The American Rescue Plan Act of 2021 was signed into law on March 11. It aims to help about 158 million households get back onto their feet after a year-long struggle with the coronavirus pandemic.
The legislation contains many provisions assisting individuals, small businesses, state and local governments, and schools. While most of its provisions for individuals relate to tax-year 2021, its tentacles reach into four tax years – 2019 through 2022.
A few of the key benefits for individuals include:
Taxpayers with Adjusted Gross Income (AGI) up to $75K single and $150K married filing jointly are eligible. Taxpayers with AGIs of $80K and $160K or higher, respectively, are not. This “cliff-like” phaseout range is much tighter compared to the two previous relief packages. As before, these payments are considered refundable tax credits and are tax-free.
Additionally, $1,400 payments are earmarked for each qualified dependent including children under age 19 (under age 24 if a full-time student) and dependent parents. Such payments are paid directly to the primary taxpayers, not to dependents.
AGI from the most-recently-filed federal tax return is used to determine eligibility. If a 2020 return is filed and is more favorable than 2019, the 2020 AGI is used. The 2020 filing window is open until the Additional Payment Determination Date (earlier of September 1 or three months following the filing deadline, which at the time of this writing was delayed to May 17). Beyond that, there is one additional opportunity – claiming the credit on the 2021 tax return based on 2021 AGI.
Any amounts correctly paid based on a taxpayer’s AGI on file with the IRS at the time of payment can be kept by the taxpayer. There is no clawback if later AGIs are not as favorable. However, if the 2020 AGI is the most favorable, that return must be filed by the Additional Payment Determination Date to maximize the credit.
Normally, the child tax credit for dependent children age 16 or younger is $2,000, subject to a phaseout starting at $200K AGI for single taxpayers and $400K for married filing jointly. For 2021 only, the credit is enhanced to $3,000 for dependent children ages 6 to 17 and $3,600 for those younger than 6.
Single filers with 2021 AGIs up to $75K and married couples up to $150K receive the full credit for 2021. Those making above these levels receive a reduced portion of the enhanced credit. At even higher AGIs, families not eligible for the $3,000 or $3,600 credit, but who have AGIs at or below $200K and $400K, respectively, still get the standard $2,000 credit with a phaseout above those thresholds.
The IRS will pay half of the credit in advance by sending monthly payments to qualifying taxpayers from July through December with eligibility based on 2019 or 2020 tax returns. The other half will be available on 2021 tax returns. If desired, taxpayers may opt out of the July-to-December payments and receive the full credit next year.
If 2021 AGI is more favorable to the taxpayer, any additional credit can be claimed at that time. If less favorable, some credit overpayment may need to be repaid at tax time, depending on 2021 AGI.
The Act excludes from federal taxation the first $10,200/person of 2020 unemployment benefits. This relief applies only to tax returns with 2020 AGIs less than $150K including all unemployment income. As of this writing, the IRS is urging taxpayers who earlier filed their 2020 returns not to file amendments to claim the exclusion. The IRS plans to automatically issue refunds.
Additionally, the special weekly federal supplement of $300 for unemployment benefits offered through state plans is extended to September 6.
While the Act does not include student loan cancellation, it does make any loan forgiveness federally tax-free through December 31, 2025. Loan forgiveness generally is a taxable event. It is possible Congress may enact some sort of blanket student debt forgiveness program in the future.
For folks who lost their employer-paid health insurance involuntarily due to lay-offs or reduced work hours, the federal government will pay their entire COBRA premiums from April through September of 2021.
Alternatively, the Act provides enhanced subsidies through 2022 to purchase coverage in the state-run health insurance Exchange. In addition, regardless of income, those who collect unemployment insurance at any time in 2021 will qualify for the free Silver Plan for the full year.
Given its complexity, the Act offers several planning opportunities to maximize its benefits for you and your family. If you are not currently working with a non-commissioned financial planner, now is the time to engage with one.
Have questions about The American Rescue Plan Act of 2021? Contact me at (585) 419-0670, ext. 50630 or by email at [email protected].
Tax information presented is not to be considered as tax advice and cannot be used for the purpose of avoiding tax penalties. Canandaigua National Bank & Trust does not provide tax, legal, or accounting advice. Please consult your personal tax advisor, attorney, or accountant for advice on these matters.