President Biden signed into law yesterday (Thursday March 11, 2021) the American Rescue Plan Act of 2021. This is the third major piece of tax legislation in the past twelve months. We are still unpacking the details, but below are some highlights.
For individuals and families:
- Economic Impact “Stimulus” Payments: The act includes a third round of EIP “stimulus” payments. This round will be $1,400 per person, up from $1,200 for adults and $500 per child for EIP 1, and $600 per person for EIP 2. Therefore, a family of four that qualifies will receive $5,600. Unlike the previous payments, all dependent children qualify, not just those under the age of 17. Also, the phase out income threshold starts at the same levels as before ($75,000 for single filers and $150,000 for married filers), but the phase out range is significantly narrower. More details on how EIP 3 will work in our next article.
- Increase in Child Tax Credit for 2021: The act increases the child tax credit from $2,000 to $3,000, and $3,600 for children under 6. It also increases the age of eligible children to 17, and makes the credit 100% refundable, which means taxpayers get a refund even if the credit exceeds their total tax bill. However, the additional child tax credit is subject to a lower phaseout threshold. Taxpayers over that threshold but under the existing threshold will get the current $2,000 per child.
- Child Tax Credit Advances: The act directs the IRS to estimate the taxpayers 2021 child tax credit and advance one half of the estimated amount to taxpayers from July to December 2021. If a taxpayer receives an advance payment that they ultimately do not qualify for, then they will have to pay those funds back. There will be an online portal available to taxpayers to opt out of the advances.
- Child and Dependent Care Credit: For 2021 only, the child-care credit is increased to a maximum of $4,000 for one child (up from $3,000), or $8,000 for two or more children (up from $6,000). In addition, the credit is fully refundable. However, taxpayers with household incomes over $400,000 can be phased out completely.
- Unemployment Benefits: The act makes the first $10,200 in unemployment benefits received in 2020 exempt from tax for taxpayers making less than $150,000 per year. Taxpayers who already filed their 2020 return and included all unemployment income in their taxable income may need to file an amended return.
- Advanced Premium Tax Credit: The act expands the premium tax credit available for the purchase of health insurance through healthcare.gov for 2021 and 2022. In addition, any taxpayer who received too much advanced premium tax credit in 2020 will not have to repay the excess amount. This provision effectively treats taxpayers who under-estimated their income when purchasing health insurance on healthcvare.gov more favorably than those taxpayers who correctly estimated or overestimated their income.
For businesses:
- Employee Retention Credit (ERC) Changes: The Act extends the life of the Employee Retention Credit (ERC) by making it available throughout 2021, and it expands it for certain start up businesses and “Severely Financially Distressed Employers”. Note that eligible employers may claim an ERC even if they received a PPP loan, but the same wages cannot be used for both PPP loan forgiveness and ERC Qualified Wages.
- Family and Sick Leave Credits: These credits compensate employers and self-employed taxpayers for payroll tax expenses associated with COVID related sick leave and family and medical leave. The act extends credits for paid sick leave to September 30, 2021.
More to come in the following days.