The American Rescue Plan Act of 2021 was signed into law by President Biden last Thursday. This $1.9 trillion package, intended to provide relief and recovery from the impacts of the Covid-19 pandemic, contains a wide range of provisions. These span from funding Covid-19 testing, contact tracing, and vaccination efforts, providing grants for school to improve their capabilities to operate amidst the pandemic, funding support to state and local governments to offset lost tax revenues, small business grants, to tax credit and other relief measures for individuals.
Here are some of the notable provisions that may impact your finances this year and your overall financial plan.
Direct Payments (“Stimulus Checks”)
The American Rescue Plan Act, much like the CARES Act (enacted in March of 2020) and the Consolidated Appropriations Act (enacted last December 2020) before it, provides a refundable tax credit made as a direct payment to individual and families. These 2021 Recovery Rebate payments have started to go to recipients.
How much could I receive?
The full credit amount is $1,400 per eligible individual
Eligible individuals include not only the taxpayers but also the taxpayers’ dependents
This is a key difference from the criteria determining the eligible number of individuals for the 2020 Recovery Rebates in the CARES Act and Consolidated Appropriations Act, which included only the taxpayers and the taxpayers’ children under age 17.
A married couple, for example, filing a joint return with a 21-year-old daughter in college, a 17-year-old son, and an 85-year-old mother living with them whom they claim as a dependent, could receive up to $1,400 x 5 = $7,000 for their 2021 Recovery Rebate.
Who is eligible?
Generally, U.S. citizens or U.S. Resident Aliens with a valid Social Security number, who are not dependents of another taxpayer, and who fall within certain income thresholds are eligible.
Your Adjusted Gross Income (AGI) determines your income eligibility, with the amount of tax credit phasing out to $0 over the following ranges by tax filing status.
Married Filing Jointly: $150,000 to $160,000
Head of Household: $112,500 to $120,000
Single and all other filers: $75,000 to $80,000
For example, if you are married filing jointly and your AGI is an amount up to the initial threshold of $150,000, you would be eligible for the full credit. If instead, your income falls between $150,000 and $160,000, your eligible credit is reduced proportionally as your income approaches the $160,000 ceiling. If your income is at the $160,000 level or above, you are no longer eligible.
Determining Eligibility
There are a few different measuring points used to determine your income eligibility for receiving the rebate benefit.
1. For the direct payments that are already starting to be disbursed now
The IRS uses available information, that is, your most recently filed tax return. Since we are still within the tax-filing period for 2020, you may or may not have already filed your 2020 return.
If you had already filed your 2020 tax return, the IRS will use your 2020 tax return to determine your Adjusted Gross Income for eligibility.
If you have not filed your 2020 tax return, the IRS will use your 2019 tax return to determine your income eligibility.
Folks that would be eligible for the direct payment based on 2019 income but whose 2020 income might result in a reduced payment (or could make them ineligible) may benefit from not having filed their 2020 returns.
For those whose income was within the phase-out range or was above the eligibility phase-out based on the 2019 tax returns, there are other opportunities to benefit from these rebates (particularly if your income had fallen in 2020 due to the pandemic or other factors).
2. The “Additional Determination Date”
Taxpayers who have not yet filed their 2020 returns but do file them before an Additional Payment Determination Date will have their rebate payment recalculated based on their 2020 AGI. If the recalculated rebate payment is higher than the amount determined from the 2019 taxes, the IRS will send out another “stimulus check” to make up the difference.
The Rescue Act sets this Additional Payment Determination Date as the earlier of
Keep in mind that If you anticipate filing an extension for 2020 and the extended filing deadline is October 15, you would still need to file your return much sooner to have your potential rebate recalculated using 2020 income.
3. Filing your 2021 Tax Return
Remember that the Recovery Rebate is a 2021 tax credit, so even if the advanced direct payments of the credit are determined using the 2019/2020 tax returns for income eligibility, filing your tax return for 2021 is the 3rd way to be eligible for this benefit.
If your 2021 AGI is lower than the 2019/2019 AGIs used to determine the advanced payment, and it is low enough to result in an eligible credit or a larger credit than was already paid out, this difference is applied as a tax credit on your 2021 tax return.
Increased Child Tax Credit (CTC) for 2021
The American Rescue Plan Act also makes some temporary enhancements to the normal Child Tax Credit for 2021.
The Child Tax Credit is raised to $3,000 from $2,000 for children over age 6 and to $3,600 for children under age 6
Eligible children can be up to 17 years old rather than just under age 17.
The enhanced CTC is also a fully refundable tax credit this year. (i.e. it can become a tax refund if the credit makes the tax liability negative)
A provision also has the IRS paying out 50% of the estimated 2021 tax credit over equal installments starting in July 2021, all based on your most recently filed tax return.
*If, however, at the end of 2021 you were eligible for a smaller amount than was paid out to you, that difference is “clawed back” by adding it to your tax liability on your 2021 tax return.
Because tax credits reduce tax liability dollar for dollar, this credit overall can have a significant impact on a family’s tax situation, particularly for a family with young children. As a hypothetical example, a married couple with 3 kids (ages 3, 5, and 8) filing jointly with $100,000 of income in 2021 (assuming all ordinary income) and taking the standard deduction ($25,100) would have tax liability of $8,590. After subtracting the CTC for the kids ($3,600 + $3,600 + $3,000 = $10,200), the couple’s tax liability would be negative $1,610 ($8,590 - $10,200) meaning a refund of $1,610!
With these enhanced credits, the credit amounts do begin to phase-out at the following Adjusted Gross Income (AGI) levels:
Married Filing Jointly: $150,000
Head of Household: $112,500
Single and all other filers: $75,000
Being ineligible for the 2021 enhanced child tax credit does not exclude you from using the normal child tax credit of up to $2,000 per child. You can still qualify for that credit up to these higher-income phase-out thresholds:
Married Filing Jointly: $400,000
Single and all other filers: $200,000
Child and Dependent Care Tax Credit Increased for 2021
The Rescue Act also makes changes to the Child and Dependent Care Tax Credit for this year that essentially raises the maximum possible credit from $1,050 to $4,000 for a single qualifying dependent and from $2,100 to $8,000 for two or more dependents.
First, the maximum amount of eligible expenses (such as daycare) used to calculate the tax credit increases from $3,000 to $8,000 for a single dependent and from $6,000 to $16,000 for multiple dependents.
There is also a percentage number applied to the taxpayer’s eligible expenses to calculate the actual credit amount (this is known as the ‘Applicable Percentage). For 2021, the Applicable Percentage increases to 50% from the previous maximum of 35%.
Before this change under the Rescue Act, the 35% applicable percentage reduced down to 20% at a much lower income range. Starting at $15,000 the percentage decreased 1% point for every $2,000 that your AGI exceeded that threshold down to a minimum floor of 20% (actually reached at an AGI of $45,000). This meant the credit amount was more limited for most taxpayers.
For 2021 the same reduction applies, but it does not start until an AGI of $125,000. As a result, when AGI hits $185,000, the applicable percentage is capped at 20%. The combination of these changes allows more people to be eligible for higher potential tax credits.
One downside for higher-income earners of $400,000 or more is that the Rescue Act adds a phase-out from the 20% minimum Applicable Percentage. Starting at a $400,000 AGI, the 20% Applicable Percentage is reduced 1% point for every $2,000 your income exceeds that threshold. This effectively makes you ineligible for any credit amount once your AGI exceeds $440,000.
Other Provisions of Note:
Federal unemployment support
Certain unemployment compensation benefits have been extended, including
The federal unemployment insurance (UI) supplement is set at $300 per week through Sept. 6.k.
The Pandemic Unemployment Assistance program providing benefits to individuals such as those self-employed is extended to September 6th
The Rescue Act also makes the first $10,200 in federal unemployment insurance assistance nontaxable for incomes under $150,000. This would be $20,400 for two spouses.
*A key point is the $150,000 AGI threshold includes the unemployment benefits received)
Health Insurance Support
Provides COBRA subsidies in 2021 for individuals that were involuntarily terminated. Individuals can maintain their coverage at $0 cost from April through September.
Expands the Premium Assistance Tax Credits for health insurance plans purchased through the state exchanges.
Small Business Support
Additionally, there is $15 billion in new funding for Economic Injury Disaster Loans (EIDL) as grants. The bill designates $7 billion for the Paycheck Protection Program (PPP) to nonprofits and news services. An additional $1 billion funds a grant program for independent live venues, theaters and cultural institutions. EIDL grants are exempt from inclusion in recipients’ gross income for tax purposes.
As you may have noticed, many of these provisions in the new legislation are nuanced and how they apply to your specific situation depends on several factors. Continue to have conversations with your financial planner, and as always please reach out if you have questions.
Contributed by: Kali Hassinger, CFP®, CSRIC™
