American Rescue Plan Act of 2021 (ARPA): Provisions for Individuals
Congress voted for the passage of the American Rescue Plan Act of 2021 (“ARPA”), on March 10, 2021, and President Biden signed it into law on March 11. The following highlights of the ARPA address provisions that provide assistance to individual taxpayers.
Recovery Rebates 2021
The third round of stimulus payments authorized by ARPA will quickly begin to flow out to individual taxpayers. There are differences with this round of payments from the second round of payments paid to individuals earlier in 2021. ARPA provides a $1,400 payment to qualified individual taxpayers ($2,800 in the case of a joint return filers) plus an additional $1,400 for each dependent reported on the taxpayer’s return. The first two stimulus payments only considered children under age 17 as eligible for recovery rebates to their parents. This new law expands the definition of dependents to include older children and other family members qualifying as dependents for tax purposes.
The ARPA stimulus payments phase down to $0 when a taxpayer’s adjusted gross income falls between $75,000 to $80,000 for individual taxpayers, $112,500 to $120,000 for head of household filers, and $150,00 to $160,000 for joint return filers.
Unemployment Relief Extended
ARPA extends unemployment benefits through September 6, 2021. This extension includes the $300 Federal Pandemic Unemployment Compensation payment added to all unemployment benefits. The new law also extends the Pandemic Unemployment Assistance program, which expands eligibility for the self-employed, gig workers, freelancers and others who do not qualify for regular unemployment insurance. A program which makes additional weeks of benefits available to workers who exhaust their state benefits, and all other CARES Act and Families First Coronavirus Response Act unemployment programs, are similarly extended until September 6.
Child Tax Credit
ARPA makes significant changes to the Child Tax Credit, but these changes only apply for tax year 2021.
- The new law increases the amount of the credit from $2,000 to $3,000, with an even larger increase to $3,600 for children who have not attained age six as of the close of the tax year. ARPA also includes 17-year-olds as qualifying children for the Child Tax Credit.
- The amount of refundable credit increases in 2021 from $1,400 per child to the maximum credit available for each child.
- The Child Tax Credit also has a new set of thresholds for phasing out the credit for higher income earners. Step one phase out begins with adjusted gross income of $75,000 for individual filers and $150,000 for joint return filers. The second step phase out begins at $200,000 for individual filers and $400,000 for joint return filers.
Advance Payment of the Credit
ARPA also instructs the U.S. Treasury and the IRS to calculate the anticipated child tax credit a taxpayer will receive in 2021; one-half of this credit is to be paid in advance to the taxpayer ratably over six months starting July 1, 2021. The IRS will also create a website to allow taxpayers to opt out of the advance payments.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit helps working families afford the cost of child care. For 2021 only, ARPA increases the credit to 50 percent of qualified expenses up to a maximum credit of $4,000 for one child or $8,000 for two or more children. In addition, the credit is fully refundable so families who owe little in taxes can still benefit. Similar to the Child Tax Credit, the new law introduces a two-step phase out to reduce the credit for those taxpayers with higher incomes.
Exclusions from Taxable Income
2020 Unemployment Benefits
Taxpayers who received unemployment benefit payments in 2020 can exclude up to $10,200 of these payments from their gross income. This exclusion applies to tax returns with less than $150,000 of adjusted gross income.
COBRA Premiums Subsidy
ARPA includes a new provision to offer a 100 percent subsidy for COBRA continuation of health insurance coverage to eligible individuals. These individuals will not have to pay COBRA premiums during the second and third quarters of 2021. The law limits eligibility generally to former employees receiving COBRA benefits as a result of an involuntary termination of employment or a reduction in hours. The new law extends the election period to opt in to COBRA coverage to individuals who had an involuntary termination of employment or reduction in hours in the last 18 months. This subsidy applies to coverage from April 1, 2021, until September 30, 2021, but ends earlier if the individual’s COBRA coverage period ends or the individual becomes eligible for Medicare or another group health plan. Individuals do not include the COBRA premium subsidy in their taxable income.
Employer-Provided Dependent Care Assistance
For 2021 only, APRA increases the annual amount of employer-provided dependent care assistance that can be excluded from an employee’s income. ARPA raised the annual maximum to $10,500 ($5,250 for MFS filers). Employers can adopt this change to their benefit plans and make it effective for all of 2021, if the plan amendments are in place before the last day of the plan’s year.
Discharge of Student Loan Debt
ARPA expands the exclusions from taxable income for student loans discharged after 2020 and before 2026. This provision sets up an opportunity for public and private student loan debts to be discharged for any reason without an income tax consequence.
The provisions in ARPA can impact an individual’s 2020 tax return, and filing or not filing a 2020 return in the next few weeks may impact the IRS calculation of a taxpayer’s recovery rebate. Increased credits and exclusions from taxable income available in 2021 can adjust planning for income and expenses in 2020 and 2021 as well. We invite you to reach out to your Cherry Bekaert tax advisor to discuss how these and other provisions in the American Rescue Plan Act of 2021 may benefit you.