President Biden signed the $1.9 trillion American Rescue Plan Act of 2021 (ARPA) yesterday which contains many tax provisions and additional stimulus payments aimed at addressing the continuing economic and health impacts from the coronavirus pandemic. The bill also includes $160 billion for vaccine and testing programs, $360 billion in aid for state and local governments and $170 billion to help schools reopen. Here is a summary of the provisions for businesses and individuals that a direct impact on you and your business.
Unemployment compensation – Unemployment compensation received in 2020 will be partially excluded from income for some taxpayers. Under the ARPA, if the adjusted gross income of the taxpayer is less than $150,000, the first $10,200 of unemployment compensation received is not reported as gross income. Individuals who have already filed their 2020 tax return can file an amended return to claim a refund if applicable. The bill also extends the $300 weekly supplemental unemployment benefits that were schedule to expire on March 14th until September 6th.
Individual recovery rebate/credit – Eligible individuals will receive payments of $1,400 (or $2,800 for eligible individuals filing a joint return) plus $1,400 for each dependent (including college students and qualifying relatives who are claimed as dependents). The payments are considered refundable income tax credits for 2021. The credits are phased out for adjusted gross income over $150,000 for a joint return and $75,000 for individuals. The credit is completely phased out for taxpayers with adjusted gross income over $160,000 for a joint return and $80,000 for individuals. The plan also now allows residents who are married to undocumented residents to receive stimulus payments. The IRS will try to make the payments electronically by the end of the month. Eligibility will be determined by looking at a taxpayers 2020 tax return, or if they have not filed yet, their 2019 return.
Child tax credit expanded – Under pre-ARPA law, the child tax credit was $2,000 per qualifying child. A qualifying child is defined as under age 17, whom the taxpayer can claim as a dependent and is a US citizen. For 2021, the child tax credit is increased to $3,000 per child or $3,600 for children under age 6. The increased credit amounts are phased out at an adjusted gross income of $150,000 for joint filers and $75,000 for individuals. Taxpayers who are not eligible to claim the increased child tax credit for 2021, can claim the regular credit up to $2,000 which is phased out for taxpayers with an adjusted gross income of over $400,000 for joint filers and $200,000 for individuals. Included in the bill is a requirement that the IRS must establish a program to make monthly (periodic) advance payments equal to 50% of eligible taxpayers 2021 child tax credit from July to December 2021. The IRS must also create an online portal to allow taxpayers to opt out of advance payments or provide information regarding the number of qualifying children. To determine eligibility, the IRS will look at taxpayers 2020 tax returns or if they are not filed yet, their 2019 returns.
Earned income tax credit – Several changes were made to the earned income tax credit including special rules for individuals with no children such as reducing the applicable minimum age to 19 (except for specified students under 24) and qualified former foster or homeless youth. The maximum age of 65 is eliminated.
Child and dependent care credit – The child and dependent care credit which previously could not exceed $3,000 for one qualifying individual or $6,000 for more than one, has been increased to $8,000 for one qualifying individual and $16,000 for more than one. The credit also changed from being non- refundable to refundable if the taxpayers have a principal abode in the US.
Student loan discharge – ARPA excludes from gross income certain discharges of student loans made after December 31, 2020 and before January 1, 2026. The exclusion applied to loans provided for post-secondary educational expenses if the loan was made by a government or educational institution, private education loans, and any loan made qualifying as 50% charity.
Premium tax credit – Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount.
First Families Coronavirus Relief Act (FFCRA) extension – Sick and family paid leave credits made available under FFCRA have been extended to September 30, 2021. The ARPA also increases the limit on credit for paid family leave to $12,000 and allows for paid leave credits for leave due to a COVID-19 vaccination. Also, the limitation on the overall number of days considered for paid sick leave will reset after March 31, 2021. The credits have been expanded to allow 501(c)(1) government organizations to take them.
Employee Retention Credit (ERC) – The employee retention credit, first included in the CARES Act and modified under the CAA, has been extended from June 30, 2021 to December 31, 2021. An employer may qualify for the ERC if there was a full or partial suspension of business operations or a significant decline in gross receipts. Previously the credit could be taken against Social Security but for third and fourth quarter, it is taken against Medicare. Since the Medicare rate is lower than Social Security, it is more likely that employers would need to file Form 7200 to receive advance payment of the employer credit.
Targeted Economic Injury Disaster Loan (EIDL) advances – Eligible small businesses may receive targeted EIDL advances from the Small Business Administration as the program was allotted another $15 billion. The advances received as targeted EIDL advances are treated as tax-exempt income.
Restaurant revitalization grants – Eligible restaurants, food trucks and similar businesses may receive restaurant revitalization grants from the Small Business Administration. The grants are treated as tax-exempt income.
Increase in exclusion for employer-provided dependent care assistance – Under pre-ARPA law, the amount that could be excluded from an employee’s gross income under a dependent care assistance plan was no more than $5,000. For 2021 only, the employer-provided dependent care assistance is increased from $5,000 to $10,500 for married filed joint. Is it increased from $2,500 to $5,250 for single or married filing separate.
Cobra premium subsidies – Individuals eligible for assistance may receive a 100% subsidy for COBRA premiums for any period of COBRA coverage during the period beginning on April 1, 2021 and ending on September 30, 2021. An assistance-eligible individual (AEI) is a COBRA qualified beneficiary who is eligible for and elects COBRA coverage due to a qualifying event of involuntary termination of employment or reduction in hours. Employers will be provided a quarterly tax credit against the Medicare payroll tax equal to the premium amounts not paid by AEIs. If the credit amount exceeds the quarterly Medicare payroll tax, the excess may be paid in advance.
For more on the provisions included in the American Rescue Plan Act, reach out to Holbrook & Manter for more information.