American Rescue Plan Act of 2021: What Individual Taxpayers Need to Know

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American Rescue Plan Act of 2021: What Individual Taxpayers Need to Know

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (ARP) into law. 

“This legislation is about giving the backbone of this nation – the essential workers, the working people who built this country, the people who keep this country going – a fighting chance,” said President Biden.

Despite the Senate’s rejection of the original bill passed by the House on February 27th, Congress managed to turn the $1.9 trillion coronavirus relief bill around in time to be enacted a few days before the March 14th deadline set by lawmakers. The House approved the ARP on March 10th by a 220-211 vote, following the Senate’s approval last Saturday by a 50-49 vote. 

In general, the ARP upholds most provisions proposed in the original House bill. Among their other amendments, the Senate removed the provision to raise the federal minimum wage to $15 per hour and narrowed the adjusted gross income (AGI) limits for recovery rebate credit eligibility.

Here’s a look at some of the key relief measures in the ARP and related considerations for individual taxpayers. 

Recovery Rebate Credits – The ARP provides a $1,400 recovery rebate credit for single taxpayers, a $2,800 recovery rebate credit for married taxpayers filing jointly, and a $1,400 recovery rebate credit for each dependent for 2021. The credit is available for individuals with Social Security Numbers, subject to phase-out limitations based on AGI:

  • For single taxpayers, the credit begins to phase out at AGI of $75,000 and completely phases out at AGI of $80,000.
  • For married taxpayers filing jointly, the credit begins to phase out at AGI of $150,000 and completely phases out at AGI of $160,000. 
  • For heads of household, the credit begins to phase out at an AGI of $112,500 and completely phases out at an AGI of $120,000.

Your 2020 AGI will be used to apply the phase-out. If you have not filed your 2020 return, your 2019 AGI will be used. If you have not filed your 2020 return yet, you should compare your AGI for 2019 and 2020 to determine if filing your 2020 return in advance of the due date is more advantageous for you.

If you are eligible for a recovery rebate credit but do not receive payment, you will receive a credit against your 2021 taxes when you file your 2021 return in 2022. If you received a higher credit amount based on your 2019 or 2020 AGI than you would receive based on your 2021 AGI, you are not required to repay the difference. 

Federal Enhanced Unemployment Insurance Benefits The ARP provides $300 a week in federal unemployment benefits through September 6, 2021, and makes the first $10,200 in unemployment benefits tax-free in 2020 for households with AGI less than $150,000. For married individuals, the $10,200 applies to each individual separately. I expect further guidance will be issued that clarifies the options available for individuals who have already filed their 2020 returns.

Exclusion of Student Loan Forgiveness – The ARP includes a provision to exclude forgiven student loan amounts for loans discharged between December 31, 2020, and January 1, 2026, from income, making these amounts tax-free. In addition to federal student loans, this exclusion also applies to private student loans, as long as you do not have a required provision of services to the discharging lender.

Limitation on Excess Business Losses of Noncorporate Taxpayers – The CARES Act repealed the limitation on excess business losses of noncorporate taxpayers for tax years 2018, 2019, and 2020 and restricted the limitation to tax years beginning after 2020 and before 2026. The ARP extends that restriction another year, through 2027. 

COBRA Continuation Coverage – The ARP provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between March 11, 2021, and Sept. 30, 2021. Continuation coverage premium assistance is not included in the recipient’s gross income. 

The ARP also creates a premium assistance refundable credit for taxpayers to use against the Sec. 3111(b) Medicare tax. The IRS may make advance credit amount payments to taxpayers. The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30, 2021.

Child Tax Credit – The ARP makes adjustments to the Child Tax Credit for tax year 2021 only. In general, the credit is equal to $2,000 per child, and $1,400 of that amount is refundable. The ARP increases the credit amount to $3,000 per child ($3,600 for a child under 6), makes the credit amount fully refundable, and increases the maximum age for a child to qualify to 17. The excess of the amount of the credit (over $2,000) is subject to phase-out, reducing the expanded portion of the credit by $50 for each $1,000 of income over these limits:

  • $150,000 for married taxpayers filing jointly, 
  • $112,500 for heads of household, and 
  • $75,000 for others. 

The ARP instructs the Treasury and IRS to begin issuing advance payments beginning on July 1, 2021, and periodically in equal amounts through the end of 2021. Taxpayers will reconcile the advance payment amount with the actual credit amount when they file their 2021 returns. 

The ARP makes a safe harbor of up to $2,000 per child available if the taxpayer’s modified AGI is:

  • $80,000 or less for single taxpayers, 
  • $120,000 for joint filers, and
  • $100,000 for head of household filers

The ARP indicates the IRS and Treasury will create a website for taxpayers to update their information and opt out of receiving advance payments.

Earned Income Tax Credit – The ARP makes a temporary change for 2021 to the Earned Income Tax Credit (EITC), allowing taxpayers to use their 2019 income (instead of 2021) in figuring the credit amount.

The ARP introduces special rules for the Earned Income Tax Credit (EITC) for 2021 only for individuals with no children:

  • The rate at which the credit phases in increases to 15.3%.
  • The amount of income at which the credit is maximized increases to $9,820. 
  • The threshold for the phaseout of the credit for non-joint filers increases to $11,610.
  • The maximum age for childless claimants is eliminated.
  • The applicable minimum age for childless claimants is decreased to 19 years of age, with the exception of:
    • full-time students (24 years of age) and
    • qualified former foster or homeless youth(18 years of age).

In addition, the ARP makes permanent changes to the EITC:

  • The credit will be available to certain separated spouses and filers with children who previously could not meet identification requirements.
  • The threshold for disqualifying investment income raises to $10,000.

Dependent Care Assistance – For tax year 2021 only, the ARP makes the Child and Dependent Care Credit refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income. The credit will be reduced for household income levels over $125,000. The credit will be reduced below 20% for households with income over $400,000.

Premium Tax Credits – For 2021 and 2022, the ARP modifies affordability

percentages used in calculating the premium tax credit to expand eligibility and the benefit for those already qualified. The ARP establishes a special rule for 2021 that treats taxpayers who received unemployment compensation (or those approved to receive it) for any week beginning during 2021 as applicable taxpayers. For 2020, the ARP eliminates the recapture provisions for taxpayers who received excess premium tax credits.

ARB will issue additional updates for our clients and community as this and other COVID-19-related legislation continue to unfold. If you have questions about this information, contact me today.

For more information on this topic and many other COVID-related matters, visit our COVID-19 Financial Resource and Tax Center.

by Bart Haag, CPA 

Bart Haag joined ARB in 1996 and has been a principal with the firm since 2005. His career focus is primarily in providing financial accounting, income tax planning, and business advisory services for clients in the automotive and motorcycle dealership industries and for closely-held businesses, many of which are family owned.

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