On March 11th, 2021, President Joe Biden signed the American Rescue Plan Act of 2021 into law, which will provide $1.9 trillion of economic stimulus in response to the continued effects of the COVID-19 pandemic. To help digest, below are some of the highlights we thought you would find beneficial. As always, this information is purely for education purposes and we highly encourage speaking with your tax professional to determine how the changes apply to you.
$1,400 Direct Payments to Individuals
- Eligible taxpayers will automatically receive an Economic Impact Payment of up to $1,400 for individuals or $2,800 for married couples, plus $1,400 for each dependent with phaseouts beginning at $75,000 AGI for single filers, $112,500 for head of household, and $150,000 for married couples filing jointly.
- Eligibility is calculated with the latest filed tax return (either 2019 or 2020).
- Once 2020 income tax returns are filed, Direct Payment amounts might be adjusted depending on the 2020 adjusted gross income, but overpayments will not be subject to ‘claw back’ provisions.
- Important: Deadline for submitting 2020 tax return for Direct Payments qualification is September 31st, 2021. For those that file late in October, please make sure to plan accordingly.
Child Tax Credit Enhancement
- Increases the Child Tax Credit from $2,000 to $3,000 per child for the 2021 tax year.
- Increases even further for children under age 6 (as of 12/31/2021) to $3,600.
- Credit amount decreases for those that earn over $112,500 as Head of Household and $150,000 for joint filers.
- Increases applicable age from under 17 to under 18.
- Fully Refundable Tax Credit (previously, up to $1,400 refundable).
- Subject to claw back provision if 2021 income is above the stated threshold.
Child and Dependent Care Credit Enhancement
- Increases maximum amount of eligible expenses for credit calculation from $3,000 to $8,000 for one child and $6,000 to $16,000 for two or more qualifying children.
- Increases income phaseout threshold from $15,000 to $125,000 for joint filers.
- Families earning between $125,000 and $440,000 in AGI will earn a partial credit.
- Increases the applicable credit from $1,050 to $4,000 for one child ($2,100 to $8,000 for multiple children).
COBRA Subsidies
- Allows those that have been involuntarily terminated due to COVID-19 to maintain their existing health insurance, via COBRA, from April 2021 through September 2021 at a cost of $0.
- Premiums for COBRA coverage are to be paid by the taxpayer’s former employer and will be reimbursable for the employer in the form of a refundable payroll tax credit.
- Qualifying individuals will have up to 90 days after receipt of notice from their group health plan to change their coverage option if the new health care coverage meets the
- COBRA minimum requirements and is no more expensive than the coverage received with the employer.
Reduction in Income Limitations for Healthcare Subsidies
- For clients who are retired or are planning on retiring before Medicare age (65) this change could be impactful.
- Under the Affordable Care Act, subsidies for health insurance were limited to those with modified adjusted gross income (MAGI) below 400% of the federal poverty level ($69,680 for a married couple). Under the American Rescue Plan, this cutoff is waived for 2021 and 2022, and has been amended to limit premiums to 8.5% of MAGI.
- To qualify, insurance must be purchased through Healthcare.gov before the end of the open enrollment period on May 15th .
- We recommend working closely with a health insurance agent, as the website has yet to reflect these changes, and there may be other guidelines or timelines to be aware of.
Employee Retention Credit Changes
- Credit that encourages business to keep employees on payroll, providing a tax credit of 50% up to $10,000 in wages per employee paid by an eligible employer.
- Credit extended throughout 2021 (previously set to end June 30th, 2021).
- Expands to businesses established after February 15th, 2020 with annual receipts of up to $1,000,000 and to businesses whose revenues are down by 90%.
Extension of Limitation on Excess Business Losses
- Allows taxpayers to offset business losses up to $250,000 ($500,000 for joint filers) against non-business income.
- This provision was set to expire at the end of 2025 but is now extended through 2026.
- If you have any additional questions, we recommend contacting your tax professional on how the changes to the American Rescue Plan Act affects your tax situation.
References
Department of the Treasury. (2021, March 18). FACT SHEET: The American Rescue Plan Will Deliver Immediate Economic Relief to Families. Retrieved from www.treasury.gov: https://home.treasury.gov/system/files/136/Fact-Sheet-03-18-21.pdf
IRS. (2021, March 18). COVID-19-Related Employee Retention Credits: General Information FAQs. Retrieved from IRS: https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-general-information-faqs
Jeffery Levine, C. C. (2021, March 10). The American Rescue Plan Act Of 2021: Tax Credits, Stimulus Checks, And More That Advisors Need To Know! Retrieved from www.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/#:~:text=Section%209611(b)%20of%20the,%2C%20through%20December%2031st%2C%202021.