Written by: Elissa Wurf, PhD, CPA, EA
On March 11, 2021, the American Rescue Plan Act of 2021 was signed into law by President Biden. We thought it would be helpful to summarize the Act for clients and friends of the firm. This overview focuses only on elements of the law applying to individual taxpayers; many other elements of the law apply to businesses. Please stay alert for updates — this legislation itself provides guidelines, but the IRS has not yet published a Regulation, Revenue Ruling, or Revenue Procedure clarifying the mechanics of the law. Also, please be aware that most changes included in the American Rescue Plan Act of 2021 apply to 2021 only.
Impacts of the American Rescue Plan Act of 2021 on Stimulus Payments
Stimulus payments (also known as Economic Impact Payments or Recovery Rebate Credits) of up to $1,400 per person have been and are being made to qualifying individuals.
- These stimulus payments are not considered taxable income by the federal government or by most states.
- The category of those who are eligible to receive the payments was expanded to include all eligible dependents. This includes not only children under 17, but also older children who are still dependents (including those in college). Elderly parents who may be dependents are also eligible to receive the stimulus payments.
- In contrast, the category of those who are eligible to receive the payments was reduced to limit eligible recipients by income. The payments were eliminated completely for most individuals with Adjusted Gross Income over $75,000 and married couples over $150,000.
- Because payments are based on income, in general, clients whose income went DOWN significantly in 2020 may benefit from filing their tax return early, while clients whose income went UP in 2020 may benefit from delaying filing until the deadline of May 17, 2021.
- Payment may have already been received or may end up being received when the 2021 return is filed.
- If no direct deposit information is on file, paper checks or debit cards will be used for payment. Within 15 days of making a payment, the IRS will mail a notice of the payment to the taxpayer’s last known address. This notice will state the amount and method of payment. Keep the IRS notices of stimulus payments received (Notice 1444) with your other tax documents. If you have not received as much stimulus payment as the law indicates you are allowed, it will help to have this on file.
- Although the tax return deadline for the year has now been extended by the IRS until Monday May 17th and the normal tax extension deadline continues to be October 15th, estimated payments for the current year continue to be due April 15th.
- Please note that if any additional stimulus payments are expected based on lower income in 2020, the return should be filed by no later than August 16th.
How the American Rescue Plan Act of 2021 Affects Unemployment Compensation
- For those who lost jobs, the first $10,200 of unemployment compensation will not be taxable and there are increases in the Premium Assistance Tax Credit for those buying health insurance off the health care exchange.
How the Act Impacts Those with Children
Child Tax Credit Expansion
- The Act expanded the Child Tax Credit from $2,000 to $3,000 or to $3,600 for children under six.
- In 2021, children age 17 and younger will qualify for this tax credit, as opposed to 2020 when only those age 16 and younger qualified.
- According to the Treasury Department, those who are eligible for the credit should receive at least part of it in advance, with monthly payments beginning in July and continuing through the end of the year. Please note, however, that the IRS does not currently have any mechanism in place for making monthly payments, so although this is the law, it remains to be seen how smoothly the rollout of monthly payments will go.
- However, as with the stimulus payments, these expanded credits apply to joint filers with AGI under $150,000, Heads of Household with AGI under $112,500, and Single or Married Filing Separate filers with AGI under $75,000.
Child and Dependent Care Credit
- There is also a significant change in the way that the Child and Dependent Care Credit is being calculated. This credit applies to those with children up to age 12 (or other dependents who are physically or mentally incapable of caring for themselves) to help pay for their care expenses while parents are working. Parents must be employed in order to qualify. In 2021, up to $8,000 in care expenses for one child or up to $16,000 in care expenses for two or more children are eligible.
- However, once again, these benefits are limited by income. In 2021, a phase-out has been introduced, so clients of all filing statuses with an AGI over $440,000 will receive no credit.
For more information about the American Rescue Plan Act of 2021, please review this fact sheet from the U.S. Department of the Treasury.
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