with income between 100% and 150% of the FPL have access to a plan with a zero dollar premium payment; and
- taxpayers making over 400% of the FPL are eligible for the credit.
Child & Dependent Care Tax Credit (CDCTC)
The CDCTC is available to help working families pay expenses for the care of qualifying dependents. For 2021 only, the ARP makes the CDCTC refundable and increases the amount of eligible qualifying expenses to $8,000 for one qualifying dependent and $16,000 for two or more qualifying dependents. The credit will be worth 50% of eligible expenses, up to a limit based on income, which means the credit is worth up to $4,000 for one qualifying dependent or $8,000 for two or more. For every $2,000 that a taxpayer’s AGI exceeds $125,000, the 50% maximum credit amount is reduced by one percentage point to a floor of 20%. For households with AGI above $400,000, the 20% maximum is further reduced for every $2,000 of AGI over $400,000 until the credit is fully phased out.
Exclusion of Student Loan Forgiveness
The ARP allows taxpayers to exclude forgiven student loan amounts for loans discharged between December 31, 2020, and January 1, 2026, from income. This tax-free treatment applies to federal student loans and, as long as the taxpayer does not have a required provision of services to the discharging lender, to private student loans.
COBRA Continuation Coverage Premium Assistance
The ARP provides 100% premium assistance to individuals who, due to involuntary termination or reduction in hours, became eligible for or already have effective COBRA continuation coverage beginning on April 1, 2021, and ending on September 30, 2021. Employers will be able to claim tax credits against unpaid COBRA premiums and will not include premium assistance amounts in the individual’s gross income.
Extended Limitation on Excess Business Losses of Noncorporate Taxpayers
For tax years beginning after December 31, 2017, and before January 1, 2026, the 2017 Tax Cuts and Jobs Act (TCJA) established limits on the deductibility of current-year business losses for noncorporate taxpayers. The CARES Act repealed the limitation for tax years 2018 through 2020. The TCJA limitation, which resurfaces in 2021, was set to expire at the end of 2025. The ARP delays the expiration date an additional year to the end of 2026.
LGA’s individual tax team can help taxpayers determine the tax implications of updated and new legislation, including the ARP provisions, based on their specific circumstances. Contact Marci Cohen, Steve Gallant, or Larry Andler with your questions and tax service needs today.
Marci Cohen is a Partner at LGA and the Lead Partner for the firm’s Family, Estate & Fiduciary Tax Group. She has over 30 years of experience in providing individual and entity tax planning and compliance services. Marci’s focus is on high-net-worth individuals and families with complex reporting and planning needs, as well as their associated trusts, estates, and entities. With her collaborative and diligent tax planning approach, Marci ensures that her clients are able to achieve their personal financial goals.
Steve Gallant is a Partner at LGA and has over 40 years of experience in public accounting. He is well-versed in all areas of taxation, including individual, trust & estate, corporate, and partnership taxation. Steve specializes in providing individual income tax and personal financial planning services and advises individuals and entities on foreign entity tax, dual citizenship, and expatriate issues.
Larry Andler is a Principal at LGA and has over 25 years of experience working with individuals and companies of all sizes in a variety of industries. He focuses on high net worth individuals with complex reporting challenges and their related businesses and trusts, startups, and C corporations. Larry works with individuals and entities in navigating the US tax system’s inbound and outbound foreign reporting requirements.