The following information highlights the key tax relief provisions included in the American Rescue Plan Act of 2021 (“TARPA 2021”) enacted into law on March 11, 2021. The relief includes many provisions to help both individuals and businesses through a recovery rebate, tax credits, and an increase to unemployment benefits through September 1, 2021. Although not discussed below, the legislation provides for many other provisions including for premium assistance for COBRA continuation and funding for Targeted Economic Injury Disaster Loan Advance payments as well as Restaurant Revitalization grants.
- Third Round of Stimulus Payments. Individuals will receive a maximum of $1,400 per person plus an additional $1,400 for each qualifying child and relative for 2021 as an advance of the 2021 tax credit(s). The phaseout begins for Single filers at $75,000, Head of Household filers at $112,500, and Married Filing Joint at $150,000 and is totally phased out at $80,000, $120,000, $160,000, respectively. The determination to issue the payment will be made based on the taxpayer’s 2020 Adjusted Gross Income. If the 2020 return has not yet been submitted, then the Internal Revenue Service will use the Adjusted Gross Income Reported on the 2019 return. The IRS has already started delivery of the payments.
- These payments cannot be used by the Internal Revenue Service as an offset to pay outstanding liabilities of the taxpayer.
- Child Tax Credit (CTC). For 2021 only, the credit is made fully refundable and the maximum credit was increased to $3,000 per qualifying child or ($3,600 if under six (6) years old). The phaseout begins for Single filers at $75,000, Head of Household filers at $112,500, and Married Filing Joint at $150,000 and is totally phased out at $200,000, $200,000, $400,000, respectively. The law also increased the age limit to 17. The first half of the estimated annual credit will be issued by the IRS as a monthly (or as feasible) advanced payment, starting on July 1, 2021. The remaining credit amount determined due is received when the taxpayer files their 2021 return. If a taxpayer receives as an advance of more than what would be allowable on the respective return, they will have to pay up to $2,000 back to the Internal Revenue service, other than to the extent they qualify for a special safe-harbor provision. There will be the ability to “OPT OUT” of the advance or to provide updated information that would impact the estimated amount.
- Earned Income Tax Credit (EITC). For individuals with no qualifying children during the taxable year beginning December 31, 2020 through January 1, 2022, the minimum age to claim the credit was reduced to 19 from 25 (24 for specified students and 18 for qualified former foster youth). In addition, the maximum age to claim the credit was eliminated. Finally, the phaseout thresholds were increased.
- CTC and EITC. The American Rescue Plan Act includes a provision for year 2021, such that a taxpayer may use either 2019 or 2021 earned income to calculate these credits.
- Dependent Care Credit. For 2021, the dependent care credit is fully refundable, and the maximum amount was increased to $8,000 for one (1) qualifying individual and $16,000 for two (2) or more. The credit percentage was also increased to 50% of qualifying expenses which is decreased by one (1) percentage point for every $2,000 of AGI over $125,000. In no event will the credit be reduced below 20 percent for taxpayers with AGI below $400,001.
- Unemployment Relief. An additional $300 per week will continue to be paid on top of existing unemployment benefits through September 1, 2021. Additionally, the first $10,200 of unemployment payments have been made tax-exempt for taxpayers (for each spouse if filing a joint return) where adjusted gross income is less than $150,000. As such, up to $20,400 may be tax-exempt for those Married Filing Joint.
- Student Loan Exclusion. 108(f) is amended to specify that a taxpayer’s gross income does not include any amounts from the discharge of any federal student loan(s) from after 2020 and before 2026. This exclusion does not apply to the discharge of loans by private lenders.
- Premium Tax Credit. For 2021 and 2022, the credit is available for individuals with incomes below 400 percent of the federal poverty lines and increases the credit for those already qualified.
- Extension of Limitation on Excess Business Losses for Noncorporate Taxpayers. The Tax Cuts and Jobs Act imposed a limitation on deduction of losses for noncorporate taxpayers (after application of passive activity loss limitation rules are applied), i.e., active business losses, for losses in excess of $500,000 for married joint filers and $250,000 for non-married filers (these amounts are indexed for inflation adjustments). Losses subject to the limitation were treated as an NOL carryforward to subsequent tax years. This limitation was effective for tax years beginning after December 31, 2017 and before January 1, 2026. The CARES Act suspended the limitation on active business losses for tax years after 2017 and before 2021. The American Rescue Plan Act extends the excess business loss limitation for one year, through 2026.
- Paid Sick & Family Leave Credit. A refundable credit is available against applicable employment taxes per quarter equal to 100 percent of qualified sick leave wages paid. The overall number of sick leave days considered is reset and shall not exceed ten (10) over the number of days taken into account for the previous quarter.
- Payroll Credit for Paid Family Leave. There is allowed a refundable credit against certain employment taxes for each calendar quarter equal to 100 percent of the qualified family leave wages paid for such quarter. The amount of wages that qualifies for any day shall not exceed $200 per day and $12,000 in the aggregate with respect to all calendar quarters.
- Credit for Sick Leave for Self-Employed Individuals. The act puts self-employed individuals in the same position as employers by allowing a credit for any taxable year equal to the qualified sick leave equivalent amount with respect to the individual. This is equivalent to the number of days during the taxable year (but not more than 10) where the individual is not able to work for which they would otherwise be entitled to sick leave times the lessor of $200 or 67 percent of the average daily self-employment income of the individual for the tax year. Average daily self-employment income equals net earnings divided by 260 days.
- Credit for Family Leave for Self-Employed Individuals. A credit is available to self-employed individuals equal to 100 percent of the qualified family leave equivalent amount with respect to the individual. If the individual would have been an employee of an employer and been entitled to family leave then they the equivalent amount would be the number of days (not to exceed 60) that the individual was unable to work times the lesser of 67% of the average daily self-employment income for the taxable year or $200.
- Employee Retention Credit. The act extends the payroll credit for employee retention through December 31, 2021; it was originally set to expire as of June 30, 2020. Additionally, the credit may now be applied to Medicare (HI) taxes as well as to Social Security (OASDI) taxes after June 30, 2021.
- Tax Treatment of Certain COVID-19 Relief. Targeted Economic Injury Disaster Loans (EIDL) and Restaurant Revitalization Grants received from the Small Business Administration (SBA) will be treated as tax-exempt income, and the exclusion of the income will not result in the denial of an increase to the basis of a pass-through entity which is helpful for purposes of loss limitation rules and taxation of distributions, nor will it reduce tax attributes.