The American Rescue Plan (ARP), which was recently signed by President Biden, includes a number of key tax provisions. Many will be enacted solely for the 2021 tax year.
These tax provisions include the following:
Treasury will make payments of $1,400 to taxpayers as an advance against a credit that is to be calculated on 2021 income tax returns. The payment/credit, also referred to as the “stimulus payment,” is allowed to an “eligible individual” who is anyone other than:
A taxpayer is entitled to the payment/credit for him/herself and also for each dependent. Unlike prior versions of these cash payments, the additional amount is allowed for any dependent and not only for children under the age of 17. The advance payment is generally based on the taxpayer’s 2019 return, though the 2020 filing may be used if it has been processed by IRS.
The payment/credit amount phases out for taxpayers whose adjusted gross income is between certain stated thresholds:
For those with adjusted gross income above the upper threshold amounts, no payment or credit is allowed.
Solely for the 2021 tax year, the $2,000 Child Tax Credit is increased to $3,600 for every child under age 6 and to $3,000 for children between the ages of 6 and 17 (one year older than under current law). This modification creates a credit that is divided into two components: i) the original credit amount of $2,000; and ii) the increased amount.
Under current law, the original $2,000 credit is subject to a phase-out when Modified Adjusted Gross Income (MAGI) exceeds $400,000 for joint filers and $200,000 for other filers. Under ARP, this phase-out computation will remain. However, a separate phase-out will be implemented for the increased credit amount, which starts at lower income threshold levels ($150,000 for joint filers, $75,000 for separate filers and $112,500 head of household filers).
ARP also provides that Treasury will create a program to enable advance payments for the Child Tax Credit starting July 1, 2021. This program will result in 50% of the credit being paid to eligible families by the end of 2021. The payments will be based on the most recently filed return.
The IRS is tasked with creating a portal enabling taxpayers to enter information applying to 2021, so that the proper amounts of credit are issued. If advance payments exceed the amount of credit determined on the 2021 tax return, the excess amount must be repaid by increasing the tax due for 2021.
The ARP provides for an extension of the $300 per week payment of unemployment compensation through September 6, 2021.
The ARP also provides that, for 2020, the first $10,200 in benefits for the tax filer will be nontaxable for households making less than $150,000. The text of the law does not provide a different threshold for single and joint filers. However, both spouses are entitled to consider $10,200 of their unemployment compensation nontaxable, for a total of $20,400 if both spouses receive such benefits.
The increase in the phase-out level from $15,000 to $125,000 will entitle those earning $125,000 or less be entitled to the entire credit.
Solely for the 2021 tax year, the limit on tax-free employer-provided dependent care assistance is increased from $5,000 to $10,500 (50% for taxpayers filing married separate). The ARP provides rules that permit a plan amendment to be made by the last day of the plan year, so long as the plan is operated consistently with this change as of the effective date of the amendment.
Under the Families First Coronavirus Response Act (FFCRA), certain benefits were required to be provided for sick leave pay and family medical leave pay. These rules applied to employers, but large employers (500 or more employees) and certain small employers were excluded from these rules. The FFCRA funded these benefits through a dollar-for-dollar refundable credit against payroll taxes. This program was mandatory through December 31, 2020. The Consolidated Appropriations Act of 2021 permits employers to voluntarily extend this program through March 31, 2021.
ARP extends the rules for sick leave pay and family medical leave pay through September 30, 2021. However, the federal credits will not be allowed if the provision of these benefits discriminates in favor of highly compensated employees, full-time employees, or on the basis of tenure. The cap on family medical leave pay is increased from $10,000 to $12,000.
The law would eliminate the exclusion for large employers and certain small employers.
The Consolidated Appropriations Act of 2021 extended the Employer Retention Tax Credit (ERTC) program, which was created under the Coronavirus Aid, Relief and Economic Security (CARES) Act solely for 2020, and for the first two quarters of 2021. The ERTC rules are considerably more lenient for 2021 and benefit a potentially larger group of employers.
ARP extends the ERTC for the final two quarters of 2021.
While ARP does not provide for student loan forgiveness, it does contain a provision classifying certain student loan forgiveness between December 30, 2020, and January 1, 2026, as tax-free. This includes loans expressly for post-secondary educational expenses where the loan is insured or guaranteed by (i) the U.S. or an instrumentality or agency thereof, (ii) a state, territory or possession of the U.S. or the District of Columbia; (iii) an eligible educational institution and (iv) certain private education loans.
The ARP does not include a change to the federal minimum wage.
The ARP includes $28 billion of grants for eateries, which include restaurants, bars, halls, brew pubs, tap rooms, and tasting rooms. The program provides for up to $5 million per restaurant or $10 million per restaurant group. A total of $5 billion of funding is reserved for restaurants with 2019 gross receipts of less than $500,000.
The grant funds can be used to offset expenses from February 15, 2020, through the end of 2021, including payroll, benefits, rent, utilities, cleaning, equipment, food and other costs.
This will operate as a Small Business Association (SBA) grant program.
The American Rescue Plan is a large piece of legislation that will be the subject of guidance from IRS and Treasury in the future regarding implementation of these new provisions. Your tax professionals at Galleros Robinson will continue to keep you up to date on the final bill and any further changes related to this summary detailed above.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.