By: Nicole T. Strbich, CFP®, CPWA®, EA - Director of Financial Planning
President Biden signed a $1.9 trillion dollar bill into law on March 11, 2021. The American Rescue Plan Act of 2021 provides a third round of stimulus checks (with some new provisions and tighter income limits), increases the child tax credits available for 2021, makes some unemployment benefits non-taxable, extends some of the current federal unemployment benefits until September 6, 2021, provides a break on COBRA and Affordable Care Act (ACA) premiums for some individuals, and includes a variety of other provisions for individuals and businesses in 2021.
According to The Tax Foundation, a leading independent tax policy 501(c)(3) nonprofit, the breakout of the funds allocated to this bill includes $410 billion for the stimulus checks, $350 billion to aid state and local governments, $289 billion for expanded unemployment benefits, $268 billion for transportation and infrastructure, financial services and other higher education institutions, $129 billion for K-12 schools, $122 billion for energy and commerce (includes testing, tracing, and vaccines), and a variety of other smaller allocations to include tax credits and funds for small businesses. Overall, about $850 billion of the funds are directed toward individuals and about $65 billion to businesses.
New Stimulus Checks
This legislation includes a third round of stimulus checks. $1,400 per person (pending the criteria below) will start being issued very shortly. This round of checks has expanded the eligibility to include any dependents of the taxpayer. This includes children who are dependents and are in high school or college and other parents or family members that can be claimed as dependents. These changes could make the upcoming checks much more attractive for some families. However, the phaseout calculations for taxpayers at certain income levels is much more restrictive and could cause some families to be ineligible for this round of payments. For married individuals filing jointly, their payment starts to phase out at $150,000 of adjusted gross income (AGI) and is fully phased out at $160,000 AGI. Single individuals (and married filing separate) have an AGI limit of $75,000 before payments are reduced and they are fully phased out at $80,000 of AGI. Individuals filing as Head of Household can have $112,500 of AGI before payments are reduced and fully phased out at $120,000.
These payments will be determined using the last tax return records on file with the IRS, but the IRS will also have an additional payment determination date to send out checks if the taxpayer’s 2020 returns entitled them to an additional amount. In a recent Kitces.com article on this subject, this additional determination date will be the earlier of 90 days after the 2020 date filing deadline or September 1, 2021 (Kitces.com is one of the nation’s leading educational resources for financial advisory firms such as Buckingham Advisors). These date options come into effect should congress extend the tax filing deadline again this year. The last determination date for this payment is the 2021 tax return. If the taxpayer did not receive the full payment they were eligible for in the prior opportunities, it will be included on the return as a tax credit.
Increased Child Tax Credits for 2021
This bill increased the maximum child tax credit in 2021 available per child from $2,000 to $3,000 and provides an additional $600 on top of the credit for children younger than 6 at the end of 2021. Additionally, it includes for this credit children age 17 at the end of 2021 (who previously were not eligible). This bill also makes these credits fully refundable. However, the AGI limitations for these expanded benefits are much lower than the current child tax credit. These credits will start phasing out for married filing jointly taxpayers with AGI of more than $150,000, for single filers with AGI over $75,000 and taxpayers filing as head of household with AGI over $112,500.
Additionally, taxpayers may be able to receive half of their child tax credit in advance later this year. According to Kitces.com, the America Rescue Plan instructs the IRS to pay 50% of a taxpayers estimated child tax credit to them in equal installments from July 1, 2021 through December 31, 2021. These payments will be estimated using the most recent information that the IRS has and will be trued up on the 2021 tax return. However, if a taxpayer received more of an advance credit than they should have received, that amount will be subject to being repaid on the tax return. There will be some taxpayers at certain lower income ranges that will not have repayment required.
The American Rescue Plan has also temporarily expanded the Child and Dependent Care tax credits available. The amount of expenses that taxpayers can use to calculate their credit has doubled for 2021 and the applicable percentage of expenses that can be used in the calculation has increased as well.
Unemployment Benefits Extended
Many of the federally-subsidized benefits that were started with the CARES Acts have been continued until September 6, 2021. The National Law Review, a trusted source for legal analysis, says that the following will be continued: the federal unemployment benefit of $300/week (in addition to state benefits), the Pandemic Unemployment Assistance program (that provides unemployment compensation to self-employed individuals and others), and the extension of the Pandemic Emergency Unemployment Compensation to provide additional weeks of unemployment benefits to workers who have exhausted their state benefits.
Importantly, some taxpayers who received unemployment benefits in 2020 are allowed to claim $10,200 of unemployment benefits as tax-free. Recipients must have an AGI less than $150,000 (irrespective of filing status) and if their AGI exceeds this threshold they are not eligible to claim any of this income as tax-free. If taxpayers file jointly and both spouses received unemployment income, they could each claim this benefit for a total of $20,400 of tax-free unemployment compensation. However, the AGI for this limit is calculated with all income reported (including unemployment benefits). For example, if you have a married couple with earnings of $140,000, plus $15,000 of unemployment benefits for a total AGI of $155,000, they would not be eligible to claim $10,200 of the benefits as tax-free. If you qualify for this benefit, you may need to delay filing your 2020 return slightly to allow the IRS to update their system or if you filed your taxes already, you may need to file an amendment.
COBRA Subsidies and ACA Changes for Individuals
For individuals who have been involuntary terminated from employment, this legislation allows them to keep their existing health insurance, via COBRA, from April through September 2021 at no cost. The prior employer will pay these premiums and then be reimbursed through a refundable payroll tax credit.
This legislation also changed the income rates that taxpayers are required to pay for health insurance purchased through the ACA policies on health insurance exchanges. These reduced rates are in effect for 2021 and 2022 and reduce the amount out-of-pocket that taxpayers would need to pay. Per Kitces.com, this bill also included a special rule that would allow taxpayers who received at least one week of unemployment compensation in 2021 to be eligible for a better-than-normal ACA premium subsidy. However, many taxpayers will likely prefer to stay on their current health insurance plan, especially if they can take advantage of the COBRA subsidies discussed above.
Other Notable Provisions in the Bill
Student Debt Forgiveness: The bill does not include any student loan forgiveness, but it does provide that the forgiveness of student loan debt (public or private) is not taxable if forgiven in the years 2021-2025.
Employer Tax Credits: The Employee Retention Credit extended through 2021 and expanded to include additional businesses. The Families First Coronavirus Response Act was extended until September 30, 2021 to continue tax credits for employers who provided eligible leave to their employees.
Small Business Relief: Per The National Law Review, this bill also injected another $7.25 billion into the Paycheck Protection Program, but didn’t extend it beyond its current expiration date of March 31, 2021. It also established the “Restaurant Revitalization Fund” to be administered by the SBA and funded it with $28.6 billion.
Extended Federal Tax Return and Payment Due Date
The Internal Revenue Service announced on March 17, 2021 that the federal income tax filing due date for individuals for the 2020 tax year has been automatically extended from April 15, 2021, to May 17, 2021. This extension also applies to individual federal income tax payments due for the 2020 tax year; tax liability that is owed by individuals for the 2020 tax year can now be paid by May 17, 2021, without penalty or interest. It is important to note that this due date extension does not apply to first quarter 2021 federal estimated tax payments for individuals and those payments are still due by April 15, 2021. We are also waiting to hear if states and other municipalities will follow suit with the IRS and extend the filing and payment due date, as those filings and payments are currently due on April 15, 2021.
We expect additional legislation to come later this year and we will continue to keep you updated. Please contact us if you have any questions or if you would like to discuss your specific situation.
For additional details regarding the American Rescue Plan Act of 2021 for Small Businesses, please refer to: https://mybuckingham.com/insights/the-american-rescue-plan-act-of-2021-what-small-business-owners-need-to-know
Biden's American Rescue Plan COVID-19 Relief Package (natlawreview.com) https://www.natlawreview.com/article/american-rescue-plan-act-signed-details-latest-covid-19-relief-package
American Rescue Plan 2021: Tax Credit & Stimulus Check Rules (kitces.com) https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/
American Rescue Plan Act of 2021 | COVID Relief | Tax Foundation https://taxfoundation.org/american-rescue-plan-covid-relief/