March 11th, the President signed the $1.9 trillion American Rescue Plan Act into law.
Here are some of the tax changes included in the bill:
Economic Impact Payments (Recovery Rebates)
The bill contains a third round of economic impact payments (set up as advance payments of a recovery rebate credit) of up to $1,400 per individual ($2,800 for married taxpayers filing jointly) plus $1,400 per dependent, including qualifying relatives and college students who are claimed as dependents.
The phase-out for individuals begins at an adjusted gross income of $75,000 and completely phases out for individual taxpayers with AGIs over $80,000. For married taxpayers filing jointly, the phase-out begins at an AGI of $150,000 and ends at $160,000. For heads of household, the phase-out begins at an AGI of $112,500 and ends at an AGI of $120,000.
Eligibility for the credit is based on the taxpayer’s 2019 AGI unless they already filed a 2020 return.
Federal Unemployment Benefits Under the American Rescue Plan Act
The American Rescue Plan Act extends a $300-per-week supplement to unemployment benefits through September 6th (originally scheduled to expire March 14th). It also makes the first $10,200 in unemployment benefits tax-exempt in 2020 for taxpayers who make less than $150,000/year.
Child Tax Credit
For 2021, the Child Tax Credit (originally $2,000) increases to $3,600 per child under 6 years old and $3,000 for children between the ages of 6 and 17. The increased credit amount phases out at an adjusted gross income of $150,000 for joint filers, $112,500 for heads of household, and $75,000 for individuals.
Employer-Provided Dependent Care Assistance
In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).
Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.
Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).
This provision is effective for tax years beginning after December 31, 2020.
Earned Income Credit
For 2021, the minimum eligibility age to claim the earned income credit is 19 years old (18 in some situations). The bill also increases the credit and phase-out percentages, allows separated spouses to use the credit in certain situations, and modifies the disqualified investment income test.
Family and Sick Leave Credits
The American Rescue Plan Act extends the credits for sick and family leave (initially introduced in the Families First Coronavirus Response Act) to September 30th, 2021. The cap on paid family leave is increased to $12,000.
Employee Retention Credit
The employee retention credit is extended from June 30 until December 31, 2021. The American Rescue Plan Act continues the ERC rate of credit at 70% for this extended period of time. Thus, employers can receive up to $28,000 per employee for 2021.
Businesses that began operating after February 15, 2020 are now eligible to claim the Employee Retention Credit if their gross receipts for the prior 3 years do not exceed $1 million.
More to Come on the American Rescue Plan Act
These are just a few many provisions contained in the new act. Stay tuned for more information. If you have any questions, comments, or concerns, please reach out to us by calling 443-320-4101 or emailing [email protected]
Author: Megan O’Donnell