Here’s the bottom line. The American Rescue Plan (ARP) offers provisions that can help taxpayers significantly as we continue to recover from the pandemic. Signed into effect by President Biden on March 11, the American Rescue Plan (ARP) includes critical tax provisions that include:
The federal government will provide a stimulus payment of $1,400 as an advance against a credit on their 2021 income tax returns. Individuals who are not eligible include the following:
- Non-resident aliens
- Individuals who are dependent upon others
- An estate or trust
A taxpayer is entitled to the payment/credit for him/herself as well as each dependent. Unlike the last round of stimulus payments, it is good for all dependents, not just children under 17. The payment will be based upon the 2019 return or the 2020 filing if IRS has already processed it.
Taxpayers are entitled to receive the stimulus based on certain thresholds, outlined below:
- Single filer adjusted gross income between $75,000 and $80,000
- Joint filers adjusted gross income between $150,000 and $160,000
No payment or credit will be issued for those with adjusted gross income above the upper threshold amounts. Checks are expected to begin being issued by the end of this month.
CHILD TAX CREDIT
For the 2021 tax year only, the Child Tax Credit will be increased to $3,600 from $2,000 for every child under 6. The credit will be $3,000 for children between the ages of 6 and 17.
These credits will be phased out when Modified Adjusted Gross Income (MAGI) exceeds $400,000 for joint filers and $200,000 for other filers. A separate phase-out will be implemented for the increased credit amount, which starts at lower-income threshold levels ($150,000 for joint filers, $75,000 for separate filers, and $112,500 head of household filers).
The Treasury is creating a program that will activate advance payments for the Child Tax Credit commencing July 1, 2021. This means that 50% of the credit will be paid to families before December 31, 2021. Payments will be based on the most recently filed return.
EXTENSION OF UNEMPLOYMENT COMPENSATION
The ARP provides an extension of the $300 per week payment of unemployment compensation through September 6, 2021. For the 2020 tax year, the first $10,200 in benefits will not be taxable for households earning less than $150,000.
Both spouses are entitled to consider $10,200 of their unemployment non-taxable. Thus, a total of $20,400 would be regarded as non-taxable.
CHILD AND DEPENDENT CARE ASSISTANCE: 2021 ONLY
- The credit is refundable
- The Fed has increased the credit amount from $3,000 to $8,000 for one child/dependent. The credit goes from $6,000 to $16,000 for two or more children/dependents
- The initial percentage for the credit is up from 35% to 50%
- The $15,000 initial phase-out level is now $125,000
- The 20% credit amount under current law is now expressed as a “phase-out percentage,” reducing the 20% credit where taxpayer AGI exceeds $400,000.
EMPLOYER-PROVIDED DEPENDENT CARE ASSISTANCE
For 2021 only, the limit on tax-free employer-provided dependent care assistance has been increased from $5,000 to $10,500 (50% for taxpayers filing married, separate). The ARP permits a plan amendment up until the last day of the plan year, so long as it is operated consistently with the updates as of the effective date of the changes.
EXTENSION OF SICK LEAVE PAY AND FAMILY MEDICAL LEAVE PAY CREDITS
Under the Families First Coronavirus Response Act (FFCRA), certain benefits were required to be provided for sick leave pay and family medical leave pay. These rules applied to employers, but large employers with 500 or more employees and certain small employers were excluded from these rules. The FFCRA funded these benefits through a dollar-for-dollar refundable credit against payroll taxes. The Consolidated Appropriations Act of 2021 permits employers to extend this program voluntarily through March 31, 2021.
ARP extends the rules for sick leave pay and family medical leave pay through September 30, 2021. However, be advised that the credits will not be allowed if there is perceived discrimination in favor of highly compensated employees, full-time employees, or based on tenure. The cap on family medical leave pay has been increased from $10,000 to $12,000.
EMPLOYEE RETENTION TAX CREDITS
The Employer Retention Tax Credit (ERTC) rules are considerably more lenient for 2021 and benefit a potentially larger group of employers. ARP has ruled to extend the ERTC through the last two quarters of 2021.
The ARP includes $28 billion of grants for bars and restaurants, providing up to $5 million per restaurant or $10 million per restaurant group. Five billion dollars is reserved for restaurants with 2019 gross receipts of less than $500,000.
Operating as a Small Business Association (SBA) grant program, monies may be used to offset expenses from February 15, 2020, through the end of 2021. These expenses include payroll, benefits, rent, utilities, cleaning, equipment, food, and other costs.
STUDENT LOAN FORGIVENESS
While ARP does not provide student loan forgiveness, it provides a classification for certain types of student loan forgiveness between December 30, 2020, and January 1, 2026, to be tax-free. This includes loans expressly for postsecondary educational expenses in which the loan is insured or guaranteed by the U.S. government, a U.S. state, territory or possession, an eligible educational institution, and certain private education loans.
FEDERAL MINIMUM WAGE
There are no changes within the ARP regarding the federal minimum wage.
The American Rescue Plan is an immense piece of legislation that will set the stage for tax provisions moving through 2021 and beyond.
There’s a lot to navigate here, so connect with C&B Accounting for expert advice on how it all affects you.