On March 11, 2021, President Biden signed into law a $1.9 trillion stimulus package entitled "The American Rescue Plan Act of 2021."

What are the Key Components in the Act?

The stimulus package includes funding for COVID-19 specific initiatives, such as:

  • Testing and vaccinations
  • Aid to state and local governments
  • Funding for school re-openings
  • Expanded unemployment insurance of (supplement with the first $10,200 being tax-free for households with income under $150,000) $300 per week until September 6, 2021
  • $25 billion in targeted relief for the restaurant industry as one of the sectors most heavily affected economically by the pandemic. For small and medium - size restaurants and chains, the relief would be a grant that would not need to be repaid if spent on operating expenses (which would include payroll, rent, and personal protection equipment for employees).
  • While normally the discharge of debt would be included in income, this bill specifies that forgiveness for student loans after December 31, 2020 and before January 1, 2026 to be tax-free.

Tax Issues are Addressed

Several tax provisions are addressed in the act, including a third stimulus payment, employer tax credits, and child and dependent care credits, among others. Here are some details on each of these:

  • Stimulus checks of $1,400 for single taxpayers, heads of households and checks for $2,800 for married taxpayers will be sent along with $1,400 for each qualifying dependent for 2021.
  • Single taxpayers with adjusted gross income (“AGI”) of $75,000 and under will get the full amount, but this phases-out between $75,000 and $80,000, and completely phases-out at $80,000 of AGI.
  • Married taxpayers will get the full amount with AGI of $150,000 or under, with the phase-out range between $150,000 and $160,000 of AGI, but this completely phases-out at $160,000 of AGI.
  • Heads of households with AGI of $112,500 or less will get the full amount, with a phase-out range between $112,500 -$120,000, but this completely phases-out at $120,000 of AGI.

Maximizing the Stimulus Payment

The Internal Revenue Service will use a taxpayer’s 2019 AGI to determine qualifying taxpayers unless the 2020 return had already been filed. The payments are essentially a credit against 2021 taxes but are fully refundable and paid in advance.

Like the last two stimulus payments that were issued, if the taxpayer was entitled to a stimulus payment and did not receive one, they will be entitled to a credit on their 2021 tax return.

In addition, stimulus payments received based on adjusted gross income from either the 2019 or 2020 tax return do not have to be repaid if AGI in 2021 is higher. Based on this a taxpayer may want to wait on filing their 2020 tax returns until the filing deadline, if AGI in 2020 is higher than 2019 to maximize the stimulus payment, because the 2020 AGI might put them in the phase-out range leading to a decreased stimulus payment.

Child and Dependent Care Credit

This Act makes changes to the child and dependent care credit for 2021 only. The bill increases the credit to $3,000 per child (or $3,600 if child is under six), increases the maximum age of qualifying children to 17, and makes the credit refundable. There are phase-outs of these credits for high income taxpayers.

The IRS has been directed to start issuing advance payments for one-half of the amount of the credit starting on July 1, 2021, with the other half of the credit to be claimed on the 2021 tax return. If a taxpayer receives an advance payment in error, there is a “hold harmless” provision in which the advanced payment does not need to be paid back. However, if a taxpayer’s income reaches a certain level, then all the advance payment may need to be paid back.

Family and Sick Leave Credit

Family and Sick leave credits which originally expired on December 30, 2020, were extended to March 31, 2021 and now have been extended until September 30, 2021. The limit on wages has been increased from $10,000 to $12,000 starting March 31, 2021. The bill expands the previous definitions to now include time off to receive COVID-19 vaccines, or to recover from a vaccine related illness or injury. The credit has been expanded so it can be applied against the hospital insurance tax, and not just the old age survivors and disability insurance. The bill would also reset the ten-day waiting period per employee.

Earned Income Tax Credit

For 2021 only, the Earned Income Tax Credit (“EITC”) enhancements include increased credit for filers without children. The childless credit increase from $543 to $1,502, increases the amount of income at which income is maximized to $9,820, and increases the phase-out for non-joint filers to $11,610. The minimum age for childless claims of the credit is reduced from 25 years of age to 19 years, except in the case of full-time students. Taxpayers can substitute 2019 earned income for 2021 earned income in 2021 returns if 2021 earned income was less than 2019.

Permanent changes to the EITC include the elimination of the prohibition of claiming the childless EITC, because they are unable to claim the EITC for filers with children solely due to lack of identification requirements. Married but separated individuals could claim EITC as an unmarried person if certain requirements related to children are satisfied. The amount of disqualifying investment income is increased to $10,000 (previously $3,650) adjusted for inflation starting after 2021.

Employee Retention Credit

The Employee Retention Credit (“ERC”), which was previously extended from December 31, 2020 to June 30, 2021 by Consolidated Appropriations Act of 2021, is now extended through 2021.

For more information, please contact Doug Finkle at doug.finkle@sobelcollc.com

Doug Finkle is a Tax Director at SobelCo with over twenty years of experience in handling tax compliance for corporations (including consolidations), partnerships, S corporations and high net worth individuals as well as sharing his in-depth knowledge of tax laws and regulations, most particularly by leveraging his wide involvement with tax planning and developing tax minimization strategies for clients.