American Rescue Plan Act
On Thursday, March 11, 2021, the American Rescue Plan Act of 2021 (ARPA 2021) was signed into law. This is a $1.9 trillion emergency relief package that includes payments to individuals and funding for federal programs, vaccines and testing, state and local governments, and schools. It is intended to assist individuals and businesses during the ongoing coronavirus pandemic and accompanying economic crisis. Major relief provisions are summarized here, including some tax provisions.
The act creates a new round of economic impact payments to be sent to qualifying individuals. The same as last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. The act creates a new Sec. 6428B that provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent (as defined in Sec. 152) for 2021, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.
For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.
The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
|Filing Status||Payment Amount||Phaseout Threshold||Phaseout Completed|
|Head of Household||$1,400||$112,500||$120,000|
The legislation extends unemployment benefit assistance:
- An additional $300 weekly benefit to those collecting unemployment benefits, through September 6, 2021
- An additional 29-week extension of federally funded unemployment benefits for individuals who exhausttheir state unemployment benefits
- Targeted federal reimbursement of state unemployment compensation designed to eliminate state one-week delays in providing benefits (allowing individuals to receive a maximum 79 weeks of benefits)
- Unemployment benefits through September 6, 2021, for many who would not otherwise qualify, including independent contractors and part-time workers
For 2020, the legislation also makes the first $10,200 (per spouse for joint returns) of unemployment benefits nontaxable if the taxpayer’s modified adjusted gross income is less than $150,000. If a 2020 tax return has already been filed, an amended return may be needed.
COBRA continuation coverage
The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The act creates a new Sec. 6432, which allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against the Sec. 3111(b) Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.
The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30. Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.
Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.
Under new Sec. 139I, continuation coverage premium assistance is not includible in the recipient’s gross income.
The employee retention tax credit has been extended through December 31, 2021. It is available to employers that were significantly impacted by the crisis and is applied to offset Social Security payroll taxes. As in the previous extension, the credit is increased to 70% of qualified wages, up to a certain maximum per quarter.
The employer tax credits for providing emergency sick and family leave have been extended through September 30, 2021.
Eligible small businesses can receive targeted economic injury disaster loan advances from the Small Business Administration. The advances are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
Eligible restaurants can receive restaurant revitalization grants from the Small Business Administration. The grants are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
The legislation allocates additional funds to state and local governments to provide emergency rental and utility assistance through December 31, 2021.
The legislation allocates funds to help homeowners with mortgage payments and utility bills.
The legislation also allocates funds to help the homeless.
Health Insurance Relief
For those who lost a job and qualify for health insurance under the federal COBRA continuation
coverage program, the federal government will generally pay the entire COBRA premium for health insurance from April 1, 2021, through September 30, 2021.
For 2021, if a taxpayer receives unemployment compensation, the taxpayer is treated as an applicable taxpayer for purposes of the premium tax credit, and the household income of the taxpayer is favorably treated for purposes of determining the amount of the credit.
Persons who bought their own health insurance through a government exchange may qualify for a lower cost through December 31, 2022.
Child tax credit
For 2021, the credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 for qualifying
children under age 6), subject to phaseout based on modified adjusted gross income. The legislation
also makes 17-year-olds eligible as qualifying children in 2021.
For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
The Treasury Department is expected to send out periodic advance payments (to be worked out by the
Treasury) for up to one-half of the credit during 2021.
Earned income tax credit
For 2021 only:
The legislation generally increases the credit available for individuals with no qualifying children
(bringing it closer to the amounts for individuals with one, two, or three or more children which were
already much higher).
For individuals with no qualifying children, the minimum age at which the credit can be claimed is
generally lowered from 25 to 19 (24 for certain full-time students) and the maximum age limit of 64 is
eliminated (there are no similar age limits for individuals with qualifying children).
To determine the credit amount, taxpayers can elect to use their 2019 earned income if it is more than
their 2021 earned income.
For 2021 and later years:
Taxpayers otherwise eligible for the credit except that their children do not have Social Security numbers (and were previously prohibited from claiming any credit) can now claim the credit for individuals with no qualifying children.
The credit is now available to certain separated spouses who do not file a joint tax return.
The level of investment income at which a taxpayer is disqualified from claiming the credit is increased
from $3,650 (as previously indexed for 2021) to $10,000 in 2021 (indexed for inflation in future years).
Child and dependent care credit
For 2021, the legislation increases the maximum credit up to $4,000 for one qualifying individual and up to $8,000 for two or more (based on an increased applicable percentage of 50% of costs paid and
increased dollar limits).
Most taxpayers will not have the applicable percentage reduced (can be reduced from 50% to 20% if
AGI exceeds a substantially increased $125,000) in 2021. However, the applicable percentage can now
also be reduced from 20% down to 0% if the taxpayer’s AGI exceeds $400,000 in 2021.
For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
Family and sick leave credits
The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, as Secs. 3131 (credit for paid sick leave), 3132 (credit for paid family leave), and 3133 (special rule related to tax on employers). The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.
The act increases the limit on the credit for paid family leave to $12,000.
The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.
The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.
The credits are expanded to allow 501(c)(1) governmental organizations to take them.
Employee retention credit
The act codifies the employee retention credit in new Sec. 3134 and extends it through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and it allows eligible employers to claim a credit for paying qualified wages to employees.
Under the act, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.
Premium tax credit
The act expands the Sec. 36B premium tax credit for 2021 and 2022 by changing the applicable percentage amounts in Sec. 36B(b)(3)(A). Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.
For student loans forgiven or canceled between January 1, 2021, and December 31, 2025, discharged
amounts are not included in taxable income.
Miscellaneous tax provisions
The act amends Sec. 162(m), for years after 2026, to add a corporation’s five highest-compensated employees (besides the employees already covered by Sec. 162(m)) to the list of individuals subject to the $1 million cap on deductible compensation.
The act extends the Sec. 461(l) limitation on excess business losses of noncorporate taxpayers for one year, through 2027.
The act also repeals Sec. 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis.
The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants.
The act temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.