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American Rescue Plan: Provisions for Individuals

As you may know, President Biden recently signed the $1.9 trillion American Rescue Plan Act of 2021 (ARPA). AAFCPAs has outlined below key provisions for individuals & families.

Direct Checks

The package includes $1,400 Recovery Rebate payments (also known as stimulus checks) for adults and their dependents.

As with prior stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. ARPA provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each qualifying dependent for 2021, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.

For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and will become completely phased out once AGI reaches $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. For taxpayers who file as a head of household, the phaseout will begin at an AGI of $112,500 and end at AGI of $120,000.

ARPA uses the 2019 AGI to determine eligibility unless the taxpayer has already filed a 2020 return.

Child Tax Credit & Dependent Care Tax Credit

The Child Tax Credit will be increased to up to $3,600 for each child under 6, up from $2,000 per child. The credit is $3,000 per child for children ages 6 to 17.

ARPA also bolsters the tax credits that parents receive to subsidize the cost of child care this year. The current credit is worth 20-35% of eligible expenses, with a maximum value of $2,100 for two or more qualifying individuals. ARPA increases that amount to $4,000 for one qualifying individual or $8,000 for two or more. ARPA also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021 (up from $5,000).

ARPA provides that taxpayers may receive the credit in advance of filing a return. The credit is fully refundable for 2021.

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 will estimate taxpayers’ Child Tax Credit amounts and make periodic payments, which are expected to run from July through December 2021.

Taxpayers, in general, will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase taxable income by the excess of the advance payment amount over the actual credit allowed. However, 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.

The IRS will 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.

COBRA Continuation Coverage

ARPA provides a COBRA continuation coverage premium assistance credit for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The credit is allowed against the 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 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 then ineligible for the health coverage tax credit.

Continuation coverage premium assistance is not included in the recipient’s gross income.

Changes to Health Insurance

The Affordable Care Act is expanding, which is a development that will largely benefit middle-income individuals and families since lower-income Americans generally qualify for Medicaid.

The relief legislation expands the subsidies for buying health insurance, thus, a 64-year-old earning $58,000 would see monthly payments decline to $412 from $1,075 under current law, according to the Congressional Budget Office.

$10,200 Unemployment Tax Break

ARPA reduces (or eliminates) the taxes workers owe on jobless benefits they received in 2020.

The Act waives federal taxes on an individual’s first $10,200 of unemployment benefits collected last year. Married couples who file a joint tax return would not be taxed on the first $20,400 of unemployment income.

Some states may not waive the tax, however. More than half of US states currently levy a state income tax on unemployment benefits.

The federal tax break applies to individuals and married couples who made less than $150,000 in adjusted gross income in 2020.

Unemployment Benefits Extended

ARPA increases the duration of benefits offered through temporary pandemic relief programs.

Aid would end Sept. 6 as opposed to March 14, an extension of almost six months.

Those programs include Pandemic Unemployment Assistance (PUA) for self-employed, gig, and other workers who do not qualify for state-level assistance, and Pandemic Emergency Unemployment Compensation (PEUC), which pays extra weeks of state benefits to the long-term unemployed.

PUA recipients would receive a maximum of 79 weeks of benefits, up from the current 50-week limit. PEUC recipients may receive up to 53 weeks of benefits instead of 24.

Benefit recipients will also receive an extra $300 a week through Sept. 6.

State unemployment benefits replaced about 38% of pre-layoff wages for workers, on average, in the third quarter of 2020, according to Labor Department data. An extra $300 a week would raise that wage replacement to 74%.

Miscellaneous Tax Provisions

Earned Income Tax Credit

ARPA makes several changes to the Earned Income Tax Credit, including introducing special rules for individuals with no children. For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.  ARPA increases the amount of the Earned Income Tax Credit for adults without children from $543 to $1,502. ARPA also takes steps that loosen the eligibility requirements for these credits and makes them refundable.

The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.

The credit would be allowed for certain separated spouses.

The threshold for disqualifying investment income would be raised from $2,200 to $10,000.

Premium Tax Credit

The Act expands the premium tax credit for 2021 and 2022 by changing the applicable percentage amounts. Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. 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.

Student Loans

The Act specifies 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.

AAFCPAs’ COVID-19 Task Force is dedicated to following emerging legislation and FAQs, understanding how this impacts our clients, and educating our 240+ person team on opportunities for proactive outreach.

If you have questions, please contact Brittany Besler, MBA, CPA, Esq. at 774.512.9001, bbesler@nullaafcpa.com; or your AAFCPAs Partner.

About the Author

Brittany Besler
Brittany possesses a unique combination of tax, legal, and business backgrounds, and is a valuable member of AAFCPAs’ Tax practice. She provides tax planning, research, and compliance solutions for corporations, partnerships, nonprofits, individuals, estates & trusts. Brittany advises businesses and individuals on various federal, state, local and foreign tax-related issues, including counseling clients on the consequences of new and updated tax laws. She assists clients in the creation of appropriate and optimal organizational structures, and advises on tax planning and tax exemption compliance. She advises newly-formed and well-established nonprofit clients on meeting compliance requirements of various government agencies, including the IRS rules on fundraising and political activities.