The American Rescue Plan Act for 2021

The American Rescue Plan Act for 2021

Posted By FAS Team

 

The American Rescue Plan Act for 2021 was signed into law last week and the FAS team has compiled a summary of relevant provisions.  While there are some similarities to the Cares Act and other COVID related relief bills passed in 2020, stimulus payments for instance, there are significant differences on who will receive benefits under the bill.  Income limitations for many benefits were curtailed as compared to the prior bills.  However, in some areas definitions were expanded to be more inclusive.  Unfortunately (or luckily), you may find yourself in an income situation where you will experience no benefit from the bill.  If this is the case, you may have adult children or others you know who stand to benefit greatly and we encourage you to share this summary with them.

 

American Rescue Plan Act of 2021:

 

  1. Stimulus Checks (“Recovery Rebates”):
    • $1,400 per qualifying individual to be sent out as soon as possible.
    • Similar to the prior stimulus payments, the IRS will issue payment based on your most recent return on file – either 2019 or 2020 if you have already filed.
    • Income qualifications are similar – $75,000 for single or $150,000 for joint filers, but phase out much quicker; becoming fully phased out at $80,000 and $160,000, respectively.  This means you could have received a partial payment last year but will not in 2021 even if your income is the same.
    • Previous bills included payment only for children under 17. The American Rescue Plan expanded those eligible to include all claimed dependents including college age children as well as elderly parents that you provide support for.
    • Payments are issued as an advance of a 2021 income tax credit similar to the payments received in 2020. If you don’t qualify based your current tax returns on file with the IRS (2019 or 2020), but do based on 2021 income, you will receive payment as a credit on your taxes.  Conversely, there are no claw backs if you receive a check and then have higher income than the thresholds in 2021.

Note – If you have grown children (18+) you have claimed as dependents on your tax return in recent years and are over the income thresholds to qualify for the stimulus check (and other benefit thresholds outlined below), you may consider having your children file their own taxes to maximize the benefits received by the family.

 

  1. Child Tax Credit Expansion:
    • Temporary increase in the tax credit for a qualifying child in 2021 – $3,000 (up from $2,000) or $3,600 for a child under the age of 6 as of December 31, 2021.
    • These “enhanced credits” are subject to phase outs that begin at the same levels as the stimulus checks but phase out at much higher income levels.
    • The qualifications for the “enhanced credits” do not affect the ability for those at higher income levels to receive the standard $2,000 child tax credit currently on the books (up to $200,000 single/$400,000 joint filers).
    • The credit is fully refundable for 2021. Meaning if you have a negative liability, you can still receive the credit as a part of your refund in April 2021.
    • The bill instructs the IRS to make advance payment of up to 50% of the estimated credit through monthly amounts over the last 6 months of 2021. These advance payments are made based on your most recent return on file but could be clawed back when you file your 2021 tax return next year.

 

  1. Child and Dependent Care Tax Credit for 2021:
    • The maximum credit you can obtain for Child or Dependent Care expenses is increasing dramatically for 2021 – $4,000 maximum credit for one qualifying dependent / $8,000 maximum credit for 2 or more dependents. This is up from $1,050 or $2,100 maximum in 2020.
    • The credit is calculated by taking your qualified expenses incurred, $8,000 for one dependent or $16,000 for 2 or more, and multiplying it by an applicable percentage. The maximum percentage is 50% and goes down to a 20% floor based on income.
    • However, this 20% floor phases out completely for taxpayers with AGI greater than $200,000 single/$400,000 joint. This is a change from prior years.
    • This credit is also fully refundable.

 

  1. COBRA and ACA Healthcare premium enhancements:
    • Significant subsidies for COBRA were added for individuals who were involuntarily terminated from employment during the pandemic. This provision allows you to obtain health insurance via COBRA for zero cost from April through September 2021.
      • The cost of the COBRA will be covered 100% by the employer and then reimbursed by the Federal government via an employer tax credit.
      • The election period for enrolling in COBRA is extended to encompass those that were laid off last year but did not elect COBRA initially.
    • Premium Tax Credits for plans purchased through the ACA marketplace were expanded to allow individuals with income up to 150% of the federal poverty level to purchase a qualified plan through the exchange at no premium cost.
    • Additionally, those with income over 400% of the FPL will now have their premium costs capped at 8.5% of their income. There is no cap or income threshold, but presumably 8.5% of a high income would be more than the cost of a qualifying plan and therefore not receive the tax credit/subsidy.
    • Finally, if you have or qualify to receive unemployment income for 1 week during 2021, you will automatically be treated as if your household income level is 133% of the FPL and qualify for 100% premium subsidy for a plan purchased through the ACA and state exchanges.

Note – We view this as one of the most significant provisions that could affect our clients given the limited income thresholds associated with it.  If you are currently purchasing healthcare insurance individually (not through an employer plan or Medicare/Medicaid), you may be impacted by these changes.  Do not hesitate to reach out to your advisor and we can work through the qualifications together and discuss changes that could be beneficial.

 

  1. Other provisions:
    • Student loan debt forgiveness was not included in the bill but provisions to make any student loan debt forgiven between 2021 – 2025 non-taxable are included. This appears to prime the pump for future legislation or executive orders to forgive student loan debt.
    • Paid Family Leave Credit for employers increased to $12,000 and qualifying period is extended through September 30, 2021.
    • Funeral Expense reimbursement is available to families of individuals who lost loved ones to COVID through FEMA.
    • EIDL program extended and funded with $15 Billion.
    • An additional $7.25 Billion of Payroll Protection Program funding is included and eligibility expanded.

 

For an in-depth review of the bill and its provisions related to individuals, visit https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/