Richard J. Wright, Jr. CPA
Director | Tax Practice
President Biden signed the $1.9 trillion American Rescue Plan Act of 2021 (ARP) on March 11, 2021. The ARP provides relief funding to families and individuals, state and local governments, businesses and tax-exempt organizations. Many of its key tax provisions will be available only for the 2021 tax year. Some notable benefits for individual taxpayers and businesses include the following:
Assistance to Families and Individuals
Third Round of Stimulus Payments
The U.S. Treasury began making stimulus payments of $1,400 in mid-March to eligible individuals as refundable tax credits that will be calculated on their 2021 income tax returns. The stimulus payment is based on the taxpayer’s 2019 return, though the 2020 filing may be used if it has been processed by the IRS. Eligible taxpayers include:
- Individuals earning up to $75,000
- Single parents earning up to $112,500
- Couples earning up to $150,000
The thresholds for the payment/credit decreases for taxpayers whose adjusted gross income is between certain parameters:
- Single taxpayers whose adjusted gross income is between $75,000 and $80,000
- Joint filing taxpayers whose adjusted gross income is between $150,000 and $160,000
Because relief is geared to those most in need, taxpayers with adjusted gross income above the upper thresholds are not eligible for the payment/credit.
Child Tax Credit
To assist low-income and middle-income taxpayers, the $2,000 Child Tax Credit has been modified for 2021 only. It increases to $3,600 for each child under age 6 and to $3,000 for children between the ages of 6 and 17. This modification is being applied in two parts: the original credit amount of $2,000 and the additional amount ($1,600 or $1,000).
Under existing tax law, the original $2,000 Child Tax Credit phases out when the taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds $400,000 for joint filers and $200,000 for other taxpayers. Under ARP, this computation remains the same and a separate phaseout is applied for the increased credit amount that begins at the lower income threshold levels of $150,000 for joint filers, $75,000 for filers, and $112,500 for head of household filers.
Beginning July 1, 2021, families will be able to obtain advance payments for the Child Tax Credit through a program that the U.S. Treasury is creating. The payments will be based on the taxpayer’s most recently filed tax return and the program will strive to pay 50% of the credit to eligible families by the end of 2021. The IRS is developing a portal to enable taxpayers to enter 2021 applicable information so that proper credit amounts are issued. If advance payments exceed the amount of credit determined on the 2021 tax return, taxpayers must repay the excess amount by increasing their tax balance due for 2021.
Child and Dependent Care Tax Credit
For 2021 only, the Child and Dependent Care Tax Credit is expanded to 50% from 35% and is refundable. Eligible expenses for the credit increased significantly from $3,000 in 2020 to $8,000 for one child/dependent, and from $6,000 to $16,000 for two or more children/dependents.
To assist families with a low tax liability, the $15,000 initial phaseout level increases to $125,000 and allows families with adjusted gross income (AGI) of $125,000 or less to be entitled to the entire credit. For families with AGI between $125,000 and $400,000, a partial credit is available. The ARP changes the 20% credit amount to a “phaseout percentage” that causes a reduction of the 20% credit when the taxpayer’s AGI exceeds $400,000.
Unemployment Compensation Extended
After more than 40 million Americans sought unemployment compensation in 2020, the ARP extends the current $300 per week payment through September 6, 2021. It also provides that the first $10,200 in benefits for the tax filer will be nontaxable for 2020 in households making less than $150,000. Although the ARP does not provide a different threshold for single and joint filers, both spouses are entitled to consider $10,200 of their unemployment compensation as nontaxable for a total amount of $20,400 if both spouses received these benefits.
Student Loan Forgiveness
Although broad student loan forgiveness was not included, the ARP includes a provision classifying certain student loan forgiveness as tax-free between December 30, 2020 and January 1, 2026. This includes loans expressly for post-secondary educational expenses where the loan is insured or guaranteed by the U.S. government or its instrument or agency; by a state, territory or possession of the U.S. or the District of Columbia; by an eligible educational institution; and for certain private education loans.
Assistance to Businesses
Sick Leave Pay and Family Medical Leave Pay Credits Extended
Sick leave pay and family medical leave pay rules are extended through September 30, 2021 under ARP. The cap on family medical leave pay increases from $10,000 to $12,000.
Under the Families First Coronavirus Response Act (FFCRA), certain benefits were required to be provided for sick leave pay and family medical leave pay. However, the federal credits will not be allowed if the provision of these benefits discriminates in favor of highly compensated employees, full-time employees or on the basis of tenure.
FFCRA had excluded large employers (500 or more employees) and certain small employers, but the ARP now extends these provisions to those groups. The FFCRA funded these benefits through a dollar-for-dollar refundable credit against payroll taxes.
Employee Retention Tax Credits
The Employer Retention Tax Credit (ERTC) program, created under the Coronavirus Aid, Relief and Economic Security (CARES) Act solely for 2020, was extended for the first two quarters of 2021 with considerably more lenient rules for 2021 to benefit a potentially larger group of employers. The ARP extends the ERTC program through December 31, 2021.
Employer-Provided Dependent Care Assistance
The limit on tax-free employer-provided dependent care assistance increases from $5,000 to $10,500 (50% for taxpayers filing married but separate) for 2021 only. The ARP includes rules allowing a plan amendment to be made by the last day of the plan year, as long as the plan is operated consistently with this change as of the effective date of the amendment.
Relief for the Restaurant Industry
The restaurant industry was one of the hardest hit due to COVID-19, resulting in workers being laid off, significant loss of business and the closure of restaurants and catering facilities. To help the industry, the ARP includes $28 billion in grants for eateries including restaurants, bars, halls, brew pubs, tap rooms and tasting rooms. Assistance of up to $5 million per restaurant or $10 million per restaurant group is available and $5 billion in funding is reserved for restaurants with 2019 gross receipts of less than $500,000. Aid will be administered as a Small Business Association (SBA) grant program and grant funds can be used to offset expenses from February 15, 2020, through the end of 2021. Eligible expenses include payroll, benefits, rent, utilities, cleaning, equipment, food and other costs.
The IRS and Treasury will issue tax guidance regarding the implementation of the ARP and its new provisions. Check with your Freed Maxick tax professional for updates and any additional changes related to the items noted above.