The American Rescue Plan Act of 2021

By Brian Ellenbecker CFP®, EA®, CPWA®, CIMA®, CLTC®

On March 11, President Biden signed the American Rescue Plan Act into law, his first major piece of legislation as president.  There are a large number of provisions in this law.

Below are the key provisions most likely to impact you:

2021 Recovery Rebates

As with past COVID-relief bills, the American Rescue Plan Act provides for a third economic impact payment worth up to $1,400 per individual and dependent.  This is an advance payment of a newly created 2021 income tax credit.

To qualify for the full payment, adjusted gross income (AGI) for individuals must be below $75,000 ($150,000 for married couples).  Individuals with AGI above $80,000 and married couples with AGI above $160,000 will not be eligible for any funds.  In the previous version of this Bill that originally passed the house and with the previous two rounds of rebates, the payments phased out completely at $100,000 for individuals and $200,000 for married taxpayers.  According to the Institute on Taxation and Economic Policy, 13 million fewer adults will now qualify for a stimulus payment, compared to previous rounds.

AGI is based on your 2019 tax return or 2020 return, if you already filed it.

Tax Planning Tip:   To maximize your rebate check:

  • DELAY FILING your 2020 return if your 2019 AGI is below $75,000 (single)/$150,000 (couples).
  • FILE YOUR 2020 RETURN ASAP if your 2020 AGI is below those thresholds, but your 2019 AGI was above them.

The new round of payments are a rebate for credits against 2021 taxes.  People who do not receive the full amount they are entitled to can claim a credit when they file their 2021 tax returns.  Those who receive payments this year and would be entitled to smaller payments based on their 2021 income don’t have to pay the money back.

Payment eligibility will be determined at three points through the next calendar year.  If you don’t receive a payment based on this initial window, you will have two other opportunities to qualify for the credit.  Here is a summary of the three windows:

  • Window 1: Most recent AGI on file with the IRS.  The initial wave of payments will be based on the most recent AGI number the IRS has on file.  For most people, that will be their 2019 AGI, unless they filed their 2020 tax return already.  If you are under the AGI threshold, you will receive the full payment amount.  If you are above the AGI threshold, you will receive either a partial payment or no payment.  However, you may still have the opportunity to receive additional funds in one of the subsequent windows.
  • Window 2: Earlier of 90 days after the 2020 calendar year filing deadline OR September 1st  By this point, most taxpayers will have filed their 2020 return.  If 2019 AGI was above the threshold but your 2020 AGI was below or in the phaseout range, you will receive a full or partial payment at this time.
  • Window 3: When you file your 2021 return.  If your 2021 AGI is lower than either your 2019 or 2020 AGI used to calculate the advance rebate and is low enough to produce a larger Recovery Rebate credit, it will be applied to your 2021 income tax return.

The various windows present opportunities to increase the amount of your Recovery Rebate credit.  If your income ends up being high enough to reduce or eliminate a payment made from a prior window, the excess amount will NOT need to be returned.  Amounts paid in error do need to be returned, though.

Dependents, including adult dependents are also eligible.  Adult dependents include college students, disabled adults and elderly relatives.  Only dependents under 17 were eligible for payments in previous relief packages.  This change is a big win for parents with older dependent children or those taking care of elderly or disabled family members.

Eligible recipients generally need a Social Security number to qualify for a payment.

Payments are already being sent out.  Most eligible individuals should receive their payment by the end of March.

Enhanced Child Tax Credit

For 2021 only, the American Rescue Plan Act increased the Child Tax Credit to $3,600 per child under six and to $3,000 for children between the ages of six through seventeen.  The “enhanced” portion of the credit is phased out once AGI exceeds $75,000 for single filers and $150,000 for married taxpayers filing jointly.  Those new income phaseouts do not impact the base credit amount of $2,000.  However, the base credit is still phased out once AGI exceeds $400,000 for joint filers or $200,000 for other taxpayers.

Half the credit is paid in advance, beginning in July.  Payments will be based on AGI from your most recent tax return on file (should be 2020 returns for most people by then).  Overpayments of this credit CAN be clawed back under certain circumstances.

The maximum age to receive the Child Tax Credit was increased by one year for 2021 only.  Children will now qualify if they are under the age of 18 vs. under the age of 17 in prior years.

This credit is now fully refundable for 2021.

A portion of the credit will be available in advance.  The IRS is instructed to pay eligible taxpayers 50% of the estimated Child Tax Credit amount for 2021 in equal installments from July 1st 2021 through December 31st, 2021.  Advanced payments will be based on your 2020 tax return or 2019 if your 2020 return has not yet been filed.  Once your 2020 return is filed, the refund amount could be adjusted based on information contained in that return.  Overpayments of this credit ARE required to be paid back when filing your 2021 return in most cases.

Enhanced Child and Dependent Care Credit

For 2021, The Child and Dependent Care Credit will be increased to a maximum of $4,000 for one child and $8,000 for two or more children.  The credit is fully refundable.

Unemployment Benefits

Benefits set to expire March 14 are extended through September 6 in the American Rescue Plan Act.  The extra $300 per week being paid on top of your state’s unemployment benefit will also continue through September 6.

The Pandemic Emergency Unemployment Assistance is extended through September 6.  PEUA is the new unemployment program for self-employed individuals and independent contractors who don’t otherwise qualify for standard unemployment benefits.

If you received unemployment benefits in 2020, up to $10,200 are exempt from tax for taxpayers with AGI below $150,000.  While the $150,000 AGI threshold applies to all filing statuses, if both spouses receive unemployment, each is eligible to exempt up to $10,200 for a possible maximum exclusion of $20,400.  However, unemployment compensation DOES count when calculating the $150,000 AGI threshold.

If you are involuntarily terminated from employment, COBRA premiums are $0 from April through September 2021.  Premiums for the coverage are paid by the taxpayer’s former employer and will be reimbursed to the employer in the form of a refundable payroll tax credit.

Health Coverage through State Run Exchanges

The maximum amount of income a person is required to spend on a health insurance policy purchased through a state health insurance exchange has been decreased for 2021 and 2022, resulting in higher Premium Tax Credits.  Taxpayers with income up to 150% of the poverty line will have the entire cost of coverage paid for by tax credits.  Also, there is no income cap to receive the credit in 2021 and 2022.  Even those above 400% of the Federal Poverty Line will receive a credit.

Relief is provided for people who received advance 2020 Premium Tax Credit payments in excess of what the actual credit amount should have been.  The claw back of excess payments is eliminated for the 2020 tax year only.

For 2021, anyone who receives unemployment for at least one week in 2021 will automatically be treated as through their household income does not exceed 133% of the poverty line.  They will be eligible for the full cost of the second least expensive Siler Plan available on their state Exchange.  There is no income cap on this provision.

Income Tax Free Student Debt Forgiveness

For the years 2021-2025, the forgiveness of student loan debt is excluded from income.  Many believe this provision may be foreshadowing future student debt relief.

Minimum Wage

The provision to gradually increase the minimum wage to $15 per hour was removed from the Senate’s version after the parliamentarian (a nonpartisan official who decides which bill can pass via reconciliation) determined that the provision did not meet the standards to pass with a simple majority.