This document provides a brief summary of key tax provisions contained in the American Rescue Plan Act, H.R. 1319, which was signed into law on March 11, 2021.
Recovery Rebates/Economic Impact Payments
The act creates a new Sec. 6428B that provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent (as defined in Sec. 152) for 2021, including college students and qualifying relatives who are claimed as dependents.
As with the 2020 economic impact payments, the IRS will send out the advance payments of the credit.
For single taxpayers, the credit and corresponding payment begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit completely phases out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout begins at an AGI of $150,000 and ends at AGI of $160,000. For heads of household, the phaseout begins at an AGI of $112,500 and ends at AGI of $120,000.
The act uses 2019 AGI to determine eligibility unless the taxpayer has already filed a 2020 return before the determination date.
The act makes the first $10,200 in unemployment benefits tax-free in 2020 if the AGI of the taxpayer(s) is less than $150,000. Note that the taxpayer’s filing status does not matter for purposes of this tax-free treatment and there is no phaseout (i.e., if AGI is $150,000, all benefits are taxable).
Child Tax Credit
The act expands the Sec. 24 child tax credit and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.
The act increases the amount of the credit to $3,000 per child ($3,600 for children under age 6 as of the close of the calendar year). The increased credit amount phases out for taxpayers with modified AGI over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of modified AGI over those limits. Once the excess amount is eliminated, the amount of the credit remains at $2,000 until the present law phaseout thresholds are reached.
The IRS is directed to estimate taxpayers’ child tax credit amounts and pay periodically in advance 50% of the annual estimated amount. Payments will run from July through December 2021.
The IRS will set up an online portal to allow taxpayers to opt-out of advance payments or provide information that would be relevant to modify the amount of the credit.
The taxpayer, in general, must reconcile the advance payment amount with the actual credit amount eligible to be claimed on his or her 2021 tax return.
Child and Dependent Care Credit
The act makes various changes to the Sec. 21 child and dependent care credit, effective for 2021 only, including making it refundable.
The credit is worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more.
Credit reduction starts at AGI levels over $125,000. For households with AGI over $400,000, the credit is reduced below 20%.
The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021 ($5,250 in the case of a separate return by a married individual in 2021).
Earned Income Tax Credit
The act also makes several changes to the Sec. 32 earned income tax credit. It introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19 (from 25), except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.
The credit’s phaseout percentage increases to 15.3%, and the phaseout amount also increases.
The credit is allowed for certain separated spouses.
The threshold for disqualifying investment income increases from $2,200 (unadjusted inflation amount) to $10,000.
Temporarily, taxpayers can use their 2019 earned income instead of 2021 earned income in figuring the credit amount.
COBRA Continuation Coverage
The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between April 1, 2021, and Sept. 30, 2021.
The act creates a new Sec. 6432, which allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against Sec. 3111(b) Medicare tax (1.45% of qualifying wages). The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.
The credit applies to premiums and wages paid on or after April 1, 2021, and through Sept. 30, 2021.
Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.
Taxpayers who receive the COBRA continuation coverage premium assistance credit are not eligible for the Sec. 35 health coverage tax credit.
Under Sec. 139I, continuation coverage premium assistance is not includible in the recipient’s gross income.
Employee Retention Credit
The act codifies the employee retention credit in new Sec. 3134 and extends it through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief and Economic Security (CARES) Act, and it allows eligible employers to claim a credit for paying qualified wages to employees.
The employee retention credit is allowed against Sec. 3111(b) Medicare tax (1.45% of qualifying wages) after June 30, 2021.
Family and Sick Leave Credits
The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), as Secs. 3131 (credit for paid sick leave), 3132 (payroll credit for paid family leave) and 3133 (special rule related to tax on employers). The credits are extended to Sept. 30, 2021.
These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.
The act increases the limit on the amount of wages qualifying for the credit to $200 per day up to a maximum of $12,000 in the aggregate for each individual. The credits are expanded to certain governmental organizations.
The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60. The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
The paid leave credits are allowed for leave that is due to a COVID-19 vaccination or to recover from a vaccine-related illness.
Premium Tax Credit
The act expands the Sec. 36B premium tax credit for 2021 and 2022 by changing the applicable percentage amounts in Sec. 36B(b)(3)(A).
Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess.
A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.
Miscellaneous Tax Provisions
The act amends Sec. 108(f) to specify that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.
The act amends Sec. 162(m), for years after 2026, to add a corporation’s five highest-compensated employees (besides the employees already covered by Sec. 162(m)) to the list of individuals subject to the $1 million cap on deductible compensation.
The act extends the Sec. 461(l) limitation on excess business losses of noncorporate taxpayers for one year, so for any taxable year beginning before Jan. 1, 2027.
The act repeals Sec. 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis.
The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants.
The act temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.
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