Key Tax Provisions in the $1.9 Trillion American Rescue Plan Act

The American Rescue Plan Act of 2021, the $1.9 trillion stimulus package debated in Congress over the past few weeks, was signed into law by President Biden on March 11, 2021. The legislation was widely expected to pass in advance of the March 14 expiration of enhanced employment benefits.

The Act’s most newsworthy provision is the $1,400 stimulus checks for individuals earning up to $75,000 per year ($150,000 per year for joint filers). That amount is gradually phased out for individuals earning up to $80,000 per year ($160,000 per year for joint filers), and will be phased out entirely for taxpayers earning greater than those amounts. Individuals will also receive an additional $1,400 payment for each dependent child claimed on their tax returns. The Act will use 2019 adjusted gross income (AGI) to determine eligibility, unless you have already filed a 2020 return. Similar to the two previous stimulus payments, these are considered Recovery Rebate payments and are fully refundable credits against 2021 taxes, payable in advance.

The Act also allocates an additional $7.25 billion to the Paycheck Protection Program (PPP) and $15 billion for targeted Economic Injury Disaster Loan (EIDL) advance payments, as well as a number of additional programs geared toward the hardest-hit industries. It also provides an extension in federal unemployment benefits as well as funding for states and municipalities, education, COVID-19 testing and vaccine distribution, and small businesses.

 

 

• Employee Retention Credit: The Act further extends the Employee Retention Credit (ERC) from June 30, 2021 until December 31, 2021, and it continues the ERC rate of credit at 70 percent for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the CAA extension and the pending ARPA extension, this means an employer could potentially have up to $40,000 in qualified wages per employee through 2021. Learn more about the Employee Retention Credit and whether your business may qualify here.

• Family and Sick Leave Credits: The Families First Coronavirus Response Act (FFCRA) enacted last March authorized refundable tax credits to reimburse employers for the cost of providing COVID-19-related paid sick and family leave wages to employees. The new legislation extends these credits to September 30, 2021 and increases the amount of wages for which an employer may claim the paid family credit in a year from $10,000 to $12,000 per employee. It also expands the definition of paid leave to include time off due to a COVID-19 vaccination.

• EIDL Grants: Under The Act, eligible small business may receive targeted economic injury disaster loan (EIDL) advances from the Small Business Administration. Amounts received as targeted EIDL advances are not included in gross income for the person who receives them.

 

• Earned Income Credit: The Act temporarily allows taxpayers to use 2019 income instead of 2021 income when calculating the amount of the credit. It also lowers the applicable minimum age to qualify for the credit in 2021 to 19 and increases the credit’s phase-out percentage to 15.3%. The threshold for disqualifying investment income is raised to $10,000 from $2,200.

• Child Tax Credit: The new legislation temporarily expands the eligibility and amount of the Child Tax Credit. The credit is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year). Additionally, the definition of a qualifying child has been broadened to include a child who has not turned 18 by the end of 2021. This expanded credit does, however, have increased modified AGI phase-out amounts of over $75,000 for singles and $150,000 for joint filers.

• Child and Dependent Care Credit: The Act makes several child and dependent care credit changes that apply for tax years that begin in 2021. The credit is refundable for 2021 and increases the employer-provided dependent care assistance exclusion to $10,500 for 2021.

• Premium Tax Credit: The premium tax credit helps eligible individuals cover premiums for health insurance purchased through the Health Insurance Marketplace. Under the Act, no additional income tax is imposed for tax years beginning in 2020 where the advance credit payments exceed the taxpayer’s premium tax credit. Additionally, the Act provides special rules for taxpayers who have received, or have been approved to receive, unemployment compensation for any week beginning during 2021.

• COBRA Continuation: Assistance-eligible individuals will receive extended coverage to September 30, 2021. The legislation also creates a refundable COBRA continuation coverage premium assistance credit.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.