The American Rescue Plan Act of 2021 (ARPA) was signed into law on March 11. The $1.9 trillion ARPA is the latest U.S. legislation package designed, among other things, to address the ongoing impacts on Americans and our economy of the coronavirus pandemic. Following are key tax-related provisions of the ARPA that are likely to affect individuals and small to mid-size businesses.
Much has been written about the $1,400 per person stimulus payments. These were part of ARPA which included phaseouts for single filers with adjusted gross income (AGI) between $75,000 and $80,000. The phaseouts are double for joint filers. The AGI phaseout thresholds can be based on either 2019 or 2020, so if 2019 is less than 2020, it may be advisable to delay filing 2020 returns until the payment is received. These are advance payments/credits toward 2021 taxes (returns filed in 2022).
Child Tax Credit
Under prior law, the child tax credit was up to $2,000 per child with up to $1,400 being refundable (i.e. up to $1,400 could be refunded even if the taxpayer had no tax liabilities). For 2021 only, ARPA has increased the credit to $3,600 for children under six years old and to $3,000 for children six to 17 years old, with 100 percent of it refundable. The IRS will estimate the amount of tax credit and pay one-half of the total credit in monthly installments from July through December. Married couples filing jointly with AGI up to $150,000 ($112,500 for heads of household and $75,000 for singles) are eligible for the full credit. The credit is phased out for taxpayers with AGI in excess of these thresholds. After 2021, the credit is supposed to revert to pre-2021 law.
Child and Dependent Care Tax Benefits
The child and dependent care credit has also been enhanced for 2021 only. It is now worth up to $4000 ($3,000 under prior law) for one qualifying individual and $8000 (6,000 under prior law) for two or more, subject to reduction based on a taxpayer’s AGI. The full value of the credit is available to households with AGI of up to $125,000, at which point it begins to be phased out.
Also for 2021 (only), the maximum tax-free amount of employer-provided dependent care assistance is increased to $10,500, roughly double the maximum exclusion under prior law.
Employee Retention Tax Credit (ERC)
Currently, certain employers are eligible for credits of up to $7,000 per quarter per employee retained through June 30, 2021 if such employers experienced a 20% reduction in gross receipts on a quarter-by-quarter comparison. See our previous blog post on this complicated analysis. The credit is eligible against Medicare payroll taxes. Under ARPA, the ERC was extended two more quarters through the end of 2021.
Paid Sick and Family Leave Credits
The ARPA also extends credits established in 2020 for certain paid sick and family leave. The credits are now available through September 30, 2021. The 10-day limitation on paid sick leave under the 2020 rules still applies, but the 10-day period is reset beginning April 1 so that employees who qualified previously can qualify again. Time off attributable to receiving vaccines or recovering from vaccine-related illnesses also qualify. Also beginning in April, the family leave credits will be worth up to $12,000 rather than $10,000 under prior law. See our blogs last year on these credits.
COBRA Insurance Coverage
The ARPA provides a tax credit to assist with COBRA premiums and wages paid through Sept. 30, 2021. Rather than collecting COBRA payments from former/eligible employees, businesses will pay the premiums and get reimbursed by receiving a credit against Medicare taxes.
Taxability of Forgiven Student Loans
Under ARPA, a taxpayer no longer has to recognize income for student loans forgiven if such loans are forgiven after 2020 and before 2026. This tax-free treatment applies to both government loans and private loans, but for private loans, there can be no requirement that the debtor has to perform services for the lender to qualify for forgiveness.
Proponents of this provision believe it paves the way for President Biden and/or legislatures to take the next step to outright relieve $10,000 to $50,000 of student debt per person.
Taxability of Unemployment Benefits
The first $10,200 of unemployment compensation is tax-free in 2020 for taxpayers with less than $150,000 of income pursuant to the ARPA. Be aware that current tax preparation software may need to be updated to include this provision and those who have filed their returns already may have to amend.
As always, associates at Williams Benator & Libby continue to analyze the continuous legislation and monitor pending law changes. If you have any questions about the above or any other matter, please reach out to any Williams Benator & Libby associate.