Overview of American Rescue Plan Act of 2021
Individual Tax Relief
Additional stimulus payments: The act includes stimulus payments of $1,400 for taxpayers, children, and non-child dependents. The payments are essentially refundable credits against 2021 taxes that are payable in advance. Like previous stimulus payments, this round is subject to income limitations and begins to phase out for single filers with adjusted gross income (AGI) over $75,000 ($112,500 for head of households and $150,000 for joint filers). Payments will completely phase out at $80,000 of AGI for single filers, $120,000 for head of household and $160,000 for joint filers, creating a much quicker phase-out range than previous payments. As such, many families will not receive 2021 payments that had previously received 2020 payments.
Unemployment Benefits: ARPA includes an extension of $300 per week of additional unemployment benefits through September 6, 2021. The act also makes the first $10,200 of unemployment benefits exempt from tax for households with up to $150,000 of income for 2020.
Expanded Child Tax Credit: Prior to the new law, the amount of the child tax credit was $2,000, but only $1,000 of that was refundable. ARPA increases the amount to $3,000 per child for 2021 ($3,600 for children under six years old) and makes the credit fully refundable. The act also directs the IRS to issue advance payments equal to half of the credit beginning on July 1, 2021. This credit begins to phase out at $150,000.
Expanded Child and Dependent Care Credit: The act temporarily increases the value of the child and dependent care tax credit, which currently covers 35% of care expenses up to $3,000 for one dependent or $6,000 for two or more dependents. The measure makes the credit refundable, increases the maximum allowable expenses to $8,000 for one dependent and $16,000 for two or more, and allows the credit to cover 50% of expenses. The dependent care credit percentage is 20% when adjusted gross income is over $43,000, so those earning $43,000 - $125,000 have an increase of 30%. This credit begins to phase out at $125,000. In addition to the credit change, the maximum exclusion of employer-provided dependent case assistance is also increased from $5,000 to $10,500 for 2021.
Expanded Earned Income Tax Credit: ARPA includes several enhancements to the earned income credit. For 2021, the credit has increased for filers without children, plus the age for childless claimants has been reduced from 25 to 19 (except in the case of full-time students). The act also allows taxpayers to substitute 2019 earned income for 2021 earned income if the 2021 earned income was less than the 2019 earned income.
Student Loan Debt: ARPA excludes from gross income certain discharges of student loans after December 31, 2020, and before January 1, 2026. The exclusion from income does not apply to the discharge of a loan made by certain lenders if the discharge is on account of services performed for the lender.
Employer Tax Relief
Employee Retention Credit: This new act extends the employer retention credit established by the CARES Act through the end of 2021.
Paid Sick Leave and Family Leave Credits: The payroll tax credit for employers providing paid sick and family leave has been extended to September 30, 2021. The act also increases the limit on applicable wages for the credit from $10,000 to $12,000. The leave now includes time off to receive a COVID-19 vaccine or recover from vaccine-related illnesses. The 10-day per employee limitation on claiming the credit will also reset after March 31, 2021.
COBRA Coverage: The act provides a 100% credit for employer payment of employee COBRA coverage for up to six months starting April 1, 2021.
The COVID-19 pandemic has affected every household and business in some way. This article only covers some of the provisions in the 628-page new law. If you or your business have suffered financial losses, contact your Baden point of contact to discuss resources under the ARPA that may be available to help you with recovery. Send us an email firstname.lastname@example.org or call 260-422-2551.
Melissa Bradberry | 03/15/2021