The American Rescue Plan Act of 2021 was passed by Congress on March 10, 2021 and was signed into law by President Biden on March 11, including some tax provisions that have implications for 2020 tax returns, even though the start of tax filing season preceded the new legislation. As a result, you may receive future notices and/or additional funds from the IRS with regards to this topic. Please contact your tax preparer with any questions you may have.
Stimulus Payments: The new legislation entails an additional $1,400 stimulus payment to individuals and $2,800 for joint filers. It also includes payments for child and adult dependents. Eligibility phase-out begins at $75,000 for individual filers and $150,000 for joint filers. The phase-out stops at $80,000 for individual filers and $160,000 for joint filers. The payments are based on 2019 returns unless the 2020 return has been filed at the time the IRS is making the payments. Additional payments will be issued if 2020 tax returns portray eligibility differences from 2019 returns.
Exclusion for Unemployment Benefits: An exclusion for 2020 of up to $10,200 of unemployment benefits is added. The AGI limit for this exclusion is $150,000, regardless of filing status. Taxpayers who’s 2020 tax returns have already been filed should wait for direction from the IRS on how to regain those taxes.
Child Tax Credit: The Child Tax Credit is raised from $2,000 (up to $1,400 of which is refundable) to $3,000 ($3,600 for children under the age of six) for 2021. The legislation details advance payments as frequently as monthly beginning July 1, 2021 and ending December 31, 2021, amounting to one twelfth of the estimated annual advance amount. The taxpayer may elect out of the advance distributions by way of an online portal set up by the IRS. The excess amount of the credit over $2,000 phases out at the rate of $50 for each $1,000 over $75,000 of adjusted gross income for single filers and $150,000 for joint filers. The remaining $2,000 doesn’t phase out until adjusted gross incomes of $400,000 for joint filers and $200,000 for other filers are reached. Additionally, there is a recapture provision if payments exceed the credit and there is also a safe harbor amount for certain adjusted gross income thresholds of $2,000 times the number of children.
Child and Dependent Care Credit: This new legislation increases the amount of expenses that can qualify for the child and dependent care credit to $8,000 for one qualifying child and to $16,000 for two or more qualifying children. The maximum percentage increases to 50 percent and the income limit increases $125,000. These changes are exclusive to the year 2021.
ACA Premium Tax Credits: Premium tax credits under the Affordable Care Act for 2021 and 2022 are now available to more individuals and in larger amounts. For 2021, the advance premium tax credits are available for those receiving unemployment compensation. The legislation also eliminates the recapture provisions applicable to 2020 for taxpayers receiving a surplus amount of premium tax credits.
Paid Sick and Family Leave: Tax credits for paid sick and family leave are extended to September 30, 2021. There is also an expansion of what qualified leave is comprised of, including Coronavirus vaccinations, and expansion for self-employed persons. The number of qualifying days is also reset as of March 31, 2021.