08 Apr Highlights from the American Rescue Plan
By signing the 1.9 trillion-dollar economic stimulus bill on March 11, 2021, President Biden signaled the government’s willingness to provide unprecedented relief to families and workers impacted by the COVID-19 crisis. In addition to the expanded economic impact payments of $1400 per individual and $2800 per couple, families are also eligible for $1400 payments for each of their dependents if they fall under the economic guidelines (AGI of $75,000 for single and $150,00 for married couples filing jointly). This brief article focuses primarily on the items that may provide assistance to individuals and families.
Temporary Changes to Child Tax Credit for 2021
The Child Tax Credit received an upgrade and currently, all of these changes are for 2021. Taxpayers with children under the age of 17 typically receive $2,000 per child as a tax credit. The American Rescue Plan increases those amounts to $3,000 per child and if you have kids under the age of 6, you will receive $3,600 due to the enhanced maximum credit for 2021.
There are lower phaseout limits than typically used for the Child Tax Credit. Taxpayers that are Married Filing Jointly (MFJ) will begin to phase out at $150,000 and singles filers will phase out at $75,000. This is for the increased amounts only. The $2,000 credit will still phase out above $400,000 (MFJ) and $200,000 (single) as it usually does. Married couples that file jointly that make between $150,000 and $400,000 will still be able to claim a $2,000 tax credit for each child under 17 years old.
The IRS has been instructed to pay 50% of the Child Tax Credit to taxpayers in installments from July 1st-December 31st. These payments will be based on your most recent tax filing, which in July for most people will be their 2020 return. This may feel a lot like the stimulus payments many have received over the last year, but there is a huge difference: clawbacks. If the IRS has paid out more than you should have received, when you file your 2021 taxes you will have to pay back the excess. Your 2021 tax liability will increase by the amount that was overpaid to you as an advance payment of the Child Tax Credit. If you think you may fall into this category, you will want to speak with your CPA for the best way to handle this as the specifics get complicated and they will be able to help you plan ahead.
Child & Dependent Care Tax Credit
There were also some enhancements for this widely used tax credit that benefits parents. This credit may also be used by those who care for a dependent adult who can’t care for themself. Typically, this credit is calculated using a maximum of $3,000 in expenses for one child or $6,000 for two or more qualifying children and multiplying that by the taxpayer’s “applicable percentage” which is determined by your income. Qualifying children are 13 or younger for the entire tax year. Both the eligible expense amount and the applicable percentage will be increased for 2021.
Normally the applicable percentage is 35% but is phased out very quickly starting at $15,000 in income to a 20% floor at $45,000 in income (regardless of filing status). For 2021 the Applicable Percentage is increased to 50% and does not begin phasing out un $125,000 (regardless of filing status). Someone making $100,000 with two qualifying children would be able to claim $8,000 in 2021 compared to $1,200 in a typical year.
High-earning taxpayers, however, will likely see a reduction in the amount that they can claim for the Child and Dependent Tax Credit for 2021. Those with Adjusted Gross Income (AGI) exceeding $440,000 will receive no tax credit for 2021. The credit is phased out from $400,000 to $440,000 in income.
Enhancements to Unemployment
Many of the enhancements to unemployment from the CARES Act from 2020 are extended to September 6th, 2021. This includes Federal subsidies to states to extend the period that unemployment benefits can be paid, unemployment benefits for self-employed workers, and weekly benefit payments increased by $300.
Tax-Free 2020 Unemployment Benefits
For those who received unemployment benefits in 2020, up to $10,200 of those payments may be tax-free if your AGI is less than $150,000 (for all filers). There are no phaseouts for this exclusion. For example, if your AGI was $149,000 you could have excluded the full $10,200 from their income. All unemployment income is included in the initial AGI when figuring out if up to $10,200 can be excluded from income. The exact details are still being hashed out at the time of writing, so be sure to consult with your CPA.
Federal Subsidies for Terminated Employees
When an employee separates from an employer for a variety of reasons they can continue with their health coverage, but the former employee will need to pay the entire premium + up to 2% in order to keep the coverage for a limited amount of time. This is known as COBRA continuation and it can be a great way to bridge a gap between a former employer’s health coverage and your next policy (or Medicare). However, if you are terminated it may not be possible to afford COBRA premiums. Terminated employees may be able to keep their coverage for $0 from April to September of 2021. This will be paid for by the former employer and reimbursed via a refundable payroll tax credit. If you find yourself involuntarily terminated, ask your HR department about getting assistance with COBRA continuation.
What About 2021 RMDs?
RMD relief was not a part of the American Rescue Plan, so as it stands now RMDs will need to be taken before the end of 2021. Typically, we process these for clients toward the end of the year.
This is may not be the last piece of COVID related legislation we see this year. We will stay up to date and continue to communicate the pieces that impact your personal finances the most. If you have any questions regarding your specific situation don’t hesitate to contact us!