American Rescue Plan Act

On Wednesday, the House of Representatives passed the American Rescue Plan Act. President Joe Biden signed on March 11, 2020.  This bill contains numerous tax provisions that will change 2021 taxes for many people. 

Unemployment Benefits

The most immediate change will be the change in how unemployment is taxed. Currently, unemployment benefits are fully taxable. This bill makes the first $10,200 in unemployment benefits tax-free for those making less than $150,000 per year. This change applies for the 2020 tax year, so many people who have already filed returns will likely need to amend them to get the tax they paid on this amount back. We will be reaching out to any of our clients who are affected by this change to coordinate the filing of an amended return, if necessary. 

Stimulus Payments

Another round of stimulus payments will be coming as part of the bill. Just like the previous payments, these are considered an advance payment of a 2021 tax credit. The IRS will be calculating the payment amounts based on whatever tax return has been most recently filed. If you have not filed your 2020 taxes yet, they will use your 2019 adjusted gross income to calculate the advance payment of the credit. These stimulus payments phase out rather quickly. Single filers will start to see these payments get reduced once their AGI exceeds $75,000. The payment will be reduced to $0 once your AGI reaches $80,000. For married couples, this threshold starts at $150,000 and ends at $160,000. If you do not receive a stimulus check because your income was too high and your income drops below the threshold on your 2021 tax return, you will receive a tax credit for the stimulus check on your 2021 taxes.  

Child Tax Credit

Prior to the passage of this bill, the Child Tax Credit was $2,000 of which $1,400 could be refunded to the taxpayer if they didn’t have enough tax to use the full $2,000 credit against. For instance, if your tax bill was only $200, the credit would reduce your tax to $0 and you would receive $1,400 extra as a refund. Or, if your tax was $10,000, the credit would reduce your tax due to $8,000. As you can see, this limits the credit to $1,400 for taxpayers with no taxes due. 

The new bill expands the child tax credit to $3,000 per child ($3,600 for children under 6) and makes the entire amount refundable. This change only applies for the 2021 tax year but watch for legislation to make this permanent. The IRS has been directed to begin making advance payments of this credit in July of 2021. This means that filers will need to reconcile this amount on their tax return. 

This expanded amount begins to phase out for taxpayers with the following income levels:

Married Filing Joint – $150,000

Head of Household – $112,500

Single – $75,000

Each year, the taxpayer will have to reconcile the amount of the credit that they received, with the amount that they should have received based on 2021 income. Depending on your income level, you may need to pay back the overpayment of the credit. 

Earned Income Tax Credit

The Earned Income Credit has been expanded to include people who are age 19. Previously, the taxpayer had to be at least 24 to claim this credit. This credit can be complex and is outside the scope of this article, but it allows for a refundable tax credit based on different income levels. The amount of the credit follows a bell curve where if you do not have any earned income, you get no credit but as your income goes up the credit increases until it starts to decrease to zero. 

Child and Dependent Care Credit

Prior to this act, taxpayers were allowed a tax credit for the amount paid for childcare during the year. The amount of the credit depended on your income, and it was not refundable. The act changes this credit to make it refundable and expands the amount that you can receive. Previously, the maximum credit was $2,100, the act expands this credit to a maximum of $8,000. Many factors impact this credit including the amount your employer provided for dependent care benefits. 

We will continue to update this article as details about how the bill will be implemented emerge.