Last week, the $1.9 trillion American Rescue Plan Act (ARPA) of 2021 was signed into law by President Biden. It included funding for COVID-19 vaccine distribution, assistance for safely reopening schools, and small business relief. There are also many expanded and new tax provisions nestled within the relief package. Here are just a few of the many American Rescue Plan tax benefits available to individuals and businesses.
Individual American Rescue Plan Tax Benefits
The ARPA provides $20 billion in state and local government aid to assist low-income families with rent and utility bills. It also includes $10 billion to help homeowners with mortgage and property tax payments. In addition, eligible individual taxpayers will receive a third round of stimulus checks and may benefit from multiple tax credits.
Economic Impact Payments (Stimulus Checks)
Single taxpayers with an adjusted gross income (AGI) of less than $75,000 are eligible to receive $1,400. Married filers with an AGI under $150,000 will receive $2,400. Those filing as head of household (HOH) earning $112,500 or less will also qualify for the full $1,400. Dependents will each receive $1,400, as well. Unlike previous stimulus checks, this also includes college students and qualifying relatives claimed as dependents. The income cutoffs for phaseout, however, have been lowered. Single filers earning more than $80,000, married filing jointly over $160,000, and HOHs with an AGI above $120,000 will not be eligible for any payment even if they have dependents. The IRS began issuing checks on Saturday, March 13. Those who do not receive payment by direct deposit or check may be eligible to receive the money through the Recovery Rebate Credit on their tax returns. Income eligibility will be based on the taxpayer’s 2019 AGI unless they have already filed their 2020 tax return.
Child Tax Credit
Under the ARPA, the Child Tax Credit (CTC) will increase to $3,000 for each child between the ages of 6 and 17. Those with children younger than 6 will receive a $3,600 credit per child for the 2021 tax year. It also allows for a fully refundable credit for low-income families, which is an increase from the $1,400 maximum under the current CTC. Those who are ineligible for the expanded tax credit due to higher incomes may still be eligible for the $2,000 CTC. Single taxpayers above $200,000 AGI and married filers above $400,000 AGI will see the $2,000 credit reduced by $50 for each $1,000 they earn over the phaseout threshold.
The newly expanded CTC is expected to be paid out (up to half of the anticipated credit amount) in monthly installments beginning in July and ending in December 2021. If there is an overpayment, individuals making less than $40,000 and couples earning less than $60,000 will not be expected to repay the amount. Although many Democrats wanted to make these changes permanent, the expanded tax credit was only approved for 2021.
Piggybacking on the federal unemployment insurance expansions created under the CARES Act, ARPA provides additional relief for those who are unemployed. Along with the extended benefits, taxpayers with incomes below $150,000 may also exempt up to $10,200 of unemployment benefits from their 2020 tax return. This provision is meant to help reduce that tax burden for many filers. If you have already filed, however, do not amend your return just yet. The IRS is asking taxpayers to wait for additional guidance.
Earned Income Tax Credit
Several changes were made to the Earned Income Tax Credit (EITC). The minimum age to claim the credit was lowered from 24 to 19, and the limitation on those 65 and older was eliminated. For the 2021 tax year, the following changes were made for taxpayers with no qualifying children:
- The credit and phaseout percentage is increased to 15.3% (previously 7.65%)
- Earned income amount is now $9,820 (was $4,220)
- The phaseout amount has increased to $11,610 (previously $5,280)
- The threshold for disqualifying investment income was raised to $10,000 (formerly $2,200)
Taxpayers will also be allowed to use their 2019 income in figuring the EITC amount.
Child and Dependent Care Credit
In addition to the Child Tax Credit and Earned Income Tax Credit, the ARPA also significantly expands the Child and Dependent Care Credit for 2021.
- Qualifying expenses percentage has increased from 35% to 50%
- Phaseout will now start at $125,000 AGI (previously $15,000)
- The credit is fully refundable
The maximum amount of qualifying expenses has increased to $8,000 for one child and $16,000 for two or more children (previously $3,000 and $6,000). This means that the maximum credit is now worth $4,000 or $8,000. Those who pay expenses through a Dependent Care Flexible Savings Account (DC-FSA) cannot claim the credit, however, as the IRS views this as double-dipping.
Student Loan Forgiveness
The ARPA takes the first step in protecting taxpayers who have received student loan forgiveness recently, as well as those who will receive it in the near future. Any amount forgiven between January 1, 2021, and December 31, 2025, will not count as income on tax returns. This is seen by many as an indication that the Democrats expect to push through a massive student loan forgiveness bill very soon.
American Rescue Plan Tax Benefits for Businesses
In addition to several individual American Rescue Plan tax benefits, the ARPA includes several important changes for business owners of all types. Here are some of the most significant updates.
Family and Sick Leave Credits
Last year’s Families First Coronavirus Response Act (FFCRA) required employers to provide paid leave to employees impacted by the coronavirus. Although the ARPA does not extend this requirement, the federal tax credits to encourage employers to provide paid sick leave are extended. Employers with fewer than 500 employees may receive the credits for any emergency paid sick leave (EPSL) provided between March 31 and September 31, 2021. The ARPA also expands the qualifying reasons for EPSL. COVID-19 immunization or illness related to the vaccination is now included, as well as time off for COVID-19 testing or awaiting the results.
The ARPA also resets the tax credit limit and amount of wages that may be claimed. As of April 1, 2021, employers may voluntarily provide up to 80 hours of EPSL per full-time employee. This is in addition to any EPSL provided before April 1. The wage limit has increased from $10,000 to $12,000 annually per employee for expanded FMLA leave.
Employers who treat highly compensated employees, full-time employees, or tenured employees differently under their voluntary paid sick leave plan are ineligible for the tax credit.
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) established by the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020 is extended through the end of 2021. There are, however, different rules for the treatment of wages depending on when employers pay. Eligibility for the tax credit is based on the employer’s size, pandemic impact on the business, and reduction in quarterly gross receipts. Under the ARPA, “recovery start-up businesses” that opened after February 15, 2020, and have annual gross receipts of $1 million or less are now eligible for the ERTC. Certain employers may be eligible to receive up to $33,000 per employee in incentives.
If you’d like to read all 242 pages of the ARPA, you can download a PDF copy here. For help with your individual or business taxes, contact Tax Defense Network at 833-803-4222 and schedule a free consultation.