On March 11, 2021, President Biden signed the American Rescue Plan Act (“the Act”), a $1.9 trillion COVID-19-relief stimulus package.
The Act extends the unemployment benefits that were set to expire March 14, and provides expansive pandemic relief funding for individuals, businesses, and state and local governments, including numerous individual and family relief measures and tax benefits. See our blog post on Business and Nonprofit Benefits for more information.
INDIVIDUAL AND FAMILY PROVISIONS
Direct payments
The ARPA allocates funds for a third economic impact payment to qualifying Americans in the amount of $1,400 ($2,800 in the case of a joint return), with an additional $1,400 for each of the taxpayer’s dependents for such taxable year. New for this round of payments. eligible qualifying dependents include full-time students under the age of 24 and adult dependents.
The one-time stimulus payments are reduced for higher-income individual taxpayers and begin to phase out for individual taxpayers with an adjusted gross income (AGI) of $150,000 in the case of a joint return or surviving spouse, $112,500 for heads of household, and $75,000 for single filers. The IRS will base these amounts on the taxpayer’s 2020 tax return, or 2019 tax return if 2020 has not yet been filed.
You can check the status of your payment through the IRS – Get My Payment tool.
Unemployment benefits
Various pandemic-related unemployment assistance measures were set to expire on March 14, 2021, and have now been extended through Sept. 6, 2021. The Act extends the additional $300 per week Federal Pandemic Unemployment Compensation, the Pandemic Unemployment Assistance Program, and the Pandemic Emergency Unemployment Compensation Program. It also makes the first $10,200 of unemployment insurance received in 2020 nontaxable income for taxpayers. The federal tax break applies to individuals and married couples who made less than $150,000 in adjusted gross income in 2020.
States may not waive the tax, however. More than half currently levy a state income tax on unemployment benefits.
Health Insurance Premium Assistance
Another temporary provision in the Act that applies only to the 2021 and 2022 taxable years increases the subsidies for eligible taxpayers with coverage purchased on the Affordable Care Act (ACA) marketplaces by making the insurance indexing adjustments inapplicable to the 2021 and 2022 tax years, as well as reducing the applicable premium percentages that are considered when calculating the premium assistance amount. Also for 2021 and 2022, the Act further expands the number of taxpayers eligible for assistance by allowing households with taxable income over 400% of the poverty line to claim assistance.
COBRA Premiums
Individuals entitled to group health plan COBRA continuation coverage during the second and/or third calendar quarters of 2021 will not have to pay for that coverage if they did not voluntarily terminate their employment, and the employer sponsoring the plan (for a self-insured plan) or the insurer (for a fully-insured plan) will be entitled to claim a fully refundable federal payroll tax credit for the amount of the premiums the individual was not required to pay.
- The credit applies to premiums and wages paid after April 1, 2021.
- Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.
- Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.
- Under new Sec. 139I, continuation coverage premium assistance is not included in the recipient’s gross income.
Child tax credit
The Act expands the Child Tax Credit, with the intent of bringing more children out of poverty, allowing taxpayers with qualifying children who are 17 or younger to claim the credit for the 2021 taxable year (changed from 16 or younger). Additionally, the Act increases the credit amount for each qualifying child for the 2021 taxable year from $2,000 to $3,000 ($3,600 for qualifying children who have not attained age 6 as of the close of the calendar year in which the taxable year of the taxpayer begins). As with the stimulus payments discussed above, the credit begins to phase out at $150,000 for joint returns or surviving spouses, $112,500 for heads of household, and $75,000 in any other case.
The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.
Earned income credit
The Act includes a provision intended to strengthen the Earned Income Tax Credit (EITC) for the 2021 taxable year for individuals with no qualifying children by generally allowing such taxpayers age 19 and older (previously age 25 and older) to claim the credit. For the 2021 taxable year, the Act eliminates the current maximum age of 64 for receiving the EITC for such taxpayers.
For taxpayers with no qualifying children in the 2021 taxable year, the provision also increases both the credit percentage and phase-out percentage from 7.65% to 15.3%, as well as increases the EITC amount from $4,220 to $9,820 and the phase-out amount from $5,280 to $11,610.
- The credit would be allowed for certain separated spouses.
- The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
- Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.
Child and dependent care credit
Another temporary provision in the Act, applicable only to the 2021 taxable year, increases the credit for dependent care assistance employment expenses. In the case where the taxpayer has one dependent, the amount increases from $3,000 to $8,000, and, in the case where the taxpayer has two or more dependents, from $6,000 to $16,000. The Act increases the percentage of these expenses that may be claimed as a credit from 35% to 50%, and begins to phase-out when an individual’s AGI exceeds $125,000. (There are additional phase-out guidelines for “high income individuals,” those with AGI of more than $400,000; see the Act for details.) Also for the 2021 taxable year, the credit is refundable.
For taxpayers who receive reimbursements from their employer, there is an exclusion from an individual’s gross income of amounts paid by an employer for dependent care assistance; the Act increases this exclusion amount from $5,000 to $10,500 (or from $2,500 to $5,250 for a separate return filed by a married individual), and the change only applies to the 2021 taxable year.
Student loan forgiveness
As part of student loan reform, the Act excludes from gross income certain student loans discharged after Dec. 31, 2020, and before Jan. 1, 2026. The provision applies to student loans provided by the federal government, state governments, and eligible educational institutions, as well as certain private education loans as defined in the Truth in Lending Act.
Family and sick leave credits
- The credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, would be extended to Sept. 30, 2021.
- The bill increases the limit on the credit for paid family leave to $12,000.
- The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
- The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.
- The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
- The credits are expanded to allow 501(c)(1) governmental organizations to take them.
Rental assistance
There is $25 billion for emergency rental assistance, including $5 billion for emergency housing vouchers for people experiencing homelessness, survivors of domestic violence and victims of human trafficking.
Support for low-income families
The ARPA includes $4.5 billion for the Low Income Home Energy Assistance Program, known as LIHEAP, to help families with home heating and cooling costs. One provision would give the agriculture secretary the authority and funding to temporarily boost the value of cash vouchers for the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) up to $35 per month for women and children for a four-month period during the pandemic.
There is also $1.4 billion in funding for programs authorized under the Older Americans Act, including support for nutrition programs, community-based support programs and the National Family Caregiver Support Program.
The bill provides $37 million to the Commodity Supplemental Food Program for low-income seniors.
Questions
In a series of upcoming e-Alerts and webinar(s), we will provide you with more information on how you can make the most of the benefits available to you, your family and/or your business. Please contact your Warady & Davis LLP advisor with your questions at 847-267-9600; info@waradydavis.com.
You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more. This information is updated regularly.