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American Rescue Plan Act is Passed

On March 11, 2021 – H.R. 1319, the American Rescue Plan Act (ARPA) of 2021 was signed into law. The ARPA will provide financial relief of approximately $1.9 trillion to individuals, businesses, not-for-profit organizations, and state and local governments during the pandemic. We want to highlight several tax items that will affect federal income taxes for some people in 2020 and 2021.
 
Third Economic Impact Payment (EIP)
·     Eligible individuals will receive a third economic impact payment (EIP) of $1,400 ($2,800 for married couples) and $1,400 for each qualifying dependent. 
·     Qualifying individuals over 16 are included with this additional EIP.
·     Please note that the income caps for receiving this third EIP have been greatly reduced from the caps that applied to prior EIP payments. Unless you have already filed your 2020 return, this EIP payment will normally be based on your 2019 tax return.
 
Unemployment Provisions
·     For those collecting unemployment benefits, the federal government is providing an additional $300 in weekly benefits through September 6, 2021.
·     Up to an additional 29 weeks will be provided to those who exhaust their state unemployment benefits.
·     The first $10,200 in unemployment benefits will be tax-free in 2020 for taxpayers earning less than $150,000 per year. If both spouses received this benefit in 2020, the amount for married couples is $20,400.
·     Additional coverage for many who would not otherwise qualify, such as independent contractors and part-time workers, will be available (or provided).
 
Child Tax Credit (CTC)
·     In 2021, the credit now includes qualifying children under the age of 18, and for eligible taxpayers, the amount has been increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6 at year-end). 
·     This increased credit amount will phase out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others. 
·     The credit will decrease by $50 for each $1,000 of income over those limits.
·     The federal government is anticipating that up to 50% of the tax credit will be advanced, via payments that will be made directly to the taxpayer from July through December 2021.Treasury is to work out the details.
·     If your income is over the threshold and you are ineligible to claim an increased CTC for 2021, you may be able to claim the regular CTC of up to $2,000, subject to the existing phase out rules.
 
Earned Income Tax Credit (EITC)
·     There are special rules for certain people without qualifying children for 2021 that increase the credit available.
·     For 2021 only, the applicable minimum age has been lowered to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age has now been removed.
·     Taxpayers may elect to use their 2019 earned income if it is more than their 2021 earned income.
·     Various other criteria are much easier to meet for 2021 and future years.
 
Child and Dependent Care Credit
·     For most taxpayers, this credit will be refundable for 2021 if it exceeds tax liability.  
·     The credit is for taxpayers with AGI of $125,000 or less, with the maximum amount of the credit for 2021 of $4,000 for one qualifying child or dependent ($8,000 for two or more qualifying children and dependents).
·     The credit is subject to phaseout at higher income levels.
 
Premium Tax Credit
If a taxpayer received too much in advance premium tax credits in 2020, they will not be required to pay back the excess amount. Also, by special rule, a taxpayer who received, or has been approved to receive, unemployment compensation for any week during 2021 is treated as an applicable taxpayer.
 
Health Insurance
·     Individuals who have lost their job and qualify for health insurance under the COBRA program are eligible for the federal government to pay the entire COBRA premium from April 1, 2021 through September 30, 2021.
·     Taxpayer is treated as an applicable taxpayer for the purposes of the premium tax credit if they receive unemployment compensation in 2021. Their household income is treated for purposes of deciding the amount of the credit.
·     Taxpayers who purchased their own health insurance through a government exchange may be eligible for a reduced cost through December 31, 2022.
 
Forgiven or Cancelled Student Loans.
If a student loan was forgiven or cancelled, between the dates of January 1, 2021 and December 31, 2025, the dismissed amounts are not included as taxable income.
 
Relief for Businesses
·     Small Business Administration (SBA) is advancing loans to eligible small businesses for targeted economic injury disaster. The advances are not to be shown as taxable income. No deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
·     Qualifying restaurants are able to receive restaurant revitalization grants from the SBA. These grants will not be included as taxable income. No deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
 
Family and Sick Leave Credits
·     Credits for paid sick leave, paid family leave and special rules related to tax on employers have been extended to September 30, 2021.
·     Credit for paid family leave has been increased to $12,000.
·     Self-employed individuals are now able to take 60 days when calculating the qualified family leave equivalent amount for self-employed individuals.
·     Paid leave credits for leave due to a COVID-19 vaccination are permissible.
·     On March 31, 2021, the limit for the overall number of days taken into account for paid sick leave will be reset.
·     501(c)(1) governmental organizations are allowed to use credits.
 
Employee Retention Credit
·     This credit allows eligible employers to claim a credit for paying qualified wages to employees has been extended through the end of 2021.
·     There are other generous provisions for taxpayers who meet certain criteria.
 
Housing
·     State and local governments will receive additional monies to provide emergency rental and utility assistance through December 31, 2021.
·     Funds have been allocated to help homeowners with mortgage payments and utility bills.
·     Money has been allotted to assist the homeless.
 
Other Business Provisions
·     Increased exclusion for employer-provided dependent care assistance increase for 2021;
·     Exclusion for EIDL Advances;
·     Exclusion for restaurant revitalization grants;
·     Expanded limit on compensation for public companies; and
·     Extension of limitation on excess business losses.
 
Please click here to read more in detail about these provisions.
 
Sources: AICPA, American Rescue Plan Act Provides Relief to Individuals and Businesses
              American Rescue Plan Act passes with many tax components, Journal of Accountancy 
              H.R. 1319 – American Rescue Plan Act of 2021