Tax Strategy: Inside the American Rescue Plan

March 25, 2021 9:00 AM

On March 10, 2021, Congress passed the American Rescue Plan Act of 2021. The tax provisions in the legislation represent less than one-third of the total cost of the legislation. The American Rescue Plan includes many non-tax provisions to help address the continuing pandemic. These include support for unemployed workers, funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools to permit returning to the classroom safely. The tax provisions include some of the tax proposals that were part of President Biden’s election campaign. This legislation would enact many of the tax changes only for this year, but later legislation in 2021 is expected to try to make many of them permanent.

Many of the temporary tax provisions in the American Rescue Plan are expected to be included in President Biden’s next piece of tax legislation later in 2021 to make those provisions permanent; in the meantime, here are some of the key provisions.

Stimulus payments

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The legislation calls for an additional $1,400 stimulus payment to individuals ($2,800 for joint filers) and including payments for child and adult dependents. These would be an advance payment of a refundable credit on the 2021 tax return. The eligibility for the payments starts to phase out at $75,000 for individual filers and $150,000 for joint filers. In the Senate, the phaseout range was shortened to end at $80,000 for individual filers rather than $100,000, and $160,000 for joint filers rather than $200,000. The payments are to be based on 2019 return information unless the 2020 return has been filed at the time the IRS is making the payments.

Taxpayers and their advisors should plan whether it is beneficial to file the 2020 tax return early enough for it to be the basis for the advance payments. In a new feature in this provision, if the IRS has made an advance payment based on the 2019 tax return and, after the 2020 return is filed, the taxpayer is entitled to an additional amount, the IRS is to also send the additional amount. For this to apply, the 2020 return must be filed within the earlier of 90 days after the tax filing deadline or Sept. 1, 2021. The IRS must make the payments by Dec. 31, 2021.

Child Tax Credit

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The legislation would increase the CTC from $2,000 to $3,000 ($3,600 for children under the age of six) and all fully refundable, for 2021 only. The legislation also calls for advance payments as frequently as monthly of the Child Tax Credit starting July 1, 2021, and ending Dec. 31, 2021. Monthly payments would equal one-twelfth of the annual advance amount. The payments are based on the 2020 tax return if filed or the 2019 tax return if no 2020 return has been filed. In a requirement that may be difficult for the IRS to accomplish, the service is required to project the ages of the children for the 2021 year and not just assume they qualified if they qualified in the prior reference year. The amounts can be adjusted based on filed returns or other information obtained by the IRS. The service is given the option of reducing the frequency of the distributions if monthly distributions prove administratively unfeasible, and is to set up an online portal where taxpayers can elect out of the advance distributions, and report changes in marital status, or changes in qualifying children, including a new birth.

The excess amount of the credit over $2,000 phases out at the rate of $50 for each $1,000 over $75,000 of adjusted gross income for single filers and $150,000 for joint filers. The remaining $2,000 does not start to phase out until adjusted gross incomes of $400,000 for joint filers and $200,000 for other filers are reached. There is also a recapture provision if payments exceed the credit but also a safe harbor amount that is not recaptured for certain AGI thresholds of $2,000 times the number of children.

Earned Income Tax Credit

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The EITC is expanded by decreasing the minimum age for childless claimants from 25 to age 19 or for a student to age 24, or age 18 for a qualified former foster youth or a qualified homeless youth. The maximum age is eliminated. The maximum credit is increased for a childless claimant from $543 to $1,502, and the amount of the income at which the credit is maximized is increased from $7,100 to $9,820. The phaseout amount is increased from $8,880 to $11,610. These changes are for 2021 only.

Some additional changes to the credit are permanent. If the children of the individual fail to qualify for the credit, the individual can still qualify for the childless credit. The credit is also allowed for separated spouses if certain requirements are met. The investment income test is increased from $3,650 to $10,000 for 2021 and is adjusted for inflation after 2021. Taxpayers can choose to use 2019 income rather than 2021 income if 2021 earned income was less than 2019 earned income.

Child and Dependent Care Credit and Employer-Provided Dependent Care Assistance

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The American Rescue Plan increases the expenses that can qualify for the child and dependent care credit from $3,000 to $8,000 for one qualifying child and from $6,000 to $16,000 for two or more qualifying children, and the maximum percentage increases from 35 percent to 50 percent. The income limit increases from $15,000 to $125,000.

The maximum exclusion for employer-provided dependent care assistance also increases from $5,000 to $10,500. These changes apply for 2021 only.

ACA premium tax credits

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The legislation enhances the premium tax credits under the Affordable Care Act for 2021 and 2022. They are available to more individuals and in larger amounts. For 2021, the advance premium tax credits are available for individuals receiving unemployment compensation. The legislation also eliminates the recapture provisions applicable to 2020 for taxpayers receiving excess premium tax credits.

Paid sick and family leave

The tax credits for paid sick and family leave will be extended from the March 31, 2021, date provided in the Consolidated Appropriations Act of 2021 to Sept. 30, 2021. There is also an expansion of what constitutes qualified leave, including for coronavirus vaccinations, and expansion for self-employed persons. The number of qualifying days is also reset as of March 31, 2021.

Senate additions

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In addition to changing the phaseout range for the stimulus payments, the Senate also added a few other tax provisions to the legislation. For 2020 only, up to $10,200 of unemployment benefits are exempted from taxation. For those who have already filed tax returns reporting unemployment benefits in full, taxpayers should await guidance from the IRS as to whether an amended return will be required or whether the IRS will provide another means to recoup those taxes.

The legislation also expands the exclusion of forgiven student loan amounts to apply to loans discharged after 2020 and before 2026. In addition, it includes a 100 percent credit against certain employer payroll taxes for COBRA premiums of eligible individuals.

Miscellaneous provisions

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