The American Rescue Plan Act (ARPA) was signed by President Biden on March 11. The tax provisions in the new $1.9 trillion legislation bring more financial relief to families and individuals struggling from the economic fallout caused by the pandemic. In addition to welcome rebates and continued unemployment benefits, the ARPA expands and increases several credits for parents with children, as well as some miscellaneous new and extended business provisions.
The following is a recap of some of the new tax provisions. Also included in the ARPA are provisions for additional money and expanded eligibility for the Paycheck Protection Program (PPP) loans, Economic Injury Disaster Loans (EIDL) and grants for restaurants and shuttered venue businesses. There are also provisions to assist schools and state and local governments with COVID-related relief funding.
You may also view the full text of the new law here.
Individual and Family Assistance
- Recovery Rebates – In the biggest of the three rounds of economic impact payments, the act provides individuals with under $75,000 in AGI a $1,400 credit ($2,800 for married couples with under $150,000 in AGI) and a $1,400 credit for each dependent for 2021. Individuals with over $75,000 but under $80,000 and married couples with over $150,000 but under $160,000 will receive a partial credit calculated based on the actual AGI within the phaseout range. These figures are based on the AGI for the 2020 return, but the information from a taxpayer’s 2019 return will be used if 2020 is not yet filed. The IRS will begin sending out payments for these amounts shortly.
- Tax-Free Unemployment Benefits – The act excludes from income the first $10,200 of unemployment benefits received in 2020 for taxpayers who have AGI under $150,000 for 2020. This retroactive benefit is designed to help alleviate any tax burden resulting from the payment of these benefits. As of this writing, there is no guidance on how this exclusion will be included on the taxpayer’s return. Consideration should be given to extending/holding off on filing these returns until guidance from the IRS is received to avoid having to file an amended return for 2020.
- Extended Unemployment Benefits – The $300 additional Federal benefit paid to taxpayers receiving at least $1 of state unemployment benefits is being extended from the March 14 end date to Sept. 6, 2021.
- Child Tax Credit – The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children. The credit is increased from $2,000 to $3,000 per child ($3,600 for children under age 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits. Advance payments of this expanded credit available for the 2021 return may be paid monthly in advances from July through December 2021. The IRS will allow taxpayers to opt out of advance payments through an online portal or to provide information that would be relevant to modifying the amount. The advance payments will be reconciled on the 2021 return. In the event payments were made in excess of what the taxpayer was eligible for, the excess will be added to taxable income. However, taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.
- Child and Dependent Care Credit – Effective for 2021 only, the act makes the child care credit refundable and increases the maximum credits from $600 per child up to $1,200 for two or more children to $4,000 per child up to $8,000 for two or more children. The credit will be worth 50% of eligible expenses for households with AGI under $125,000. For households with AGI over $125,000 the credit would be limited, and for households with AGI over $400,000 the credit can be reduced below 20%. The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
- Earned Income Credit – The act introduces special rules for individuals with no children. For 2021, the applicable minimum age is decreased to 19 from 25, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated. The credit’s phaseout percentage is increased to 15.3% from 7.65%, and the phaseout amounts are increased to $11,610 for individuals. The credit would be allowed for certain separated spouses. The threshold for disqualifying investment income would be raised from $2,200 to $10,000. Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in determining the credit amount.
- Family and Sick Leave Credits – The credits for paid sick leave, paid family leave and code section 1333 regarding taxes on employers under the Families First Coronavirus Response Act are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave and are now expanded to include 501(c)(1) government organizations. The credit for paid family leave increases to $12,000, and the days of qualified leave increase to 60 days up from 50 for self-employed individuals. The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination. The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
- Student Loans – The act makes student loan forgiveness nontaxable for any student loan forgiven after Dec. 31, 2020, and before Jan. 1, 2026.
- COBRA Continuation Coverage – The act provides tax-free COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The credit is allowed against the Sec. 3111(b) Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount. This credit would allow a maximum of six months tax-free premium subsidy to any taxpayer who lost job-based health insurance coverage due to involuntary loss of work since the pandemic began. The subsidy would cover premiums and wages from the period April 1 through Sept. 30, 2021 and is available to anyone who is not eligible for other group health coverage.
- Premium Tax Credit – The tax credit on premiums paid to eligible individuals using an ACA compliant Marketplace Health Plan and will be increased to further subsidize individuals and families enrolled in an eligible plan. The new provision would allow for a maximum contribution of 8.5% of their income to their health plan. The change would apply to 2021 and 2022 only.
Business and Miscellaneous Provisions
- Employee Retention Credit (ERC) – The act extends the ERC to Dec. 31, 2021. This credit would allow eligible employers to receive up to $33,000 per employee against their payroll taxes in 2020 and 2021.
- Deductible Compensation Limitation – The act amends Sec. 162(m), for years after 2026, to add a corporation’s five highest-compensated employees (besides the employees already covered by Sec. 162(m)) to the list of individuals subject to the $1 million cap on deductible compensation.
- Excess Business Losses – The act extends the Sec. 461(l) limitation on excess business losses of noncorporate taxpayers for one year, through 2027.
- Foreign Tax Credit Interest Allocation – The act repeals Section 864(f) which allowed affiliated groups to elect to allocate interest expense on a worldwide basis when calculating a taxpayer’s foreign tax credit limitation.
- Economic Injury Disaster Loan Grants (EIDL) – EIDL grants will not be included in gross income; expenses associated with these grants will be deductible as ordinary expenses as long as they fall under the IRC Section 162 guidelines, and basis increase will be allowed. SBA restaurant revitalization grants will also be granted similar treatment.
- Paycheck Protection Loan Eligibility – The act allows for a new eligibility category for an “additional covered nonprofit entity” which includes any nonprofit that is NOT listed in section 501(c)(3), 501(c)(4), 501(c)(6), or 501(c)(19), receives and spends less than 15% of its receipts and expenses on lobbying, spends less than $1 million on lobbying, and employs not more than 300 employees.
Should you have any questions, please don’t hesitate to reach out to your tonneson + co representative.