In the latest round of COVID-19 legislation, the American Rescue Plan Act of 2021 passed the Senate by a 50-49 vote on March 6, 2021. The bill had been subject to many changes in the Senate after passing in the House on February 27. The bill was signed into law by the President on March 11, 2021.
We have summarized the major pieces of tax legislation here. This does not cover every aspect of the law but what we think is most relevant to the readers of the blog.
Major Individual Tax Highlights:
Third Round of Direct Stimulus – $1,400 payments will be distributed to individuals making $75,000 per year ($150,000 for couples, $112,500 for head of household) but drop to $0 for those making $80,000 annually ($160,000 for couples, $120,000 for head of household), down from a phase-out at $100,000 for individuals in the House-passed bill. The payments are essentially credits against 2021 taxes, but fully refundable and payable in advance (similar to the prior payments). In this round, all dependents of any age are included, not just dependents under 17.
Child Tax Credit – The bill includes a significant overhaul of the child tax credit, but only for the 2021 tax year. Most Americans would receive $3,000 a year for each child ages 6 to 17, and $3,600 for each child under age 6. It is a major expansion of the existing child tax credit, which currently provides $2,000 a year for children from birth through age 16. The additional child tax credit above the $2,000 base amount is subject to an income phaseout. The provision in the bill would last one year. The IRS has been directed to send advance “periodic” payments of 50% of the credit amount beginning July 1st for taxpayers below specified income limits. Advance payments may have to be repaid if received in error. The bill does provide a safe harbor from repayment for low-to-middle income households. For 2021 the credit is fully refundable as opposed to partially refundable under existing law.
Earned Income Tax Credit – For 2021 only, the amount of the credit is significantly increased for filers without children. The changes cause the childless EITC amount for 2021 to increase from $543 to $1,502, increase the amount of income at which the credit is maximized to $9,820 (currently set at $7,100) and increase the threshold for the phase-out of the credit for non-joint filers to $11,610 (currently set at $8,880). The minimum age for childless claimants of the EITC is also reduced from 25 to 19 (except in the case of full-time students).
Unemployment Benefits Relief – The bill also includes an extension of enhanced $300 weekly unemployment relief first made available in the early pandemic relief bills. The extension, originally set to expire in March, would run through early September under the bill, but with some changes. The notable change for tax purposes makes the first $10,200 of unemployment relief exempt from tax for households with up to $150,000 of income.
Dependent Care Assistance – This is significantly enhanced for 2021 only. The bill increases the credit to 50% of up to $8,000 of qualified dependent care expenses for a qualifying person and on up to $16,000 for two or more qualifying persons. Phaseout of credit begins once adjusted gross income reaches $125,000. The 2021 credit is refundable. Existing law provides for a 35% credit on up to $3,000 of qualified expenses ($6,000 for two or more) that begins to decrease once AGI reaches $15,000, but does not decrease below a 20% credit. In addition to the enhanced credit, the maximum exclusion of employer-provided dependent care assistance is increased to $10,500 ($5,250 married filing separate filers) for 2021 only. Consult your tax advisor to determine which option is right for you.
Employer Tax Highlights:
Employee Retention Credit – This highly popular employer credit was extended through the end of calendar 2021. The ERC was originally included in the CARES ACT, and then updated in the Consolidated Appropriations Act (CAA). This update allowed taxpayers to get PPP loans and then also use the ERC, which has really expanded its use.
For eligible employers, the ERC is equal to 50 percent of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020. For more information on this credit, see our prior blog titled, “Doubling Up on the Employee Retention Credit and PPP Loan Forgiveness“.
Paid Sick and Family Leave Credits – This credit was one of the first emergency acts of the COVID period which was in the FFRCA. The period for which the credit could be claimed on eligible wages was originally set to expire on December 31, 2020, and then extended to March 31, 2021 by the CAA. The bill extends the applicable period to September 30, 2021. The bill also increases the limit on applicable wages for which the credit can be claimed to $12,000 from $10,000, effective after March 31, 2021.
If you have any questions, please reach out to your JMF Tax CPA.