On March 11, 2021, President Biden signed into law H.R. 1319, the American Rescue Plan Act of 2021 (ARPA). In the midst of the coronavirus (COVID-19) pandemic, this legislation provides new relief for American workers and families. The legislation extends certain provisions included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated Appropriations Act (CAA).
2021 Recovery Rebate Payments for Individuals
ARPA section 9601 provides a $1,400 refundable tax credit for each family member [IRC section 6428B(b)]. Eligible taxpayers will receive an advance payment, similar to the Economic Impact Payments in the CARES Act and the CAA. The advance payments will be based on the information in the taxpayer’s 2019 or 2020 tax returns.
The credit is $1,400 for a single taxpayer ($2,800 for joint filers), in addition to $1,400 per dependent [IRC section 6428B(b)(1),(2)]. The credit phases out between $75,000 and $80,000 of adjusted gross income ($112,500 and $120,000 for head of household filers; $150,000 and $160,000 for joint filers) proportional to the taxpayer’s income in excess of the phaseout threshold over $25,000 ($37,500 for head of household filers and $50,000 for joint filers). Thus, under this phaseout structure, the credit is reduced to zero for all taxpayers at the $18,000, $120,000, and $160,000 adjusted gross income (AGI) levels, depending on filing status. [See IRC sections 6428B(d)(1), (d)(2)(A), (d)(2)(B).]
For purposes of this credit, the term “eligible individual” means any individual other than:
- any nonresident alien individual;
- any individual who is a dependent of another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins; and
- an estate or trust. [IRC section 6428B(c)]
Thus, a dependent includes both children and non-child dependents [IRC section 6428B(e)(1)]. Under the rules for the previous stimulus payments, adult dependents did not qualify. Under the rules for the 2021 stimulus payment, adult dependents do qualify to receive a stimulus payment. A taxpayer is eligible for a credit with respect to any individual in the household for whom a Social Security number is associated with such individual on the tax return [IRC section 6428B(e)(2)].
For joint returns on which only one of the taxpayers has a valid taxpayer identification number, the credit for the taxpayer and spouse is limited to $1,400 [IRC section 6428B(e)(2)(B)(i)]. If both the taxpayer and spouse do not have a valid taxpayer identification number, the credit for the taxpayer and spouse is limited to zero. This limitation does not apply where at least one spouse was a member of the Armed Forces of the United States at any time during the taxable year and the valid identification number of at least one spouse is included on the return of tax for the taxable year [IRC section 6428B(e)(2)(E)].
For purposes of this credit, the term “valid identification number” means a Social Security number issued to an individual by its administration on or before the due date for filing the return for the taxable year. In the case of a dependent who is adopted or placed for adoption, the ID shall include the adoption taxpayer identification number of such dependent [IRC section 6428B(d)(1)(i),(ii)].
The amount of the credit allowed shall be reduced (but not below zero) by the amount which bears the same ratio to such credit as the excess of the taxpayer’s AGI for such taxable year, over $75,000, bears to $5,000.
Taxpayers whose 2021 tax credit exceeds the amount of the advance payment can claim the difference on their 2021 tax return. However, unlike advance payments of the credit, any additional credit allowed in excess of the advance payment may be subject to administrative offset for past due federal or state debts, including past-due child support.
Taxpayers who received an advance payment that exceeds their maximum eligible credit based on their 2021 tax return information will not be required to repay any amount of the payment.
Advance payments of the Recovery Rebate Credit are generally not subject to administrative offset for past due federal or state debts, including offset for past-due child support [ARPA section 9601(h)(6), amending IRC section 6211(b)(4)(A)]. However, any Rebate Recovery Credit allowable on the 2021 return in excess of the advance payment received, is subject to administrative offset for past due federal or state debts, including offset for past-due child support.
Extension of pandemic unemployment assistance
ARPA provides unemployment benefits to some self-employed individuals and pandemic-affected individuals who do not qualify for regular state unemployment benefits, through September 6, 2021 [section 9011(a) amending CARES Act section 2102(e)(1)(B)]. In addition, ARPA increases the maximum number of weeks an individual may collect unemployment benefits from 50 to 79 [amending CARES Act section 2102(c)(2)].
Extension of FPUC
This legislation extends both federal pandemic unemployment compensation, which is added to both the federal and state benefits, and the mixed-earner supplement added to it for eligible workers through August 29, 2021 [ARPA section 9011(a) amending CARES Act section 2104(c)(2)]. In addition, the FPUC is continued at the rate of $300 per week for weeks ending after March 14, 2021, and before September 6, 2021 [amending CARES Act section 2104(b)(3)(A)]. Also, the mixed-earner supplement is to be treated in the same way as the FPUC in determining eligibility for Medicaid and the Children’s Health Insurance Program [amending CARES Act section 2104(b)].
Extension of pandemic emergency unemployment compensation
ARPA increases the number of weeks an individual worker may receive benefits in the Pandemic Emergency Unemployment Compensation (PEUC) program from 24 to 48 weeks. In addition, it extends the time in which workers can receive PEUC benefits if they exhaust their regular state unemployment benefits through September 6, 2021.
Suspension of the tax on a portion of unemployment insurance compensation
For taxable years beginning in 2020 only, any unemployment compensation received by an individual taxpayer (or, in the case of a joint return, received by each spouse) up to $10,200 will not be included in AGI [ARPA section 9042(a) adding new IRC section 85(c)(1)].
Extension of full federal funding of the first week of compensable regular unemployment for states with no waiting week
ARPA restores full reimbursement for state costs relating to the waiting week beginning December 30, 2020, and continues it through September 6, 2021 [ARPA section 9014(a) amending CARES Act section 2105(e)(2)].
Child Tax Credit
For 2021, the child tax credit (CTC) will be fully refundable [ARPA section 9611(a), adding new IRC section 24(i)(1)]. In addition, the amount of the CTC will increase to $3,000 per child ($3,600 for a child under age 6) [new IRC section 24(i)(3)]. This provision also increases the age of qualifying children by one year for 2021, such that 17-year-olds qualify for the credit [new IRC section 24(i)(2)]. For 2021, the excess of the child tax credit (i.e., the additional $1,000 or $1,600 per child in excess of existing $2,000 per-child credit) is reduced by $50 for every $1000 in modified AGI in excess of $150,000 for joint filers ($112,500 for head of household filers, $75,000 for others) [new IRC section 24 (i)(4)(A), (i)(4)(B)]. Once the excess credit amount is so reduced, the credit plateaus at $2,000, and then phases out at the levels established in the TCJA ($400,000 for joint filers, $200,000 for others).
Advance CTC payments
In addition, ARPA directs the Secretary of the Treasury to issue advance payments of the CTC based on 2019 or 2020 tax return information. The payments are intended to be delivered on a monthly basis, but if the Secretary determines that this frequency is infeasible, the Secretary may issue the payments as frequently as is feasible. The advance payments do not begin until July 1, 2021, and will comprise in total half of the child tax credit for which the taxpayer is otherwise entitled for 2021 (with the remaining half claimed on the 2021 tax return). Thus, under the advance payment provision, if the Secretary determined that a monthly payment was feasible, a taxpayer with two children above age 5 would receive $500 per month for each of the six months remaining in calendar year 2021, for a total of $3,000. The remaining $3,000 would be claimed in 2021 on the taxpayer’s tax return. If, however, the Secretary determined that it was feasible to make a payment every two months, each advance payment would total $1,000 [ARPA section 9611(a), adding new IRC section 7527A].
The taxpayer’s CTC claimed on the 2021 tax return is reduced by the aggregate of advance payments paid by the Secretary. In the case of taxpayers who received an overpayment of the advance credit due to a child for whom the advance was paid in 2021 when in fact the child was no longer a dependent, the provision provides a hold-harmless amount on the repayment obligation. Under this hold-harmless amount, a taxpayer below the income threshold ($40,000 for a single taxpayer, $50,000 for a head of household, and $60,000 for a joint filer) will be protected from repaying up to $2,000 in overpayments per child incorrectly taken into account. The hold-harmless threshold is decreased to $0 as the taxpayer’s income rises to double the threshold amount.
Advance payments of the CTC are generally not subject to administrative offset for past due federal or state debts, including offset for past-due child support [ARPA section 9601(h)(6) amending IRC section 6211(b)(4)(A)]. Nevertheless, any CTC allowable on the 2021 return in excess of the advance payment received is subject to administrative offset for past due federal or state debts, including offset for past-due child support [ARPA section 9611 adding new IRC section 7527A(f)(4)].
The Secretary of the Treasury is directed to establish an on-line portal to allow taxpayers to opt out of receiving advanced payments and provide information regarding changes in income, marital status, and number of qualifying children for purposes of determining each taxpayer’s maximum eligible credit.
Earned Income Tax Credit
Individuals with no qualifying children
For 2021, ARPA expands the eligibility and amount of the earned income tax credit for taxpayers with no qualifying children (childless EITC) for 2021. Specifically, the minimum age to claim the childless EITC has been lowered from 25 to 19, except for certain full-time students [ARPA section 9621 adding new IRC section 32(n), amending section 32(c)(1)(B)(i)] and the upper age limit for the childless EITC has been eliminated [amended IRC section 32(c)(1)(B)(i)]. This provision also increases childless EITC amount by increasing the credit percentage and phaseout percentage from 7.65% to 15.3%, increasing the income at which the maximum credit amount is reached to $9,820, and increasing the income at which phaseout begins to $11,610 for non-joint filers. In addition, taxpayers are permitted to use either 2019 or 2021 income, whichever provides the greater credit [ARPA section 9626(a)]. Under these parameters, the maximum credit amount in 2021 increases from $543 to $1,502. The provision contains special rules regarding the application of the credit for former foster youth and homeless youth [new IRC section 32(n)].
Individuals with qualifying children who fail to meet certain identification requirements
The legislation repeals the provision prohibiting an otherwise EITC-eligible taxpayer with qualifying children from claiming the childless EITC if he cannot claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid SSN). Accordingly, individuals who do not claim the EITC with respect to qualifying children due to failure to meet identification requirements would now be able claim the childless EITC [ARPA section 9621, deleting IRC section 32(c)(1)(F)].
Certain separated spouses
ARPA allows a married but separated individual to be treated as not married for purposes of the EITC if a joint return is not filed. Thus, the EITC may be claimed by the individual on a separate return. This rule only applies if the taxpayer lives with a qualifying child for more than one-half of the taxable year and either does not have the same principal place of abode as her spouse for the last six months of the year, or has a separation decree, instrument, or agreement and does not live with his or her spouse by the end of the taxable year. This change aligns the EITC eligibility requirements with present-day family law practice [ARPA section 9621, amending IRC section 32(d)].
Modification of the disqualified investments income test
ARPA increases the limitation on disqualified investment income for purposes of claiming the EITC from $3,650 to $10,000, which is indexed for inflation [ARPA section 9624, amending IRC section 32(i)].
Temporary special rule for determining earned income
ARPA allows taxpayers, for purposes of computing the EITC, to substitute their 2019 earned income for their 2021 earned income, if 2021 earned income was less than 2019 earned income [amended IRC section 32(i)].
Child and Dependent Care Tax Credit
For 2021, the child and dependent care tax credit is fully refundable. The maximum credit rate has been increased to 50% and the phaseout threshold will begin at $125,000 instead of $15,000. In addition, the amount of child and dependent care expenses that are eligible for the credit have been increased to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals (such that the maximum credits are $4,000 and $8,000). At $125,000, the credit percentage begins to phase out, and plateaus at 20%. This 20% credit rate phases out for taxpayers whose AGI is in excess of $400,000, such that taxpayers with income in excess of $500,000 are not eligible for the credit [ARPA section 9631, adding new IRC section 21(g)].
Increase in the Exclusion for Employer-Provided Dependent Care Assistance
For 2021, the maximum amount allowed to be excluded from AGI will increase from $5,000 to $10,500—$5,250 in the case of married filing separately [ARPA section 9632, adding new IRC section 129(a)(2)(D)].
Modified Treatment of Student Loan Forgiveness
Effective for certain student loans forgiven after December 31, 2020, and before January 1, 2026, the income resulting from the discharge of indebtedness may be exempt from tax. ARPA provides that student loans made, insured, or guaranteed by the federal or state governments, as well as loans from non-governmental institutions, such as banks, other private lenders and educational institutions may be nontaxable and excludible in gross income. Loans forgiven in exchange for services rendered are not covered by this provision, however, and thus are taxable and includible in gross income [ARPA section 9675, amending IRC section 108(f)].
Expanded Premium Assistance Credit
ARPA reduces healthcare premiums for low- and middle-income families by increasing the Affordable Care Act’s (ACA) premium tax credits for 2021 and 2022 [ARPA section 9663, adding new IRC section 36B(b)(3)(A)(iii)]. The act also creates healthcare subsidies for unemployed workers who are ineligible for COBRA [ARPA section 9663, amending IRC section 36B]. According to an IRS Statement released March 12, 2021:
The IRS is reviewing implementation plans for the newly enacted American Rescue Plan Act of 2021. Additional information about a new round of Economic Impact Payments, the expanded Child Tax Credit, including advance payments of the Child Tax Credit, and other tax provisions will be made available as soon as possible on IRS.gov. The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time.
The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable. For those who haven’t filed yet, the IRS will provide a worksheet for paper filers and work with software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return. For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance. (https://bit.ly/30NPq4Y)