President Biden has just signed the $1.9 trillion  American Rescue Plan Act (ARP) of 2021, which includes a few COVID-related tax provisions you should know about. Most interestingly, it contains no provision to pay for the spending, including any income or estate and gift tax increases.

2020 tax-free unemployment benefits

The bill continues the $300 of additional weekly unemployment benefits through Sept. 6 and also makes the first $10,200 of unemployment payments per person nontaxable in 2020 for households with adjusted gross income (AGI) of less than $150,000 (excluding the unemployment income).

Retroactive advanced premium tax credit

An individual can receive an advanced premium tax credit (APTC) to lower their monthly health insurance payment (premium). If at the end of the year they have received more APTC than the credit allowed based on final household income, the taxpayer does not have to pay back the excess when filing their 2020 federal tax return. For those who have already filed their 2020 return, we are waiting for guidance as to how to get the refund.

Recovery rebates to individuals

Single taxpayers with AGI under $75,000 will receive a $1,400 refundable tax credit, while joint filers with AGI under $150,000 will receive $2,800. In addition, taxpayers will receive $1,400 for each qualifying dependent (including adult dependents).  Those with AGI in excess of $80,000 ($160,000 for joint filers) will receive no recovery rebate.

The Treasury is directed to issue this credit as an advance payment based on the information on 2019 or 2020 tax returns. This credit will be reconciled on the 2021 tax return. Taxpayers who are married to undocumented residents will be able to receive the stimulus payments.

Child tax credit

Special rules for 2021 include an expansion of the credit from $2,000 to $3,000 per eligible child under age 18 ($3,600 per child under age 6). The fully refundable credit, with 50% of the credit issued as advance periodic payments starting in July, will be reconciled on the 2021 tax return. The Credit begins to be phased-out at $75,000 ($150,000 for MFJ and surviving spouse and $112,500 for head of household). Once the increased credit amount is reduced, the credit plateaus at $2,000, and the phaseout begins at $200,000 ($400,000 for MFJ). Starting in July, the Treasury will issue advance payments of the child tax credit based on 2019 or 2020 tax return information.

Earned income credit For 2021 only, the bill expands the eligibility and the amount of the earned income credit (EIC) for taxpayers with no qualifying children. The maximum credit amount for childless people will increase from $543 to $1,502. For 2021, taxpayers can use their 2019 income if it was higher than 2021.

The bill also includes permanent changes, allowing a married but separated individual to be treated as not married for purposes of the EIC if a joint return is not filed and the individual lives with a qualifying child for more than half the year. Individuals who otherwise would be eligible for EIC, but whose children do not have Social Security numbers, are now permitted to claim the childless credit. The disqualified investment income limit has increased from $3,650 (2020) to $10,000 and will be adjusted for inflation.

Child and dependent care credit

The act makes various changes to the child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income 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.

Other provisions

The act includes other tax changes, such as:

  • Extension and expansion of the paid sick leave and paid family leave credits
  • Extension of employee retention credits
  • Clarification that forgiven EIDL advances are tax-free
  • Exemption of student loan forgiveness from federal taxation through 2026

Because taxes are complicated, it’s important to have qualified experts like the professionals at Cantrell & Cantrell, PLLC on your side. Call us at 713-333-0555.