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Summary of the American Rescue Plan Act

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On Thursday, March 11, the American Rescue Plan Act of 2021 was signed into law by President Joe Biden.  This roughly $1.9 trillion dollar bill is the third stimulus package passed within the last year. The bill provides cash for state and local governments, public schools, and funding for testing and vaccine distribution, and includes provisions that authorize stimulus payments and tax credits. There are a number of resources available to summarize the bill in its entirety, so here we will focus on the areas that most likely impact our clients and their families.

Direct stimulus payments of up to $1,400 for eligible individuals, including all dependents in the household. This is a meaningful change from previous stimulus payments as older dependent children and elderly family members claimed as dependents are included in the calculation.  However, income phaseouts are narrower than with the CARES Act and Consolidated Appropriations Act.

  • Single and Married Filing Separate: $75,000 – $80,000
  • Head of Household: $112,500 – $120,000
  • Married Filing Joint: $150,000 – $160,000

The IRS will use the most recent tax return on file to determine adjusted gross income (AGI), however the bill allows for additional determination dates that can increase the amount of stimulus checks received for those taxpayers’ that are initially phased out, either partially or completely.  Also, of note, there are no claw-back provisions in the bill, meaning any amount correctly paid based on a taxpayer’s income on file with IRS at the time of payment can be kept by the taxpayer. These changes can benefit individuals with temporarily low incomes in 2020. Considering when to file your 2020 tax return is important, so make sure to consult your Foster & Motley team or tax professional to discuss the impact.

The Child Tax Credit increased from the existing $2,000 per qualifying child, up to $3,000 for 2021, the benefit is further increased to $3,600 for children under age 6.  The IRS will make advance payments of the credit at one-twelfth of the annual estimate for 2021 beginning in July. The phaseout of the enhanced tax credit does not impact existing Child Tax Credit of up to $2,000 per qualifying child, which remains at $200,000 of AGI for single filers and $400,000 for joint returns, however the increased amount above the existing $2,000 is subject to phaseout at lower income amounts.  Specifically, the increased credit is phased out by $50 per each $1,000 a taxpayer’s income exceeds their applicable threshold:

  • $75,000 for Single and Married Filing Separate
  • $112,500 for Head of Household
  • $150,000 for Joint Filers

There are other differences with the increased tax credit, so we would suggest speaking with your Foster & Motley team or your tax professional to make sure you fully understand the impact.

The bill also includes an increase in the Dependent and Child Care Credit, which is fairly straightforward:

  • Eligible expenses increased from $3,000 for one qualifying child and $6,000 for two or more, up to $8,000 and $16,000 in 2021, respectively.
  • Increased maximum applicable percentage from 35% in 2020 up to 50% in 2021.
  • Maximum credit increased to $4,000 for one qualifying child, $8,000 for two or more from 2020 max credit of $1,050 and $2,100, respectively.
  • Taxpayers with AGI above $400,000 start to be phased out, with those taxpayer’s above $440,000 receiving no Child and Dependent Care Tax Credit in 2021.

Other meaningful provisions in the American Rescue Plan Act of 2021 include:

  • Extension of various Unemployment Compensation benefits, including up to $10,200 of benefits received in 2020 being tax-free for taxpayers under $150,000 of AGI. For those who received unemployment income and have already filed their 2020 tax return, this means they may want to consider having it amended.
  • Increase in Premium Assistance Tax Credit for households buying health insurance from state exchanges.
  • A continuation of COBRA coverage, providing a 100% subsidy to COBRA eligible individuals for a six-month period, beginning April 1st.

Although this bill does not forgive student loans, it does include a provision suggesting that future relief may be coming in subsequent legislation. It does allow any student debt forgiven between 2020 and 2025 to be tax-free.  Also not included in the bill is a temporary waiver of Required Minimum Distributions (RMD) that had been granted in 2020.  No provision exists in this legislation to eliminate 2021 RMDs.

In summary, The American Rescue Plan Act of 2021 is a large, broadly sweeping piece of legislation that presents many tax planning opportunities.  We look forward to discussing these important changes with you in the coming months.

Note: This is only a brief synopsis of the American Rescue Plan Act. You can find a PDF of the entire bill HERE.