COVID Relief Update: The American Rescue Plan Act of 2021
Part 1: Episode 117 – On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”), fulfilling one of his campaign pledges to provide additional COVID-19 pandemic relief. Because ARPA was just enacted and there are numerous provisions, we will need to wait for future guidance issued by the IRS and Department of Treasury. In the meantime, this Part 1 Podcast summarizes the provisions related to (1) Stimulus Payments, (2) Child Tax Credit and (3) Child and Dependent Care Tax Credit. (For a summary of additional provisions, be sure to see the full transcript below and listen to the Part 2 Podcast.)
Transcript of Podcast Episodes 117 and 118
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”), fulfilling one of his campaign pledges to provide additional COVID-19 pandemic relief. ARPA provides $1.9 trillion to struggling Americans and businesses and is the second largest relief bill after last year’s $2.2 trillion Coronavirus Aid, Relief and Economic Security (“CARES”) Act enacted in March 2020. Unfortunately, the bill’s passage was not a result of the bipartisanship that President Biden also pledged he would work on. Not one Republican member of the Senate or House voted in favor of the law. Nevertheless, ARPA brings needed relief to the many who were left jobless, furloughed, struggling to pay rent, or otherwise financially and adversely affected by the pandemic.
Since the law was just enacted and there are numerous provisions, additional details will need to wait for future guidance issued by the IRS and Department of Treasury, but here’s a summary of some of the key provisions as we understand them today.
1. Stimulus Payments
You may recall that the first Economic Impact Payment (i.e., “stimulus payment”) of up to $1,200 to eligible individuals was a result of the CARES Act. At the end of 2020, the Consolidated Appropriations Act of 2021 (“CA Act”) was enacted, which provided many adult Americans with an additional stimulus payment of up to $600. That stimulus payment was decried as wholly inadequate, and President Biden promised to provide additional stimulus payments to eligible individuals. ARPA officially designates the stimulus payments as 2021 Recovery Rebates, which are an advance of a 2021 income tax credit. ARPA provides an additional $1,400 per qualifying household member. For example, a married couple with two children may receive up to $5,600. By comparison, that is more than the $3,400 maximum payment from the CARES Act and the $2,400 from the CA Act.
There are, however, some major differences in the eligibility for this third round of stimulus payments. Under ARPA, dependents could include children age 17 and older, including college students age 23 and younger, as well as elderly or infirm family members living in the household as dependents. For children, under the CARES Act and CA Act, the definition of a dependent child relied upon eligibility for a child tax credit and hence was limited to children under the age of 17.
The ARPA payments also have more restrictive adjusted gross income (“AGI”) limitations. Benefits will phase out more quickly than before. For individuals, the phaseout range is $75,000 to $80,000. For head of household, it is $112,500 to $120,000. For married couples filing jointly, it is $150,000 to $160,000. Contrast that to the phaseout limits under the CARES Act and CA Act of 2021 respectively: individuals – $99,000/$87,000; head of household – $136,500/$124,500; and married filing jointly – $198,000/$174,000. As you can see, each round of stimulus payments has resulted in tightened qualifications to target relief to individuals and families with lower incomes.
To determine eligibility, the IRS will look to the most recently filed income tax return. For many, that will be the 2019 return. However, since the pandemic started in 2020, many who were adversely affected may have less income in 2020. That may be important to meet the phaseout limits. In that case, quickly filing a 2020 income tax return may be beneficial. However, at this point it is difficult to predict when stimulus payments will actually be made, although the Biden Administration has stated that payments could start in a matter of a few days. If the 2020 income tax return is not filed in time for the stimulus payment, that simply means that you’ll have to wait until later this year to receive the correct amount because ARPA authorizes the IRS to make corrections based upon the 2020 income tax return.
If you would qualify under your 2019 income tax return, but not under your 2020 income tax return, you may be better off waiting to file the 2020 return. The stimulus payment is not considered taxable income, and ARPA specifically forbids the IRS to take back any payments made (i.e., “clawback”).
For those who continue to financially struggle into 2021 but who don’t qualify to receive the full stimulus payment based upon past income data, you still might be able to get the stimulus payment when you file your 2021 income tax return next year. Remember that the ARPA stimulus payment is really an advance of an income tax credit for 2021.
2. Child Tax Credit
Prior to ARPA, the maximum child tax credit was $2,000 (“standard child tax credit”). ARPA provides for an increase of the maximum amount of the child tax credit from $2,000 to $3,000 per qualifying child. In addition, the maximum credit is further increased to $3,600 per qualifying child under the age of six as of December 31, 2021 (“enhanced child tax credit”). However, the AGI phaseout ranges for this enhanced child tax credit are significantly reduced.
The phaseout for the standard child tax credit begins at $400,000 for married filing jointly, and $200,000 for single. For every $1,000 over the phaseout limit, the credit is reduced by $50. The phaseout for the enhanced child tax credit begins at $150,000 for married filing jointly, and $75,000 of single. For every $1,000 over the phaseout limit, the credit is reduced by $50.
The child tax credit typically applies to children ages 16 and under as of the end of the year. ARPA temporarily increases the age to 17 and under for 2021.
Prior to the Tax Cuts and Jobs Act of 2017 (the “TCJA”), the child tax credit was a non-refundable credit. The TCJA increased the credit from $1,000 to $2,000 and made up to $1,400 of that amount refundable. ARPA makes the full child tax credit for 2021 refundable. That’s an important difference because if the credit makes the total tax liability negative for the year, the remaining credit is refunded to the taxpayer. This provision is expected to positively impact many families with young children.
In addition, ARPA requires that the IRS pay 50 percent of the estimated child tax credit amount in the second half of 2021, using tax data from 2020. If the advance exceeds the actual child tax credit amount, in some situations the excess is subject to clawback on the 2021 income tax return. Further guidance will be required from the IRS. As you can see, all of these changes made by ARPA can make calculating the child tax credit a complicated exercise.
3. Child and Dependent Care Tax Credit
Working parents with young children will receive more benefits from ARPA due to changes made to the Child and Dependent Care Tax Credit for 2021. This is a credit for dependent care expenses enabling the parent to continue working. Prior to ARPA, the credit was calculated using a maximum of $3,000 of qualifying expenses (e.g., daycare) for one qualifying child (i.e., those under age 13 for the entire year), and $6,000 of expenses for two or more qualifying children. (Taxpayers with dependents who are physically or mentally incapable of caring for themselves may also qualify for this credit.) ARPA increased the maximum amount of expenses that can be used to $8,000 and $16,000 depending upon one or more than one qualifying dependents. The law also changed the AGI limitations before the credit is phased out and the method for calculating the credit, making this credit available to many more American families with young children or other qualifying dependents. The changes will also impact high-income (i.e., over $400,000 in AGI) eligible families negatively. Whereas in the past they may have been eligible for a portion of the credit, they may no longer be eligible in 2021 and may phase out more quickly.
4. Unemployment Assistance
Enhanced unemployment benefits and assistance that were initially put into place by the CARES Act have been extended by ARPA. For example:
- The Pandemic Unemployment Assistance program created by the CARES Act to assist self-employed individuals who would normally not be eligible for unemployment compensation has been extended through September 6, 2021.
- The federal subsidy to regular state-provided unemployment compensation known as the Federal Pandemic Unemployment Compensation program, has been extended through September 6, 2021, with a federal unemployment benefit of $300 per week over and above state benefits.
- Federal aid will continue to be provided to states that provide unemployment compensation benefits beyond the normal period which the state typically provides unemployment benefits for. This federal assistance will continue through September 6, 2021.
Another unemployment benefit provided by ARPA is significant. For those with an AGI of less than $150,000, up to $10,200 of unemployment compensation received in 2020 will be tax-free. Additional guidance, however, is required because it is not clear if the $150,000 threshold applies to all taxpayers regardless of filing status, and if there is a phaseout or a true “cliff” (e.g., $149,999 of AGI results in a full $10,200 of tax-free unemployment benefits, whereas $150,000 of AGI results in zero tax-free benefits).
5. Health Insurance
ARPA also provides health insurance assistance to those who may have been laid off or furloughed from their jobs. Many individuals have their health insurance through their jobs, and the premiums are typically significantly subsidized by the employer. If an employee is terminated, they can rely upon COBRA (“Consolidated Omnibus Budget Reconciliation Act of 1985”) to continue health insurance coverage, but premiums can be up to 102 percent of the unsubsidized total premium, making the insurance out of reach for many. Fortunately, ARPA provides that employees who were involuntarily terminated from employment may maintain their health insurance coverage through COBRA from April 1, 2021, through September 2021, at no cost. The former employer will need to pay for the coverage, but the employer will receive a refundable payroll tax credit.
Additional health insurance assistance is provided for those who purchase their health insurance through a state-run health insurance exchange. For 2021 and 2022, the Premium Assistance Tax Credit has been enhanced.
6. Earned Income Tax Credit
Several changes were made to the Earned Income Tax Credit (“EITC”) for those with no qualifying children in 2021. The EITC is available to low- and moderate-income taxpayers as long as a certain percentage of their earned income does not exceed the amount designated in the law. The minimum age to claim the credit with no qualifying children was lowered from 25 to 19 years of age. The age limitation for those age 65 and over was also eliminated. The credit amount would also increase.
7. Rent and Mortgage Payments
There is a federal moratorium on evictions and foreclosures until the end of September 2021.
Conclusion
ARPA’s primary focus is clearly aimed at assisting individuals and steering more assistance to those in lower income levels because they were impacted by the pandemic the most, while limiting assistance to those in higher income levels. There are also many other provisions, some of which are designed to help small businesses, as well as state and local governments. Other provisions are aimed at helping schools, colleges and universities, and continuing vaccine research and distribution. Programs that help provide food to the needy also received significant support from ARPA, including extending the increase in benefits under the Supplemental Nutrition Assistance Program (SNAP) through September 2021. SNAP benefits were increased by 15 percent by the CA Act, but only through June 30, 2021.
This summary is not meant to be all-inclusive and is general education in nature. As you can tell, the details are complicated. As a result, clients are encouraged to seek the advice of their own tax and legal advisors. As further legislative developments occur, we will be sure to let you know how they may impact you, your family and your business.
The information presented is designed to provide general information regarding the subject matter covered and is current as of the date of publication. It is not intended to serve as legal, tax or other financial advice related to individual situations, because each person’s legal, tax and financial situation is different. For this reason, please consult with your own attorney, tax professional and/or other advisors regarding your specific situation.
Tax laws are complex and subject to change. The information presented is based on current interpretation of the laws. Neither Security Mutual nor its agents are permitted to provide tax or legal advice.