American Rescue Plan
The recently passed American Rescue Plan Act includes various tax components. The following provides a brief overview of some of the provisions, click on each link to go to specific provisions.
Child Tax Credit
The Act expands the child tax credit in several ways and allows taxpayers to receive the tax credit proceeds in advance of filing a return, but only for the 2021 tax year. The Act makes the credit fully refundable for 2021 and makes 17-year-old dependents eligible as qualifying children (previously, the child tax credit ended for dependents when they reached age 17).
The Act increases the amount of the credit to from $2,000 to $3,000 per child ($3,600 for children under 6). The increased credit amount ($1,000 or $1,600) phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.
The IRS is directed to estimate child tax credit amounts and to pay a portion of the credit in monthly installments through the end of 2021, possibly beginning July 1. For people who rely on the child tax credit to reduce their federal tax obligation they will need to pay close attention to how this will work for the 2021 year.
When we file your 2021 tax returns, we will have to reconcile the advance payment amount with the actual tax credit allowed on next year’s tax return, which could potentially result in repayments of amounts received, a lower tax refund, or a balance due with your return.
In the case of a taxpayer who received advance payment in error (for example, where a 2019 or 2020 return indicated a dependent child who is no longer a dependent in 2021), the Act provides a safe harbor provision, protecting taxpayers from having to pay back overpayments of up to $2,000 per child. The safe harbor is available for single taxpayers with modified adjusted gross income of $80,000 or less ($120,000 for joint filers, $100,000 for head of household filers).
The IRS and Treasury are directed to create a website for taxpayers to opt out of receiving advance payments, or to provide information on status changes that would impact the amount of the credit – we will have more information on this website as it becomes available. However, we emphasize that if you rely on the child tax credit to reduce your income tax liability, you may want to opt out of receiving the monthly advance.
Child and Dependent Care Credit
The Act makes various changes to the child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
The Act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
Earned Income Tax Credit
The Act also makes several changes to the earned income tax credit. It introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.
- The credit’s phaseout percentage and the phaseout amounts are increased.
- The credit would be allowed for certain separated spouses.
- The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.
The Act creates a new round of economic impact payments (another non-taxable stimulus payment) to be sent to qualifying individuals. The economic impact payments are set up as advance payments of a recovery rebate credit. The Act provides for qualified individuals to receive a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent 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. 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.
Unemployment Benefits
The Act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year. The Massachusetts legislature is currently in the process of negotiations on whether the first $10,200 will be nontaxable for Massachusetts tax purposes. We continue to monitor the Massachusetts process and hopefully, before April 15, they will issue regulations and we will then complete any returns held for unemployment purposes.
Also, please note that the IRS has advised taxpayers who already file their tax returns for 2020, but who are eligible for the break on unemployment income, not to file an amended tax return to claim the benefit. The IRS is currently working on a fix and plans to automatically process refunds for eligible individuals who have already filed.
At this time, we have no further information as to the anticipated timing for these refunds, so please stay tuned for updates as they are released.
Other Provisions
The Act extends credits for sick and family leave to September 30, 2021.
The Act extends the employee retention credit through the end of 2021.
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