The American Rescue Plan Act of 2021 has been signed into law by President Biden. The $1.9 trillion bill includes increased funding for COVID-19 vaccination programs and testing, state and local governments for economic relief, K–12 and higher education schools to assist with re-opening, and certain industries, such as restaurants and airlines, that have been hit especially hard by COVID-19.

The bill also includes several temporary, but significant, tax-relief provisions, which we highlight below:

Direct Stimulus Payments

A third round of Economic Income Payments (EIP) will be issued in amounts of up to $1,400 for an individual, $2,800 for joint filers, and $1,400 for each qualifying dependent. Eligible, qualifying dependents include full-time students under the age of 24 and adult dependents, which is a change from the first two rounds of EIP. The amount received will phase out as adjusted gross income exceeds various thresholds based on filing status ($75,000–$80,000 single, $112,500–$120,000 head of household, $150,000–$160,000 married filing joint). No payment will be issued if adjusted gross exceeds the top of the phase-out range.

Adjusted gross income will be determined based on 2020 tax returns if they've already been filed at the time the payment is issued. If a 2020 tax return has not been filed, the IRS will then utilize the 2019 tax return to make an initial determination of eligibility. If a later 2020 tax return filing allows for a larger payment than was first determined, the IRS will process additional payments in fall 2021. In addition, if a 2021 tax return filing allows for a larger payment than was determined based on the 2019 or 2020 tax returns, the additional amount can be claimed as a recovery rebate credit on the 2021 tax return. Similar to the first two rounds, the IRS will not seek recovery of funds paid out during any of the determination periods, even if a subsequent tax return filing includes a higher adjusted gross income.

Extension of Unemployment Benefits and Retroactive Change to 2020 Taxation

Federal unemployment benefits of $300 per week have been extended through September 6, 2021, supplementing state unemployment benefits. Notably, the bill excludes the first $10,200 of unemployment benefits received in 2020 from federal taxation for households with income of up to $150,000. The IRS is expected to issue guidance to taxpayers who have already filed their 2020 tax returns for amending their returns to account for this change.

Temporary Expansion of Child Tax Credits

The maximum child credit is temporarily increased for the 2021 tax year from $2,000 to $3,600 for children under age 6 and to $3,000 for children ages 6 to 17. The excess of the increased credit amount is phased out by $50 for every $1,000 of adjusted gross income in excess of threshold amounts ($75,000 single, $112,500 head of household, $150,000 married filing joint). Once the excess is eliminated, the amount of the credit remains at $2,000, as under current rules. The IRS plans to issue advance payments of these credits to eligible taxpayers on a monthly basis beginning July 1, 2021. The amount of the credit not received as an advance payment can be claimed on the 2021 tax return.

Temporary Enhancement of Dependent Care Benefits

The dependent care credit is temporarily enhanced for the 2021 tax year by increasing the maximum credit percentage from 35% to 50% and increasing the amount of eligible expenses to $8,000 for one individual and $16,000 for two or more, up from $3,000 and $6,000, respectively. The credit will also be made fully refundable.

In addition, the maximum exclusion from W-2 compensation for electable dependent care benefits through an employer increases to $10,500 for tax year 2021.

Temporary Enhancements to Premium Tax Credits for Health Care

For tax years 2021 and 2022, affordability calculations increase the credit amounts available for purchasing health insurance through the marketplace exchange. Individuals with household income exceeding 400% of the federal poverty limit will be eligible for premium credits.

For tax year 2020 only, taxpayers will not have to repay excess advance premium tax credits where their household income was greater than the estimated amount used to establish the advance premium credit amount.

COBRA Premium Subsidy

Eligible individuals will receive a 100% subsidy for COBRA premiums from April 1, 2021, through September 30, 2021. The subsidies will be provided in the form of a payroll tax credit to the former employer.

Exclusion of Student Loan Forgiveness from Income

The bill excludes forgiven student loan amounts from taxable income for loans forgiven in the years 2021–2025. The provision does not apply to loans forgiven by private lenders.

If you have any questions about how any of the provisions within the American Rescue Plan Act of 2021 will impact your personal financial or tax situation, please contact us.