Tax credits and other implications of the American Rescue Plan Act
Michael Antonelli, Baird PWM Market Strategist, talks with Kelsey Clair, CPA, Baird's Tax Strategist, about the new American Rescue Plan Act
The signature feature of the recently enacted American Rescue Plan Act of 2021 was a fresh round of stimulus payments, with checks of up to $1,400 to be issued to qualifying individuals, both adults and children. But that’s not the only effect it might have on your financial planning for this year. Here is a thumbnail guide to ARPA’s tax credits and other benefits that you may be able to take advantage of:
Child Tax Credit
The existing child tax credit of $2,000 per child is increased to $3,000 per child ($3,600 for children under age 6) for 2021 and is fully refundable, whereas only $1,400 had been refundable prior to ARPA. The maximum age for children to qualify is temporarily increased from 16 to 17. The amount in excess of the current law’s $2,000 credit begins to phase out when modified adjusted gross income exceeds $150,000 for joint returns, $112,500 for head of household returns, and $75,000 for single returns. ARPA also gives you the option of receiving half the amount of your credit on a monthly basis beginning July 1, 2021, getting the other half after you file your 2021 income tax return.
Child and Dependent Care Credit
Previously, you could claim a credit equal to 35% of up to $3,000 in qualified expenses ($6,000 for two or more dependents) but that’s now increased to 50 percent with a maximum of $8,000 ($16,000 for two or more dependents). The credit used to be nonrefundable, meaning you had to have an existing tax liability to use it, but it’s fully refundable in 2021 only. When claiming the child and dependent care credit, you have to reduce your claim by any employer-provided dependent care benefits, but for 2021 that exclusion is raised from $5,000 to $10,500 ($5,250 for a married taxpayer filing separately).
The CARES Act set up several unemployment assistance programs that were originally set to expire at the end of 2020. The Federal Pandemic Unemployment Compensation (FPUC) program, which initially provided for an additional $600 in unemployment benefits per week through July 31, 2020, has now been extended through September 6, 2021, but at a $300 weekly benefit. This is a federal program, so you can supplement it with benefits at the state level.
One other significant change: The first $10,200 in unemployment benefits for households with income below $150,000 is exempt from federal tax. But note that this exemption only applies to benefits received in 2020.
Payroll Tax Credits
Some important provisions for small business owners: Earlier relief acts made employers eligible for a refundable credit against the employer portion of the payroll tax on qualified paid sick and family leave, on up to $10,000 in qualifying wages. The ARPA raises this to $12,000 for applicable wages paid after March 31, 2021. In addition, the refundable Employee Retention Tax Credit is extended through December 31, 2021.
The amount is $1400 per person but starts to phase out at income of $75,000 ($150,000 for a joint filer). This income is based on your 2020 tax return, or your 2019 return if you have not filed for 2020. The payment phases out more quickly than the previous round, at an AGI of $80,000 or more for single filers and $160,000 or more for married filers. For Social Security recipients who are not required to file a return, the rebate will be based on the individual’s 2020 Social Security information.
As was the case with the previous stimulus payments, if the calculated rebate amount on the 2021 tax return is less than the amount already received, you won’t be required to pay back the difference. So if your income increased in 2020, you may want to hold off on filing your 2020 tax returns to ensure the payment is calculated based on your lower, 2019 income. The credit is refundable, so no minimum level of income or minimum tax liability is required to receive the full credit.
Student Loan Forgiveness
One final note: The American Rescue Plan Act holds that any federal student loan discharged between December 31, 2020, and January 1, 2026, does not need to be included in taxable income. Does that mean that broader student loan forgiveness could apply in the future? We shall see.