Highlights of the American Rescue Plan Act

As of this writing on the late afternoon of March 10, 2021, the House and Senate have just passed the American Rescue Plan Act (ARP) and shortly the president is expected to sign it into law. This bill includes many provisions that have major tax impacts for 2020 and 2021 tax returns.

A word of caution is merited as final guidance under IRS regulations does not exist for exactly how to include some items in your filing, but we suggest you start identifying key items that apply to your tax circumstances.

We’ll keep you apprised as things clarify. Below is a bullet-point list of headline items.

• Unemployment benefits: A retroactive tax provisions makes the first $10,200 of unemployment payments nontaxable ($20,400 in the case of a joint return, but only $10,200 per spouse) in 2020 for households earning less than $150,000.
  • Additional provision of a $300 weekly federal unemployment benefit through 6 September 2021
• Economic Impact Payments: Single taxpayers with AGI under $75,000 will receive a $1,400 refundable tax credit, while joint filers with AGI under $150,000 will receive $2,800.
  • In addition, taxpayers will receive $1,400 for each qualifying dependent (including adult dependents).
  • The credit will completely phase out at an income threshold of $80,000 for single filers and $160,000 for joint.
  • The Treasury is directed to issue this credit as an advance payment based on the information on 2019 or 2020 tax returns.
  • It may make sense to delay filing until after payments are disbursed.
• Child Tax Credit: Special rules for 2021 include an expansion of the credit from $2,000 to $3,000 per eligible child under age 18 ($3,600 per child under age 6). Starting in July, the Treasury will issue advance payments of 50% of the child tax credit based on 2019 or 2020 tax return information.
• Earned income credit: For 2021 only, the bill expands the eligibility and the amount of the earned income credit (EIC) for taxpayers with no qualifying children. The maximum credit amount for childless people will increase from $543 to $1,502. For 2021, taxpayers can use their 2019 income if it was higher than 2021.
  • The disqualified investment income limit has increased from $3,650 (2020) to $10,000 and will be adjusted for inflation.
• The act includes other tax changes, such as:
  • Refundability and enhancement of child and dependent care tax credit
  • An individual can receive an advanced premium tax credit (APTC) to lower their monthly health insurance payment (premium).
  • Increase in exclusion for employer-provided dependent care assistance
  • Extension and expansion of the Families First Coronavirus Response Act (FFCRA) paid sick leave and paid family leave credits
  • Extension of employee retention credit
  • Modification of the premium tax credit
  • Change to the tax treatment of targeted economic injury disaster loan (EIDL) advances
  • Exemption of student loan forgiveness from federal taxation through 2026
  • Expanded COBRA continuation coverage premium assistance credit