President Biden Signs American Rescue Plan Act with Many Tax Components

President Biden signed legislation aimed at providing economic and other relief from the COVID-19 pandemic. The 628-page American Rescue Plan Act (ARPA) includes $1.9 trillion in funding for individuals, businesses, and state and local governments.

The ARPA extends and expands some of the CARES Act’s critical provisions and the Consolidated Appropriations Act (CAA). It also includes some new provisions that should come as welcome news to many families and businesses.

Here’s a broad overview of some of the provisions that may affect you:

Recovery rebates

• Additional direct payments (or recovery rebates) of $1,400 — plus $1,400 per dependent (including adult dependents) will be made to eligible individuals. To qualify, individuals must have an adjusted gross income (AGI) of up to $75,000 per year ($150,000 for married couples filing jointly and $112,500 for heads of households). The payments phase out and are no longer made when AGI exceeds $80,000 for individuals, $160,000 for married joint filers and $120,000 for heads of household.

Child and dependent care tax credits

• The Child Tax Credit (CTC) increases to $3,000 for each child age six to 17 and $3,600 per year for children under age six. To be eligible for the full payment, you must have a modified AGI of under $75,000 for singles, $112,500 for heads-of-households and $150,000 for joint filers and surviving spouses. The credit phases out at a rate of $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold.
• Parents will begin receiving advance payments of part of the CTC later this year. Under the ARPA, the IRS must establish a program to make monthly payments equal to 50% of eligible taxpayers’ 2021 CTCs, from July 2021 through December 2021.
• Some taxpayers who aren’t eligible to claim an increased CTC in 2021 because their income is too high may be able to claim the regular CTC of up to $2,000, subject to the existing phaseout rules.
• 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.

Student loan forgiveness

• Any student loan debt forgiven between December 31, 2020, and January 1, 2026, will receive tax-free treatment.

Extension of unemployment compensation

• An additional $300 per week in unemployment benefits will be paid through September 6, 2021. Also, the first $10,200 in unemployment benefits received beginning in 2020 isn’t included in gross income for taxpayers with AGIs under $150,000. (However, for joint filers below the AGI limit, the $10,200 exclusion applies separately to each spouse.)

Other provisions for individuals

• There’s expanded availability of and increased Affordable Care Act (ACA) subsidies for those who obtain insurance in the ACA marketplaces, for 2021 and 2022.
• Federal rental assistance is included for families affected by COVID-19, applicable to past due rent, future rent payments, and utility and energy bills.
• There’s expanded eligibility for low-income individuals with no qualifying children to claim the Earned Income Tax Credit.
• The Act creates a COBRA continuation coverage premium assistance credit.

Businesses and other employers

Family and sick leave credits

The Act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response. The credits are extended to September 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.

• The Act increases the limit on the credit for paid family leave to $12,000.
• The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
• 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.
• The credits are expanded to allow 501(c)(1) governmental organizations to take them.

Other provisions for employers

• Pandemic assistance grants will be made to eligible businesses serving food or drinks, including restaurants and food trucks.
• There will be additional funding for forgivable loans to eligible businesses under the Paycheck Protection Program (PPP), which is scheduled to expire on March 31, 2021.
• Nonprofit organizations and online news services will receive expanded PPP eligibility.
• New targeted Economic Injury Disaster Loan grants will be available for eligible small businesses in low-income communities.
• The Employee Retention Tax Credit is extended for eligible employers that continue to pay employee wages during COVID-19-related closures or experience reduced revenue through December 31, 2021. This includes “recovery startup businesses” (those launched after February 15, 2020, with average annual gross receipts of $1 million or less).
• Tax credits for paid sick and family leave are modified and extended to September 30, 2021.
• The excess business loss limitation is extended through December 31, 2026.

The American Rescue Plan is a large piece of legislation that will be the subject of future guidance from the IRS and Treasury regarding implementing these new provisions. Your tax professionals at Yeo & Yeo will continue to keep you up to date on any further changes to the summary above.