Tax Provisions of the American Rescue Plan Act
The following is a summary of our top ten list of tax provisions in the recently passed American Rescue Plan Act. The first listed change to the Premium Tax Credit and the provisions for Unemployment Benefits and the EIDL grant are effective for 2020. The others are effective beginning in 2021.
Premium tax credit (effective in 2020)
For 2020 taxpayers who received too much in advance premium tax credits will not have to repay the excess amount.
For 2021 and 2022 the act expands the premium tax credit by changing the applicable percentage amounts. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.
Unemployment benefits (effective in 2020)
The act retroactively makes the first $10,200 in unemployment benefits tax-free in 2020 for households with income of less than $150,000.
Economic Injury Disaster Loan (EIDL) Grants (effective in 2020)
The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants.
Recovery rebate tax credit and economic impact “stimulus” payments
As with last year’s economic impact payments, the IRS will send out advance “stimulus” payments of this 2021 recovery rebate tax credit. The act provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each qualified dependent for 2021, including college students and qualifying relatives who are claimed as dependents.
For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.
The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
COBRA continuation coverage
The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The act creates a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount. The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30.
A new 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. The continuation coverage premium assistance is not includible in the recipient’s gross income.
Child tax credit
The act expands the child tax credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.
The act increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.
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. The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.
The taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase their tax liability by the excess of the advance payment amount over the actual credit allowed. But taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.
Child and dependent care credit
The act makes various changes to the child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
Student loans
The act amends Sec. 108(f) to specify that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.
Family and sick leave credits
The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave. The act increases the limit on the credit for paid family leave to $12,000 and makes other changes to the credit.
Employee retention credit
The act extends this tax credit through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) and it allows eligible employers to claim a credit for paying qualified wages to employees.