The American Rescue Plan Act — Tax Credits + Expanded Relief

On Thursday, March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA). A $1.9 trillion stimulus package, the ARPA offers a variety of tax relief and aid for individuals and businesses. Most notably, the third round of stimulus checks are making their way to taxpayers making less than $75,000 annually ($112,500 for heads of households and $150,000 for joint filers).

Here, we’ll dive into the rebates, credits, and enhancements available within the ARPA.

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.

As the pandemic continues and vaccines begin to reach the general public, Congress extended and enhanced several existing programs that provide significant tax credit opportunities for businesses. Among these enhanced programs are emergency paid sick leave, premium tax credits, retirement rehabilitation, COBRA subsidy, and more.

Emergency Paid Sick Leave, COBRA Subsidy, and Premium Tax Credits

The emergency paid sick leave (EPSL) and extended family and medical leave (E-FMLA) were enacted under the Families First Coronavirus Response Act (FFCRA). While both have associated tax credits that are now extended through March 31, 2021, employer compliance became voluntary after December 31, 2020.

The ARPA increased EPSL credits for self-employed individuals. After March 31, 20201, qualifying individuals can retroactively claim the credit for up to 60 days. Employees qualify for leave if they are seeking a test or diagnosis of COVID-19, were exposed to COVID-19, or are obtaining a COVID-19 vaccine. Additional qualifying events include recovering from illness related to the COVID-19 vaccine.

Premium Tax Credits (PTC) allow families to purchase health insurance with refundable tax credits. Targeting low-income and poverty-level individuals, PTC creates a reduced premium and offers substantial financial benefits for those otherwise unable to afford health coverage.

In response to sustained unemployment, the ARAP provides a 100% subsidy for COBRA premiums from April 1 through September 30, 2021. Employers and insurance companies are responsible for complying with the COBRA subsidy, and employee benefits professionals should carefully note federal COBRA compliance.

For a more detailed analysis of EPSL, COBRA, and PTC, we’ve created a thorough analysis.

Retirement Plan Funding

The ARPA created several provisions to help employers fund retirement plans. Multi-employer plans now have access to more flexibility for funding plans or schedules. The Act also provided extended rehabilitation periods for plans that were seriously endangered during 2020 or 2021. Both multi-employer and single-employer plans have an extended period for amortizing shortfalls. The timeframe was extended from seven years to 15.

Employee Retention Tax Credit

A long-standing disaster relief element, the ERC established in the CARES Act allowed employers to receive refundable quarterly payroll tax credits on qualified wages paid after March 12, 2020 and before January 1, 2021. The new bill modifies and expands several components of the credit. The ETC is now available through December 31, 2021.

Here, we created a comparison between the ERC for 2020 and the modifications made for 2021.

Aldrich is here to help you understand financial relief options available to you and your business. We will provide guidance on the next steps to maximize financial, tax, and business decisions. For more resources to help you navigate the developing impact of coronavirus on your business, please contact your Aldrich Advisor.