On March 11, 2021, President Biden signed into law the American Rescue Plan Act (ARPA). The $1.9 trillion law is intended to provide sweeping relief from the economic and other repercussions of the ongoing COVID-19 pandemic. In addition to funding for testing, contact tracing, vaccinations, education, and state and local governments, the ARPA includes extensive relief that could directly impact your finances.
Under the ARPA, many people will receive a third round of direct payments (which the law calls Recovery Rebates). It provides for direct payments of $1,400 — plus $1,400 per dependent — for single tax filers with adjusted gross income (AGI) up to $75,000 per year, heads of households with AGI up to $112,500 and married couples with AGI up to $150,000. The rebates phase out when AGI exceeds $80,000, $120,000 and $160,000, respectively. A dependent for the purpose of this round of payments includes adult dependents, such as college students and other qualifying family members.
The payments will be based on your 2019 or 2020 income, depending on whether you’ve filed your 2020 tax return. If you haven’t filed and expect your 2020 AGI to be at or above the phaseout threshold, you should consider delaying the filing of your 2020 return until after your rebate payment is received.
Payments will be reconciled on your 2021 tax return. If you qualify for a rebate based on your 2020 income but didn’t receive a check because the government based your eligibility on your 2019 tax return where the amount of your AGI disqualified you from receiving the rebate, you can claim a credit on your 2021 return. However, if you receive a payment based on your 2019 AGI amount and you don’t actually qualify for the rebate based on your 2020 AGI, you won’t be required to repay the rebate when you file your 2021 return.
The ARPA extends the extra $300 per week in unemployment benefits, over and above state unemployment benefits, through September 6, 2021. It also increases the maximum period of benefits from 50 weeks to 79 weeks.
In addition, the law spares unemployment beneficiaries an unwelcome surprise tax bill by making the first $10,200 in unemployment benefits received in 2020 nontaxable for households with incomes less than $150,000. If you qualify for this tax break and have already filed your 2020 returns, you’ll want to await IRS guidance as to how to proceed. The IRS is reviewing the possibility that they’ll be able to make the adjustments automatically and issue necessary refunds without further action on the part of the taxpayer. Once the IRS clarifies how they will be handling previously filed returns we will provide an update. In a recent information release the IRS has requested that taxpayers not file amended returns related to changes to their 2020 tax returns due to provisions of the ARP Act.
The new law temporarily expands the $2,000 Child Tax Credit significantly. For 2021 only, eligible taxpayers will receive a $3,000 credit for each child ages 6 to 17 and a $3,600 credit for each child under age 6.
This credit has two components subject to different phaseout rules: a $2,000 credit and an additional $1,000 or $1,600 credit, depending on the age of the child. The $2,000 credit is subject to a phaseout when income exceeds $400,000 for joint filers and $200,000 for other filers. The ARPA continues this treatment for the first $2,000 of the credit in 2021, but it applies a separate phaseout for the additional $1,000/$1,600 amount — $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers.
The ARPA directs the U.S. Treasury Department to create a program to make monthly advance payments for the increased child tax credit beginning in July 2021, based on taxpayers’ most recently filed tax returns. That means eligible taxpayers will receive half of the credit before year end. If the 2021 advance payments end up exceeding the amount of the allowable 2021 credit, the excess amount will be calculated on and must be repaid with the taxpayer’s 2021 tax return. The IRS will establish an online portal where eligible taxpayers can opt out of advance payments or enter information that modifies the amount of your monthly payments.
The ARPA expands the child and dependent care tax credit substantially, albeit again temporarily. For 2021, taxpayers can claim a refundable 50% credit for up to $8,000 in care expenses for one child or dependent and up to $16,000 in expenses for two or more children or dependents, which results in a credit worth up to $4,000 or $8,000. As in previous years, the credit percentage begins phasing out to a floor of 20% when household income levels exceed $125,000; however, for 2021, households with income over $400,000 will begin a new phaseout until the credit is fully disallowed.
For comparison, the 2020 expense limits were $3,000 and $6,000, and the credit topped out at 35% of allowable expenses. The phaseout began when household income exceeded $150,000, though the credit is no less than 20% of the allowable expenses regardless of household income.
The ARPA also increases the limit on tax-free employer-provided dependent care assistance for 2021 to $10,500 (50% for married couples filing separately). That’s more than double the current limit of $5,000, and is available to employees should their employers choose to implement the increased limits
The ARPA does not forgive student loan debt, but it anticipates a possible development may occur in the near future. For now, the Act ensures the tax-free treatment of student loan debt forgiven between December 31, 2020, and January 1, 2026. Forgiven debt typically is treated as taxable income.
Health insurance will become more affordable for some insured individuals in 2021 and 2022 because of two provisions in the ARPA. The provisions relate to the Affordable Care Act (ACA) and continuation coverage that may be available under the Consolidated Omnibus Budget Reconciliation Act, better known as COBRA.
The law increases both the availability and the amount of ACA subsidies, retroactive to January 1, 2021. It extends cost-sharing support to anyone who receives, or was approved to receive, unemployment benefits in 2021. It also limits the amount that anyone who obtains insurance through the federal or state marketplaces must pay for premiums to 8.5% of their modified adjusted gross income — regardless of their income.
The ARPA also provides a 100% premium subsidy for qualified beneficiaries who are 1) currently enrolled in COBRA or 2) either eligible but didn’t enroll previously or enrolled but dropped out. The subsidy is available only to employees who lost group coverage because they were involuntarily terminated or their hours were reduced. It covers the period of April 2021 through September 2021.
Like the CARES Act and the Consolidated Appropriations Act (CAA) before it, the ARPA includes assistance for those struggling to keep their homes due to the pandemic. For example, it provides rental assistance to eligible families for past due rent, future rent, and utility and energy bills.
The law also provides additional funding to the Homeowner Assistance Fund. The fund is intended to prevent mortgage delinquencies, defaults, foreclosures, the loss of utility or home energy services, and the displacement of homeowners experiencing financial hardship after January 21, 2020.
The ARPA contains numerous provisions affecting businesses, too. For example, it provides an additional $7.25 billion in funding for the Paycheck Protection Program (PPP). However, the new law didn’t extend the current March 31 deadline for PPP loans to be approved, but Congress is discussing another bill to extend it.
The ARPA also provides another $15 billion for Economic Injury Disaster Loan (EIDL) Advance Grants. Small businesses in low-income communities are eligible for EIDL grants of up to $10,000; $5 billion is reserved for $5,000 grants to businesses that experienced a revenue loss of more than 50% and have no more than 10 employees.
The law also includes targeted relief for some of the industries hit hardest by the COVID-19 pandemic. It establishes a $28.6 billion fund for businesses that primarily serve food or drinks, with $5 billion earmarked for restaurants with 2019 gross receipts under $500,000. In addition, the ARPA directs an additional $1.25 billion to the “shuttered venue operators” grant program that was created by the CAA and expands eligibility to include operators that received a PPP loan after December 27, 2020. These operators include live performing arts organizations and movie theaters.
The ARPA is a sweeping piece of legislation, with regulators sure to provide substantial implementation guidance on certain provisions. Keep in contact with your tax advisors to take advantage of any provisions that apply to you or your business.
Contact a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
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