A Deep Dive into the Tax Provisions of the American Rescue Plan Act of 2021

Last week we posted a High-Level View of the American Rescue Plan video, but this week we wanted to dive a little deeper! We know this is a complex plan that has left many confused and wondering how this applies to their 2020 versus 2021 taxes. So we’re going to tackle that together!

To start, let’s look at a few highlights you’ll see explained below:

1. Only 25% of the provisions involve tax changes.
2. Most of these provisions are intended to be in effect for just 2021.
3. The majority of the tax provisions in this act affect 2021. Only one affects the current 2020 tax year for individuals.
4. There are no Business Tax Provisions affecting 2020 only.

Business Tax Provisions Affecting 2021

1. Payroll Tax Credits for Sick & Family Leave extended to September 30, 2021. This extends the payroll tax credits first introduced under the Families First Coronavirus Response Act for sick & family leave related to COVID. This credit can be taken against the employer’s share of either Medicare or Social Security taxes.

2. Employee Retention Credit extended to January 1, 2022. This extends this payroll tax credit, which can be applied against the employer’s share of Medicare or Social Security. At the time it was originally enacted, this credit interacted with the Paycheck Protection Program (PPP) loans in such a way that the same payroll expense could not be used for both. There have been changes made to this credit since then.

3. Paycheck Protection Program (PPP Loans) modified to make it easier for certain Nonprofits to qualify. This does not apply to 501(c )(3)’s or some other 501(c ) nonprofits; it does relax the ability of nonprofits with receipts from lobbying activities to apply for the PPP loan. Qualifying nonprofits are also authorized to apply for the Second Draw PPP loans.

4. Targeted EIDL Grants of $5,000 for Small Businesses. This is a new grant for qualifying small business with no more than 10 employees. SBA applications to the program will start 28 days after this legislation was enacted. There will be a 14-day application period. Small businesses with economic loss greater than 50% will be given priority. Other small businesses can apply 42 days after enactment, subject to funds availability. These grants will NOT be taxable income; expenses paid with the EIDL grants will still be deductible.

5. Grants for Restaurants. This SBA program will award $20 billion in grants for eligible restaurants of different levels of annual gross receipts; $5 billion will be earmarked for restaurants with less than $500K of gross receipts in 2019. Additionally, for the first 21 days, priority will be given to women-owned, veteran-owned or socially/economically disadvantaged entities. There are other restrictions.

Individual Tax Provisions Affecting 2020 Only

1. Unemployment Compensation – first $10,200 not taxable on the federal return. This will be true for households with income less than $150K, no matter the filing status. Those who have already filed individual returns for 2020 can amend but the IRS is currently recommending that taxpayers wait. Presumably, the IRS is weighing whether it can implement some tool that will allow taxpayers to provide the needed information without having to amend.

Individual Tax Provisions affecting 2021

1. $1,400 Stimulus Payment (aka Economic Impact Payment/Rebate Credit). The IRS will be issuing Economic Impact Payments of $1,400 per taxpayer and $1,400 per dependent (regardless of age), for 2021. Eligibility will be based on the 2019 tax return (or the 2020 return if already filed). The payments phase out completely for taxpayers who have adjusted gross income of:

a. $80K for Single,

b. $160K for Married Filing Joint and

c. $120K for Head of Household

If taxpayers qualify but are unable to receive the payments for whatever reason, they will be able to receive the payment as a Recovery Rebate Credit on their 2021 returns. They may receive a refund for any credit owed them but they will NOT have to pay back any excess stimulus payment received.

2. Child Tax Credit Increased for 2021 only. The credit is increased from $2,000 per child to $3,000 per child ($3,600 per child for children under 6 years old by end of year). The child tax credit will be fully refundable and includes dependents under 18. The credit phases out for taxpayers who have adjusted gross income over:

a. $75K for Single,

b. $150K for Married Filing Joint and

c. $112.5K for Head of Household

The phaseout only applies to the increase in the credit; those with higher income will still get the previous credit of $2,000 per child.

3. Advance Payments on Child Tax Credit to be issued between July 1st and December 31st, 2021. As part of the Child Tax Credit increase mentioned in #3, the Treasury Department was mandated to establish a program by July 2021 in order to make advance payments to certain taxpayers. These will be monthly payments in the amount of 1/12 of the expected annual child tax credit, from July 1st to December 31st, 2021. The original calculations will be based on 2019 returns (or 2020 returns, once filed) but the details of this program are still being worked out. Note: any excess will have to be repaid unless families fall below certain income thresholds.

4. Earned Income Tax Credit Increased for Adults without Children in 2021 only. This increase in the EITC is only for adults WITHOUT a child. The credit is increased from 7.5% to 15.3% and the phaseout ranges have increased. The net result is that the maximum potential credit has increased from $543 to $1502. This will only affect taxpayers with income below $27,370 (Married Filing Joint) or $21,430 (all other filing statuses).

5. Dependent Care Tax Credit Increased for 2021 only. This normally non-refundable credit will be refundable for 2021. It was normally based on up to $3K of child care/dependent care expenses for the first child, $6K for two or more children. For 2021, it the expense amounts will be increased to $8K for the first child, $16K for two or more children. And the percentage for calculating the credit is increased to 50%. This new and improved credit will begin to phase out for taxpayers with adjusted gross income of $125K. But they will still be able to take the old tax credit of $2K per child unless their adjusted gross income exceeds $400K.

6. Excludible Employer Provided Dependent Care Assistance Increased for 2021. The amount allowed for excludible dependent care benefits is increased from $5,000 to $10,500 for Married Filing Joint.

7. Premium Tax Credit (for health insurance) changed for 2021 AND 2022. For these two years, the tables used to calculate the premium tax credit have been revised to make it easier for a family to fall within the lower poverty limits for calculating the premium tax credit.

8. Federal unemployment supplement of $300/week extended to September 6, 2021.

9. 100% Federal Subsidy for COBRA Continuation Coverage from April 1st to September 30, 2021.

10. Forgiven Student Debt is NOT taxable for 2021 to 2025.