Recovery Rebates
As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) from March 2020, taxpayers received their first round of stimulus checks in the amount of $1,200 for individuals and $500 for qualifying children. When the Consolidated Appropriations Act passed in December, an additional $600 was distributed. After a year of managing pandemic ramifications, taxpayers are once again receiving stimulus checks, this time in the amount of $1,400.
These payments are, similar to the previous two, fully refundable credits against 2021 taxes. For those who have yet to file their 2020 taxes, 2019 gross income will be used to determine stimulus eligibility. If increased income in a previous tax year makes you ineligible for the stimulus, the amount is creditable for your 2021 tax returns.
Unemployment Relief
The ARPA revived enhanced weekly unemployment checks that were part of the initial stimulus packages. The additional $300 runs through early September, and $10,200 of unemployment income received in 2020 was made tax-exempt for those with less than $150,000 in income.
With many taxpayers having already filed their 2020 returns, the IRS plans on issuing any refunds related to the tax-exempt unemployment income in May 2021 automatically for those who already filed returns.
Student Loan Forgiveness + Exclusion
Previously, student loan forgiveness could only be excluded from taxable income under extreme circumstances, including the borrower’s death or disability. The APRA expands the exclusion from taxable income for student loans for any reason until the end of 2025 and applies not only to Federal loans but to private student loans as well. This addition to the tax code may not be significant at the moment but would be considerable if Biden can meet his campaign promise of large-scale student loan forgiveness.
Child Tax Credit
The ARPA makes a few important changes to the child tax credit (CTC) for 2021. Previously, taxpayers could only claim $2,000 per child under 17, and the credit is reduced by 5% of adjusted gross income over $200,000 for single parents and $400,000 for joint filers, and only $1,400 was refundable. The ARPA changes the amount to $3,000 per child and $3,600 per child under six. The credit is now also fully refundable and includes children who are 17. The enhanced credit under ARPA does phase out for those with adjusted gross income over $75,000 or $150,000 for joint filers. For taxpayers over those limits, the old child tax credit rules still apply.
Half of the enhanced child tax credit will be eligible for an early cash payment from the IRS starting in July 2021 to December 2021 in monthly installments. For taxpayers that receive a payment in error, the IRS established a safe harbor provision for single taxpayers with a modified adjusted gross income of $80,000 or less ($120,000 for joint filers). Recipients no longer need to pay back overpayments of up to $2,000 per child.
Earned Income Tax Credit
The earned income tax credit (EIC) is a form of financial relief to support low-to-moderate-income families. For 2021, the amount of credit is significantly increased for filers without children. Typically, the EIC provides meaningful aid for those with children. For this year only the childless EIC amount is increased from $543 to $1,502, and the credit is maximized from $7,100 to $9,820. The phaseout threshold was also increased to $11,610 for non-joint filers.
In the spirit of making financial aid more accessible, the minimum age to claim a childless EIC was reduced from 25 to 19. The ARPA also allows filers to use their 2019 earned income to claim the EIC on a 2021 return if they earned less in 2021 than in 2019. This provision was also made available for 2020 tax returns as part of the Consolidated Appropriations Act.
The ARPA made a few permanent changes to the EIC as well. The Act now allows filers to claim the childless EIC even if they lack identification requirements. Additionally, separated individuals may claim the EIC as unmarried after providing documentation. The amount of disqualifying investment income was adjusted for inflation and increased from $3,650 to $10,000.
Dependent Care Assistance Program Improvements
A dependent care assistance plan (DCAP) is a benefit plan that helps pay for qualifying family services. In previous stimulus packages, it was unclear if or how DCAP reimbursements counted toward taxable income. The ARPA, however, clarifies that the DCAP exclusion is now $10,500 (or $5,250 for married individuals) for the calendar year 2021. Individuals looking to take advantage of this provision must increase their DCAP election before the end of the 2021 plan year.