Stimulus Checks
The third round of Economic Impact Payments (EIP3) of up to $1,400 ($2,800 for married persons filing jointly) is being sent to eligible individuals (IRC section 6428B). EIP3 payments of up to $1,400 are also being sent for qualifying dependents (including college students and dependent adults) reported on a taxpayer’s return. All such payments tax free.
ARPA provides an additional $300 in federal unemployment benefits from March 14, 2021, through September 6, 2021 (Labor Day).
EIP3 eligibility depends on a taxpayer’s adjusted gross income for 2020 (2019 AGI if a 2020 federal income tax return has not yet been filed). To receive the full $1,400, a taxpayer’s AGI must not exceed $75,000 for singles, $112,500 for heads of households, and $150,000 for married persons filing jointly. Phaseout ranges go up to AGI of $80,000 for singles, $120,000 for heads of households, and $160,000 for joint filers. There also will be payments to recipients who are not required to file returns, such as certain retirees or veterans with income below the tax return filing thresholds.
Unemployment Benefits
ARPA provides an additional $300 in federal unemployment benefits from March 14, 2021 (the formerly scheduled date for the expiration of federal benefits) through September 6, 2021 (Labor Day). These benefits are taxable, as are state unemployment benefits received in 2021.
Unemployment benefits of up to $10,200 received in 2020 are excludable from gross income if the taxpayer’s adjusted gross income up to $150,000 [IRC section 85(c)]. The IRS released a statement on March 12, 2021, informing those who have not filed their 2020 returns to look at the new instructions for line 7 of Form 1040 or 1040-SR, which include a new worksheet to calculate tax-free unemployment benefits if they file on paper; software is updated accordingly. Those who already filed their 2020 returns do not have to do anything; the IRS will automatically make adjustments.
Health Coverage Assistance
The spread of coronavirus (COVID-19) has increased the importance of having adequate health coverage, a concern reflected by the increased health coverage tax incentives in ARPA.
Premium tax credits.
These credits help eligible taxpayers buy health insurance through a government exchange, at a lower net cost than ordinarily would be the case. ARPA liberalizes eligibility for the credits with the following provisions:
- Those receiving unemployment benefits in 2021 may obtain premium tax credits on an advanced basis, reducing the monthly cost of health insurance already purchased on an exchange.
- The affordability percentage for individuals with household income above 400% of the federal poverty line has been suspended, enabling higher-income taxpayers to get lower-cost health insurance.
- The required contribution of household income, which had ranged from 2.06% to 9.78%, has been cut to a 0–8.5% range. This applies for 2021 and 2022, resulting in higher premium credits and lower health insurance costs.
- There is no recapture of any advance premium tax credit that turns out to be more than the amount for which the taxpayer was eligible.
COBRA.
Individuals who are involuntarily terminated from a job and elect Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage do not have to pay for it through September 30, 2021 (ARPA section 9501). In addition, the election period for COBRA coverage has been extended. (A model election notice, as well as a model notice that the assistance period is ending, should be available in April.) The employer pays for this benefit through tax credits for which the employer is eligible. This benefit is not includible in gross income.
Paid sick leave and paid family leave.
ARPA extends these benefits through September 30, 2021, so employers may continue to offer this these benefits to eligible individuals. Self-employed individuals impacted by COVID-19 may claim comparable income tax credits. Paid sick leave and paid family leave are treated as taxable compensation.
Child Tax Credit
The tax credit for a qualifying child has been greatly expanded for 2021 (IRC section 24). The current tax credit goes up to $3,600 for a child age 6 or younger, and up to $3,000 per qualifying child over age 6 through age 17 (one year older than the prior limit). The credit is fully refundable. This is compared with the former credit of $2,000 for any qualifying child, of which only $1,400 was refundable.
Eligibility for the credit depends on adjusted gross income (AGI). The full amounts begin to phase out at an AGI of $150,000 for joint filers and surviving spouses, $112,500 for heads of households, and $75,000 for singles and married persons filing separately.
Beginning July 1, 2021, the IRS is directed to issue advance payments of half the credit in periodic (likely monthly) payments (IRC section 7527A). The balance of the credit is received when the 2021 return is filed in 2022. If an individual winds up receiving too large of an advance payment (e.g., if the dependent is no longer a qualified dependent), there is a safe harbor to avoid any payback of amounts over $2,000. The safe harbor applies only for those with modified AGI below modest limits.
Child and Dependent Care Benefits
ARPA contains certain provisions, effective only in 2021, to temporarily help families with dependent children.
The spread of coronavirus (COVID-19) has increased the importance of having adequate health coverage, a concern reflected by the increased health coverage tax incentives in ARPA.
Child and dependent care credit.
The credit has been expanded and made refundable (IRC section 21). The amount of the credit is increased to a percentage of qualifying expenses up to $8,000 for one child and $16,000 for two or more qualifying children (up from $3,000 and $6,000 respectively). The credit percentage has increased to 50% (up from 35%). The maximum credit applies to those with income up to $125,000 and then phases down to 20% for income up to $185,000. The 20% credit rate applies through AGI of $400,000, after which the credit phases down to zero for income over $440,000.
Employer-provided dependent care assistance.
The dollar limit on excludable benefits under an employer’s dependent care assistance plan is $10,200 (up from the $5,000 limit applicable in 2020 and again in 2022). This increased exclusion, which applies to salary reduction contributions by employees under a cafeteria plan (IRC section 125) as well as to employer-paid benefits (IRC section 129), will enable employees to use up carryovers from 2020 on a tax-free basis.
Earned Income Tax Credit
This refundable tax credit has been expanded for 2021 (IRC section 32). For eligible taxpayers who do not have any qualifying children, the maximum credit amount in 2021 is $1,502 (up from $543). The increased credit amount results from a higher income limit ($9,820 for singles; $11,610 for joint filers).
The minimum age for claiming the credit has been reduced to age 19 (with a special rule for full-time students, former foster care youths, or qualified homeless youth). The age cap of 65 has been removed.
All eligible taxpayers may use their 2019 earned income instead of their 2021 earned income, if that income is lower, when figuring the credit on their 2021 return.
Some changes to the earned income tax credit (EITC) are permanent:
- A married person who lives with a qualifying child more than half the year and apart from a spouse for the last six months of the year or is legally separated can claim the credit as if they were single.
- Having investment income over a threshold amount disqualifies an individual from claiming the credit. The cap on investment income for 2021 is raised to $10,000 (it was previously set at $3,650). The dollar limit will be adjusted annually for inflation after 2021.
Student Loans
ARPA provides that forgiveness of student loan debt from 2021 through 2025 is not includible in gross income [IRC section 108(f)]. Covered debt is not limited to federal student loans. ARPA does not forgive student loan debt; it merely provides for tax-free treatment for anyone receiving a discharge of such indebtedness.
More to Come
Some of the provisions now set to be temporary may be extended or made permanent in future legislation. Any major developments in the future are likely to be well publicized.
