The American Rescue Plan Act of 2021

The American Rescue Plan Act of 2021 (ARP) includes some major tax changes that impact individuals and businesses.

Round Three of Stimulus Payments

Individuals will receive a $1,400 payment ($2,800 for couples). In this round, dependents, including adult dependents, also receive $1,400.

Similar to the last two rounds, payments begin to phase out when your adjusted gross income (AGI) exceeds $75,000 for singles or $150,000 for married couples filing jointly. However, the total phase-out comes much sooner. Payments disappear entirely once your adjusted gross income reaches $80,000 for single filers or $160,000 for married couples filing jointly.

Like prior rounds, the IRS bases payments on your most recently filed return. If you are eligible for a payment in 2021 but don’t receive one, you can claim it as a credit on your 2021 tax return.

Expanded Child Tax Credit

For 2020 tax returns, the child tax credit is worth $2,000 per dependent child under age 17. The credit begins to phase out for taxpayers with adjusted gross income (AGI) above $200,000 for single filers or $400,000 for married couples filing jointly. If the credit reduces your tax bill below zero, up to $1,400 of it is refundable.

The ARP temporarily expands the child tax credit for 2021. First, it allows 17-year-old dependents to qualify for the credit. Second, it increases the credit to $3,000 per child ($3,600 per child under age 6) for some – but not all – families. The increased credit begins to phase out for single taxpayers with AGI over $75,000 and joint filers once their AGI exceeds $150,000. For taxpayers who live in the U.S. for more than half of the year, the credit is now fully refundable.

Finally, it requires the IRS to pay half of the credit to eligible taxpayers in advance by sending periodic payments (mainly in the form of direct deposits) to families from July 2021 to December 2021. The IRS will base eligibility for these advance payments on your most recently filed tax return.

What happens if your family circumstances change during the year and you have more or less income than shown on your most recently filed return? The IRS is developing an online portal to allow taxpayers to update their income, marital status and number of dependents. You may also be able to opt out of the advanced payments on the portal and instead take the full child tax credit on your 2021 tax return.

Child and Dependent Care Credit

For 2021, the maximum Child and Dependent Care Credit rises from $1,050 for one child and $2,100 for two or more children to $4,000 per child, with a maximum of $8,000 for multiple dependents. 

The credit will also be fully refundable, meaning you can get a refund even if it’s more than what you owe for 2021. The credit completely phases out once your AGI exceeds $440,000.

Tax-Free Unemployment Benefits

The Act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers with income up to $150,000. The AGI limit applies to all filing statuses: joint, head of household and single.

Married couples who both received unemployment benefits can each exclude up to $10,200 of unemployment compensation, but only if their combined AGI doesn’t exceed the $150,000 level. There is no gradual phase-out above $150,000 – if your AGI is $150,001, then all unemployment benefits are taxable.

If you’ve already filed a tax return for 2020 and qualify for the unemployment benefit exclusion, the IRS asks that you don’t file an amended return just yet. The agency will issue additional guidance for affected taxpayers. That could mean special instructions for filing an amended return or having the IRS automatically adjust taxpayers’ reported taxable income and issue refunds to people who already filed.

Exclusion of Student Loan Forgiveness

The ARP includes a provision to exclude the forgiveness of certain student loans from taxable income. This applies to loans forgiven between December 31, 2020, and January 1, 2026. Normally, cancellation of debt is treated like income and subject to taxes. 

While the ARP doesn’t provide any blanket student loan forgiveness, if Congress can pass loan forgiveness legislation before the exclusion runs out, it won’t count toward taxpayers’ taxable income.

Extension of the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a refundable credit that businesses can claim on qualified wages paid to employees. Currently, the credit is worth up to 70% of qualified wages (up to $10,000 per employee) per quarter. The CARES Act initially applied this credit to wages paid between March 13 and December 31, 2020. This was later extended to cover the first two quarters of 2021.

The ARP expanded it through December 31, 2021. It also allows certain startup businesses – defined as those established after February 15, 2020, with annual receipts up to $1 million – to qualify for the credit.

As of January 1, 2021, employers are eligible to claim the ERTC if they were operating a trade or business during January through June of 2021 and experienced either:

1. A full or partial suspension of operations because of a government order due to COVID-19, or
2. A decline in gross receipts during a 2021 calendar quarter, where gross receipts for that quarter are less than 80% of gross receipts for the same quarter in 2019.

Paid Sick and Family Leave

The ARP modifies and extends the paid sick and family leave credits originally put in place under the Families First and Coronavirus Relief Act (FFCRA) last year.

Employers who provide paid sick and family leave can receive a 100% tax credit for up to 10 days of paid sick leave, up to $200 or $511 per day (depending on the reason for the leave). Employers can also receive a 100% tax credit (up to $200 per day and $12,000 in the aggregate) for emergency family leave. 

Self-employed individuals also qualify to claim a credit for sick and family leave. The ARP increased the number of days a self-employed individual can use to calculate their credit from 50 days to 60 days. These credits are extended through September 30, 2021.The changes we’ve listed here aren’t a complete look at the $1.9 trillion stimulus bill – just those most likely to impact our clients.