On March 11, 2021, President Biden signed the American Rescue Plan into law. This $1.9 trillion COVID relief bill contains several tax provisions. Here are the highlights for individuals and businesses.
Individuals and Families
The act includes a $1,400 stimulus payment to taxpayers. This stimulus payment is subject to income limitations, with the amount decreasing for individuals making over $75,000 ($112,500 for heads of households and $150,000 for joint filers). Individuals making over $80,000 ($120,000 for heads of households and $160,000 for joint filers) will not receive a stimulus payment.
Your 2020 adjusted gross income will determine your income eligibility for the stimulus payment, but 2019 amounts will be used in lieu of 2020 amounts for taxpayers who haven’t filed their 2020 returns. However, as with the prior pandemic stimulus payments, if you don’t receive the stimulus money you’re entitled to, the amount will be creditable when preparing your 2021 returns in 2022.
Child Tax Credit
As part of the act, for 2021 only, the child tax credit will increase from $2,000 per child to $3,000 per child (and $3,600 for a child under the age of six). For 2021 only, this credit will be fully refundable. In a normal taxable year, only $1,400 of the usual $2,000 credit is refundable. The act also increased the maximum age for qualifying children to include 17-year-olds.
This credit is subject to income limitations, with the amount of the credit decreasing for individuals making over $75,000 ($112,500 for heads of households and $150,000 for joint filers). There will be a $50 reduction of the credit for every $1,000 of modified adjusted gross income above the income limitations until the credit reaches its usual amount of $2,000. From there, the credit remains $2,000 unless the taxpayer makes more than $400,000 as a joint filer or $200,000 for all other filers, in which case they are not eligible for the credit.
In the second half of 2021, taxpayers will start to receive early payments of their child tax credit for 2021. These payments will amount to half of your total child tax credit amount for this year. You’ll receive the remaining amount of your credit when you file your 2021 returns in 2022.
Prior tax returns will determine your eligibility for the credit. If you receive the credit in error, such as receiving a credit for a child who recently turned 18, there is a safe harbor for taxpayers. This safe harbor would protect you from making repayments. The safe harbor is available for single taxpayers with a modified adjusted gross income of $80,000 or less ($100,000 for heads of households and $120,000 for joint filers).
Earned Income Tax Credit
The Earned Income Tax Credit helps low- to moderate-income workers and families get a tax break. As part of the act, the credit expanded in both amount and age of eligible taxpayers, along with other improvements.
Dependent Care Assistance
The act increased the child and dependent care credit for 2021. The credit is now equal to 50% of qualified expenses for the care of a qualifying individual. This is up from 35% in normal taxable years.
The amount of eligible expenses for 2021 increased to $8,000 for one individual and $16,000 for two or more individuals. The credit is also fully refundable for the 2021 taxable year.
This credit is subject to income limitations. There is a one-percentage point reduction for each $2,000 of adjusted gross income over $125,000. The percentage reduction stops at 20% until a taxpayer’s adjusted gross income reaches $400,000, in which case the percentage reduction continues to 0%.
In addition to this credit, the maximum exclusion of employer-provided dependent care assistance increased for 2021 to $10,500. This is double the maximum exclusion under the current law.
The enhanced $300 weekly unemployment relief made available in early pandemic relief bills is now in place until September 2021. The act also makes the first $10,200 of unemployment relief received in 2020 exempt from tax for households with less than $150,000 of income.
Exclusion of Forgiven Student Loans
Newly expanded exclusions were included in the act for forgiven student loan amounts. While the bill doesn’t provide student loan forgiveness, it states that student loan forgiveness issued between December 30, 2020 and January 1, 2026 will not be taxable to the recipient.
Paid Sick and Family Leave Credits
In the earliest days of the pandemic, Congress passed the payroll tax credit for employers who provided paid sick and family leave for time off to recover from or care for someone with COVID-19. Under the new act, the applicable period for that credit now extends to September 30, 2021. The act also increased the limit on applicable wages from $10,000 to $12,000, effective April 1, 2021.
Employers can now use the credit for the time employees use to take off to receive the COVID-19 vaccine or recover from vaccine-related illness. The ten-day per employee limitation on claiming the credit will also reset as of April 1, 2021.
Employee Retention Tax Credit
The act extended the payroll credit for employee retention through the end of 2021 from the original expiration of June 30, 2021.
Retirement Plan Funding
The act dedicated funding to the multi-employer union pensions that are in the most danger of failing. Minimum contributions decreased for single employer pension plans and various other changes eased certain restrictions.
Other Tax Relief
COBRA Premiums for Laid Off Workers
Under the act, COBRA premiums are 100% subsidized by the government for employees who lost their jobs because of the pandemic, along with their covered relatives, through September 30, 2021.
Tax Treatment of COVID Relief
Targeted Economic Injury Disaster Loans (EIDL) and Restaurant Revitalization Grants received from the Small Business Administration will not be subject to income tax. The exclusion will not result in the denial of a deduction reduction of tax attributes or denial of an increase in basis.
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