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Unpacking the American Rescue Plan of 2021 for Individuals


Mar. 23, 2021

On March 11th, President Biden signed his first significant piece of legislation into law, the American Rescue Plan Act (ARPA). ARPA is a $1.9 trillion rescue package designed to continue assisting the US’s recovery from the devastating economic and health effects of the ongoing COVID-19 pandemic.

The bill follows on the heels of the $2 trillion CARES Act of early 2020, as well as the $900 billion Consolidated Appropriations Act of 2021, passed in December. The massive bill extends some of the measures put in place by previous stimulus legislation and introduces many new recovery measures. It does not, however, include any additional ‘relief’ or a further suspension of required minimum distributions (RMDs) from retirement accounts, as provided in the CARES Act.

Here are some of the key provisions outlined in the new law:

  • Of significance to millions of Americans, the ARPA provides a third round of direct payments at $1,400 for individuals and each qualifying dependent. Formally called 2021 Recovery Rebates, these direct payments qualify for any dependent of the taxpayer, unlike the previous round that included payments of only $600 per eligible child aged 16 years or younger. A qualifying dependent includes children under 19, children under 24 attending school full-time, and financially supported adults in a household. In contrast to the stimulus payments in 2020, the adjusted gross income (AGI) phaseout ranges are, unfortunately, much narrower:
    • $75,000 - $80,000 for single and married filing separately
    • $150,000 - $160,000 for married filing jointly
    • $112,500 - $120,000 for head of household
    • Example: John and Jamie are married with two children, a 21-year-old in college and a 17-year-old. John’s mother also lives with them and is considered a dependent. Accordingly, John and Jamie’s 2021 Recovery Rebate could be 5 x $1,400 = $7,000. However, John’s lowest AGI in 2019 or 2020 was $155,000, placing him 50% of the way through the married filing jointly phase-out range. Therefore, his 2021 Recovery Rebate is adjusted to $7,000 x 50% = $3,500.
    • Planning Opportunity: Since the IRS has begun processing the direct payments based on either your 2019 tax return or 2020 tax return, whichever one is the most recent, it is in your best interest to file your 2020 tax return right away if your 2020 AGI is lower than your 2019 AGI. Otherwise, if your 2019 AGI is lower than your 2020, it makes sense to wait until after you receive your direct payments since there will be no clawback of the rebate on the 2021 tax return.
  • There are significant enhancements to the child tax credit for 2021. Prior to the ARPA, the child tax credit provided parents with a $2,000 credit for each child under 17, subject to income phaseouts of $200,000 for singles and $400,000 for joint filers. Under the new tax credit, parents can receive an extra $1,600 for each child under 6, $1,000 for children ages 6-16, or $500 for ages 17 and 18, as well as $500 for full-time students up to age 24. Most notably, the credit will be distributed in monthly installments beginning in July instead of at tax time. Additional details relating to the child tax credit include:
    • The credit is subject to significantly lower income phaseout ranges, which begin at $75,000 for singles, $150,000 for joint filers, and $112,500 for heads of households.
    • If parents are not eligible for the new higher child tax credit, they can still claim the ‘traditional’ credit of $2,000 per child.
    • The 2021 child tax credit is fully refundable, which is a helpful change for many families as the prior child tax credit was partially- or non-refundable before 2017.
    • The minimum earning requirement of $2,500 has been waived for 2021, helping those who may have been out of work and have had no earned income.
  • Alongside the increase of the child tax credit, the Act temporarily enhances the child and dependent care tax credit, nearly quadrupling the credit in 2021 for qualifying individuals. Maximum eligible care expenses (e.g., adult or child day care expenses) more than doubled from $3,000 to $8,000 for one dependent, and from $6,000 to $16,000 for two or more dependents. Furthermore, a taxpayer is now able to claim a tax credit for 50% of those expenses instead of the previous 35%. Finally, the act raises the AGI phaseout threshold from $15,000 to $125,000 regardless of filing status.
  • The Act also extends the Pandemic Unemployment Assistance (PUA) program. The federal government will continue to supplement state’s unemployment insurance benefits by providing an additional $300 per week through September 6, 2021. Furthermore, the first $10,200 of unemployment benefits received per taxpayer in 2020 are now retroactively tax-free. No matter the filing status, however, the AGI limit is set at $150,000. Those who had taxes withheld from their unemployment benefits will be able to recover them when they file taxes this year, and those who have already filed their taxes should consider filing an amended return for the 2020 tax year.
  • The Act establishes a 100% premium subsidy for COBRA continuation coverage for health insurance from April through September, a total of six months. Individuals who involuntarily lose their jobs or have their hours reduced below the required minimum can remain on their employer’s healthcare plan and the premiums will be fully covered. Their previous employer will pay the premiums and be reimbursed through refundable payroll tax credits.
  • For individuals with no access to health care coverage through their employer, or for those who purchase health insurance through a state-run exchange (i.e., ACA insurance), premiums are now capped at 8.5% of income for all individuals. Previously, a household was disqualified from receiving any of these premium assistance tax credits if income exceeded 400% of the federal poverty line. This temporary enhancement is in effect for 2021 and 2022.

Several other key provisions that were either rumored or in the original House bill ultimately did not make it into the final version. These include a proposed minimum wage increase and broader student loan forgiveness—the Act does include a provision making any student loan forgiveness tax free through 2025. Notably, many of the enhancements in this bill are temporary and limited to 2021 only, unless otherwise stated. There is a strong likelihood that Congress will revisit these issues in the coming months with the goal of enshrining them into permanent law.

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Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.

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