The American Rescue Plan (H.R. 1319) is a $1.9 trillion emergency legislative package to provide the resources needed to address the ongoing COVID-19 public health crisis and spur a strong economic recovery. It was signed into law earlier this year.
What’s in it, and how does it impact you? Here are some of the highlights –
The act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year.
The act creates a new round of economic impact payments to be sent to qualifying individuals. The same as last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. 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 last year’s economic impact payments, the IRS will send out the advance payments of the credit.
COBRA continuation coverage
Assistance eligible individuals (AEIs) are given a 100% subsidy for premiums for COBRA continuation coverage the period beginning on April 1, 2021 (the first day of the first month beginning after enactment) and ending on Sept. 30, 2021. The subsidy is provided by not requiring AEIs to make premium payments but requiring the taxpayer to whom the AEI otherwise would pay the premiums to treat them as paid.
Child tax credit
The act expands the Sec. 24 child tax credit in several ways 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 6). The increased credit amount phases out for taxpayers with incomes 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 income over those limits.
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, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.
The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.
The credit would be allowed for certain separated spouses.
The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.
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 will be 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 will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
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, P.L. 116-136, and it allows eligible employers to claim a credit for paying qualified wages to employees.
Under the act, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.
Want to find out how the new plan impacts you or your business? Reach out to one of our tax advisors to learn more.