The following is a brief summary of the American Rescue Plan Act of 2021, which was signed into law on March 11, 2021.
Economic Impact Payments (aka Stimulus Round 3):
- Receive a 2021 refundable tax credit of $1,400 ($2,800 if filing joint) plus $1,400 for each dependent (no age limit) based on your 2019 or 2020 adjusted gross income.
- If your initial payment is based on your 2019 return and the 2020 return shows you have a higher amount, you will receive another payment for the additional amount.
- Planning Tip: Since the EIP is based on your 2019 or 2020 return, consider when you will file your 2020 return. If your income increased in 2020 but your 2019 income qualifies you for the EIP, wait to file your 2020 tax return until after you received your payment.
Tax-Free Unemployment Benefits (For 2020 only):
- For the 2020 tax year only, if your adjusted gross income is less than $150,000 you (and your spouse, if they also received unemployment benefits) receive the first $10,200 of unemployment benefits tax-free.
- If your adjusted gross income is more than $150,000 than all of your unemployment benefit is taxable.
- If you have already filed your 2020 tax return, the IRS strongly urges taxpayers to not file amended returns right now. The IRS will provide more details coming soon.
- Planning Tip: The income limit for the tax-free unemployment provision is “per taxpayer.” Therefore, if filing a joint return results in fully taxable unemployment benefits because you exceed the $150,000 income limit, consider a filing status change to “married filing separate” for 2020.
Unemployment Benefits Extended:
- The additional $300 per week of Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation is extended to September 6th, 2021.
Child Tax Credit (For 2021 only):
- The child tax credit (CTC) is fully refundable
- The credit has increased to $3,000 per child ages 6 through 17 and $3,600 per child ages 0 to 5.
- The increased CTC (over the $2,000 prior amount) phases out when modified adjusted gross income exceeds $75,000 (single, MFS), $150,000 (MFJ, QW), and $112,500 (HOH). Once the increased CTC is phased-out, the $2,000 per qualifying child still applies under the previous thresholds.
- 50% of the 2021 credit will be advanced from July 2021 to December 2021. At this time it is unknown if an ‘opt-out’ option will be made available.
Dependent Care Credit (For 2021 only):
- The child and dependent care credit are fully refundable.
- Qualified expenses used for the credit have increased to $8,000 for one child and $16,000 for two or more children.
- The maximum credit rate increases to 50% of your adjusted gross income if it is less than $125,000 with a credit percentage phase-out up to $438,000.
Dependent Care Assistance (For 2021 only):
- Your maximum employer-dependent care tax-free benefit increases from $5,000 to $10,500 (for 2021 only).
- Planning Tip: In some cases, it may be more beneficial to take the 2021 increased dependent care credit instead of the tax-free employee benefit.
Earned Income Credit (For 2021 only):
- If you do not have children the credit amount increases, the minimum age is lowered to age 19 (from age 25), and the maximum age is eliminated (can be over 65 years old).
- Starting in the 2021 tax year, you can get EIC if you have less than $10,000 of investment income (increased from $3650) or if you are married and file a separate return in certain circumstances.
- 2019 earned income can be substituted if higher than 2021 earned income. Reminder: you can also use your 2019 income on your 2020 tax return to increase your credit.
Premium Tax Credit (2020 only):
- For the 2020 tax year, if you received too much advance premium tax credit for your health insurance, you do not need to pay it back.
- If you have already filed your 2020 tax return, the IRS strongly urges taxpayers to not file amended returns right now. The IRS will provide more details soon.
Premium Tax Credit (2021 and 2022 Only):
- For the 2021 and 2022 tax years, the amount your family is expected to contribute towards your health insurance is reduced and households over 400% of the federal poverty line are potentially eligible for a premium tax credit.
Paid Sick and Family Leave Tax Credits:
- Your business can receive a 100% tax credit for eligible paid sick leave and family leave wages. This credit has been extended through September 30th, 2021.
- Three additional covered reasons for paid leave related to the COVID-19 vaccination were included in the new law.
- The equivalent refundable tax credits for self-employed individuals now apply through September 30th, 2021.
Employee Retention Credit:
- Businesses can receive a 70% tax credit for certain wages paid to employees through December 31st, 2021 if your business’s operations are suspended by government order, if you had a substantial decline in gross receipts from 2019, or if you are a recovery start-up business (started after February 15th, 2020 with less than $1 million in gross receipts). This credit has been extended through December 31, 2021.
COVID-19 Benefit Taxation:
- If you received a targeted EIDL advance or a restaurant revitalization grant, the benefit is tax-free to you.
Form 1099-K Reporting:
- Third-party settlement organizations (like Paypal) that process your electronic payments MUST report them to the IRS on Form 1099-K if they exceed $600 (no matter how many transactions).
- Transactions are only reported if you receive funds to provide goods or services for the payment (not for payments from family or friends).
- Your business may be required to subsidize 100% of the COBRA cost if an employee receives COBRA due to a reduction in hours or involuntary termination.
- Your business will receive a 100% payroll tax credit to offset the cost of the subsidy.
- Employees who left employment voluntarily are not eligible for this benefit.
Excess Business Losses:
- The Tax Cuts and Jobs act prevents you from using large business losses (more than $250,000, or $500,000 if filing joint) against non-business income for the tax years 2018 through 2025.
- The CARES Act suspended this for tax years 2018 through 2020.
- The new law extends the Excess Business Loans rule through the tax year 2026.
Student Loan Forgiveness Exclusion:
- For tax years 2021 through 2025, any discharge of student loan debt may be excluded from taxable income, as long as there is no provision for the student to provide services to the lender.
Paycheck Protection Program (PPP)
- The new law appropriates additional funds for the PPP and makes some minor modifications.
If you have any questions about how The American Rescue Act may impact you or your business, please call us at (616) 957-2055.