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American Rescue Plan for Indviduals

Scott Patterson

8 months ago · 11 min read

Whether you are in need of rescue or not, Congress has passed the American Rescue Plan (ARP). This is the sweeping $1.9 trillion relief bill you undoubtedly heard was coming. The bill provides piles of money for COVID vaccines and testing, state and local aid, more stimulus payments, and various tax changes. Here is an overview of the provisions affecting individual taxpayers. For provisions affecting businesses, see this post.

Stimulus Payments

More stimmy! If you make less than $75,000 (single) or $150,000 (joint) you will receive $1,400 per taxpayer AND dependent. There are some crucial differences this time around:

  1. ALL dependents are now eligible for stimulus payments. Previously, if you had a child over the age of 16 or if you had an adult dependent, that dependent didn’t receive a stimulus. This time, you'll receive $1,400 for all dependents.
  2. The phase out range is significantly shorter than before. You are completely out of luck if your income exceeds $80,000 (single) or $160,000 (married).
Unique Tax Planning Opportunities

Because of this phase out range, we have to be very, very careful of how we plan to maximize stimulus money. Once the IRS pays you the money, that money is yours, and the IRS can’t take it back (absent of fraud, of course).

We’ve found some cases for married couples who combine to make more than $150,000 in 2020 filing separately may no longer be a boondoggle. Historically, this strategy hasn’t been fruitful because the married filing separate tax rates are extremely prohibitive. Now a strategic separate filings could allow a lower earning spouse to receive significant stimulus payments. In the words of the great philosopher Ice-T, “Don’t hate the player, hate the game.”

Stimulus payments will be paid out in two phases this time around. In Phase 1, the IRS will take all of the data that it already has and pay stimulus payments out based on that. If you haven’t filed a 2019 or 2020 tax return, you won’t get a stimulus payment. For anyone who earned less in 2020 than in 2019 and has not filed a tax return yet, there will be a second date in which the IRS pays out to everyone who should have received more stimulus/a bigger stimulus based on their 2020 filing. That date is going to be the earlier of 90 days after tax deadline day OR September 1. What does this mean? It means that there’s no rush to get your taxes filed for 2020 just so you can get a stimulus payment.

This round is in advance of a 2021 tax credit. Just like we are doing now, the amount you receive will be reconciled to the amount you deserve on your 2021 return (Filed in 2022). If your situation has changed and you deserve more, you’ll receive it as part of your refund. If the opposite is true and you received more than you deserve it is yours to keep.

We’ve had several parents and children inquire if their child should consider “filing independent” so the child can receive the stimulus payment directly. Since parents and children receive the same amount of money for this 2021 stimulus the strategy is not as enticing as in 2020. However, remember that being a dependent is not something you can choose. There are rules outlined in IRS Publication 501 that determine if you are or you are not a “qualifying child.”

Unemployment Benefits are Now (Partially) Non-Taxable

For 2020 only, $10,200 of unemployment benefits per person are not taxable for those that made less than $150,000. Oddly enough, the income limit calculation must be done including all unemployment income. This tax exclusion is applied separately to each spouse allowing a total of $20,400 on a joint return.

IRS has already given instructions on how to file a 2020 tax return and receive this. However, for those that have already filed, we still wait instructions. Conventional wisdom says an amended return will be necessary.

Our biggest question is how states will react to this. There are already a number of changes to the tax code that warrant consideration by the states. South Carolina requires an adjustment for the new charitable deduction granted in the CARES Act. Who knows if SC will follow federal rules and allow unemployment to be exempt from state taxation.

Expanded Child Tax Credit

If you have a child under the age of 17, you typically receive a Child Tax Credit of $2,000. The ARP is extending that Child Tax Credit to $3,600 per child under the age of 6 and $3,000 per child between the ages of 6-17. Dependents who are 18+ remain worth a $500 credit. This means that parents who have a child turning 18 in 2021 will enjoy the child tax credit one more year. For now, this change is for Tax Year 2021 only, though these things have a way of becoming permanent once conceived.

The expanded portion of the credit won’t be available to everyone. As with the stimulus payments, you won’t receive the expanded Child Tax Credit or the advance on the Child Tax Credit if you make more than $75,000 if you’re single or $150,000 if you’re married. If income exceeds that threshold, you will still get the base Child Tax Credit of $2,000, just not the extra money.

The expanded Child Tax Credit also comes with another opportunity for taxpayers to be frustrated with IRS. Half of the Child Tax Credit is to be paid out on a monthly basis from July - December. If you qualify, you will receive $300 per month per child under the age of 6 or $250 per month per child between 6-17 years. I’d like to see Vegas put odds on the chance this doesn’t get screwed up.

Unlike the stimulus payments though, the IRS can and will get this money back from you if you don’t qualify when you file your 2021 tax return. If 2020 was the only year that you were under the threshold to get the expanded Child Tax Credit, you’re going to want to opt out of the expanded credit and the advance of it. We expect the IRS is going to set up a portal for those who have children to opt out of getting the advanced payments if you’d like.

You heard it here first, this is going to be messy. No way around it. But in the end, most families who qualify will enjoy an extra $1,000 per child this year and an additional $600 on top of that if your child is under the age of 6 in 2021.

One last change that bears mentioning is that the child tax credit is “fully refundable” for 2021. Normally, a portion of the Child Tax Credit will reduce your tax bill but cannot be paid to you if you have no tax bill. Refundable tax credits may be paid even if your tax bill has already been reduced to zero.

Expanded Earned Income Credit (EIC)

Several aspects of this credit have been changed. Maximum amounts have increased, age qualifications have been expanded, and disqualifying criteria has been reduced.

  • The minimum age has been reduced to 19 (not for full time students though) and the upper limit of age 65 has been completely removed.
  • The disqualifying investment income limit of $2,200 has been raised to $10,000.
  • Individuals with no children’s maximum amount has tripled.
  • Certain separated couples will not be disqualified.

Child and Dependent Care Credit

Eligible parents can use day care expenses of $8,000 for one child or up to $16,000 for two (or more) children to lower their tax bill. This is more than double what was available in the past. Apparently that wasn’t enough. The percentage of those expenses to be used when calculating the credit has also been increased and may be as much as 50%. This means that the maximum credit has increased from $2,100 to $8,000.

Extended Unemployment Benefits

If you remain on unemployment, your benefits were set to expire on March 14. Those benefits have now been extended through September 6. The extra federal assistance which was set to expire as well is maintained at an extra $300 per week during this time. This is widely expected to be the last extension of unemployment benefits.

Changes to Marketplace Insurance

The threshold for qualifying for a health insurance subsidy will increase to approximately 2.5 million families, and the ones who are getting a subsidy will see an increase in it. Taxpayers with household income below 150% of the federal poverty line will have 100% of premiums paid for in 2021 and 2022.

Normally those with incomes exceeding 400% of the federal poverty line are not eligible for a subsidy. However, higher-earning taxpayers will see their portion of the insurance premium payment capped at 8.5% of income. The government will pick up the rest.

Retroactive for 2020 only, if the government paid more for insurance subsidies than a tax return says they should have, no repayment is necessary. This repayment is normally a major source of heartburn for us since few extra dollars in income can lead to thousands of dollars added to your tax bill. We will not miss this part of the tax law.

Cobra Health Insurance

Employees laid off will have up to six months (April through September) of insurance premiums paid in full. No application or paperwork is required. Employers will simply make the payments and receive a reimbursement from the IRS.

What Isn’t in the rescue plan?

Several things didn’t make the final bill:

  1. Required minimum distributions are still a thing for 2021. They haven’t been canceled yet.
  2. Raising minimum wage to $15/hr. The Democrats are inevitably going to take another swipe at this soon, though we’ll see if they want to raise minimum wage by quite that much or not in future legislation.
  3. Student loans aren’t being forgiven — yet. The Democrats did position themselves to make this move at a later date, though. Hidden inside the depths of the ARP is a clause that any future student loan debt that is forgiven will not be subject to income tax. That’s a crucial paragraph. There’s no meaning to it quite yet, but when this topic of canceling X dollars in student loan debt comes up again (and it’ll be soon), the foundation is in place to ultimately not have it cripple people in future taxes.
  4. The House’s version of the bill crippled retirement plan contributions by eliminating the cost-of-living adjustments to the maximum contribution amounts. The Senate stripped that from the final bill.

Extended tax season?

Speculation varies wildly on whether tax season will be extended. Major tax chains are lobbying against the change calling the April 15th tax filing deadline a “significant component of American culture.” (insert eye-roll here) CPAs have asked for the filing deadline to be extended to June 15th. Buckle up. It’s going to be a wild ride!

Hoping you feel rescued,

Notice: This generic information is not intended to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary (by industry, entity type, and locale), consult your accountant, lawyer, and/or HR expert for specific guidance.

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