The House and Senate passed the American Rescue Plan Act (ARP) and the President signed it into law on March 11, 2020. This bill includes many provisions that have major tax impacts for 2020 and 2021 tax returns.
2020 Tax-free Unemployment Benefits
The bill provides a $300 weekly federal unemployment benefit through Sept. 6, 2021, and makes the first $10,200 of unemployment payments nontaxable ($20,400 in the case of a joint return, but only $10,200 per spouse) in 2020 for households earning less than $150,000.
We are still awaiting information on whether the IRS will process refunds for returns already filed, or if taxpayers will need to amend. The IRS communicated, “We do not have any information or guidance to share regarding unemployment and the American Rescue Plan.” When the IRS provides guidance, we will immediately pass it along.
Retroactive Advanced Premium Tax Credit
Individuals can receive an advanced premium tax credit (APTC) to lower their monthly health insurance payments. If at the end of the year they have received more APTC than the credit allowed based on household income, the taxpayer does not have to pay back the excess when filing their 2020 federal tax return.
Recovery Rebates for Individuals
Single taxpayers making under $75,000 will receive a $1,400 refundable tax credit, while joint filers making less than $150,000 will receive $2,800. Also, taxpayers will receive $1,400 for each qualifying dependent (including adult dependents). The credit will end at an income threshold of $80,000 for single filers and $160,000 for joint.
Taxpayers who are married to undocumented residents will be able to receive the stimulus payments. If you experience changes to income, dependencies, or filing status, it may be advantageous to file before/after these payments are issued.
Child Tax Credit
Special rules for 2021 include an expansion of the credit from $2,000 to $3,000 per eligible child under age 18 ($3,600 per child under age 6). The fully refundable credit will be reconciled on the 2021 tax return. For 2021, the increased credit amount (additional $1,000 or $1,600 per-child more than the present-law $2,000 per-child) begins to be phased-out at $75,000. Once reduced, the credit plateaus at $2,000, and the phaseout begins at $200,000.
Starting in July, the Treasury will issue advance payments of the child tax credit based on 2019 or 2020 tax return information. The Treasury is tasked with establishing an online portal to allow taxpayers to opt-out of receiving advanced payments and provide information regarding changes in income, marital status, and the number of qualifying children for purposes of determining each taxpayer’s maximum eligible credit.
Earned Income Credit
For 2021 only, the bill expands the eligibility and the amount of the earned income credit for taxpayers with no qualifying children. The maximum credit amount for childless people will increase from $543 to $1,502. For 2021, taxpayers can use their 2019 income if it was higher than 2021.
The bill also includes permanent changes, allowing a married, but separated, individual to be treated as not married for purposes of the earned income credit (EIC) if a joint return is not filed and the individual lives with a qualifying child for more than half the year. Individuals who otherwise would be eligible for EIC, but whose children do not have Social Security numbers, are now permitted to claim the childless credit. The disqualified investment income limit has increased from $3,650 (2020) to $10,000 and will be adjusted for inflation.
The act includes other tax changes, such as:
- Refundability and enhancement of child and dependent care tax credit
- Increase exclusion for employer-provided dependent care assistance
- Extension and expansion of the Families First Coronavirus Response Act (FFCRA) paid sick leave and paid family leave credits
- Extension of employee retention credit
- Modification of the premium tax credit
- Change to the tax treatment of targeted economic injury disaster loan (EIDL) advances
- Exemption of student loan forgiveness from federal taxation through 2026
- Expanded COBRA continuation coverage premium assistance credit
Details regarding these provisions can be found in our summary of the American Rescue Plan Act.