Key Tax Provisions in the American Rescue Plan Act of 2021 Affecting Individuals

On March 11, 2021, President Joe Biden signed into law the $1.9 trillion American Rescue Plan Act of 2021 (ARP), which includes spending provisions for COVID-19 vaccinations, aid to state and local governments, and a number of tax provisions that affect individuals. The ARP, which was passed through the budget reconciliation process, is the first legislative achievement for the Biden administration.

The tax provisions in the ARP that affect individuals include:

• A 2021 recovery rebate credit
• An expanded child tax credit
• An expanded earned income tax credit
• An expanded dependent care tax credit
• An increase in the amount of employer-provided dependent care assistance that can be excluded from gross income
• An exclusion from gross income of student loan forgiveness
• An exemption of some unemployment compensation from federal income tax
• An extension of the limitation on excess business losses

2021 Recovery Rebate Credit

“Eligible individuals” are entitled to a tax credit against their 2021 income tax liability in an amount equal to the sum of: (1) $1,400 ($2,800 in the case of eligible individuals that file a joint tax return); plus (2) $1,400 for each dependent. An eligible individual is any individual other than (i) a nonresident alien, (ii) an individual for whom a dependency deduction is allowable to another taxpayer for the tax year, or (iii) an estate or trust.

The amount of the credit is reduced proportionally when an eligible individual’s 2019 adjusted gross income (AGI) exceeds: (1) $75,000 in the case of a single individual; (2) $112,500 in the case of an individual filing as head of household; and (3) $150,000 in the case of a married individual that files a joint tax return. The payment is completely eliminated when 2019 AGI exceeds: (1) $80,000 in the case of a single individual; (2) $120,000 in the case of an individual filing as head of household; and (3) $160,000 in the case of a married individual that files a joint tax return.

The Secretary of the Treasury is to make advance payment of the credit to eligible individuals as “rapidly as possible,” and eligible individuals generally will receive an advanced payment (via direct deposit, debit card, or check) of the credit amount in March 2021. However, only eligible individuals that reported a valid Social Security Number on their 2019 (or, if already filed, a 2020 tax return) will receive an advance payment as the credit amount is deemed to be zero “unless the taxpayer includes the valid [Social Security] number of the taxpayer on the return of tax for the taxable year.”

A taxpayer’s 2019 AGI will generally be used to determine his or her eligibility for (and the amount of) the advance payment. However, if a taxpayer has already filed his or her 2020 tax return, the advance payment will be calculated using the taxpayer’s 2020 AGI instead.

Child Tax Credit

For 2021, the ARP increases the child tax credit from $2,000 to $3,000 for each child ages 6 to 17 and to $3,600 for each child under age 6, and makes the credit fully refundable. The increased credit amount ($1,000/$1,600) is reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified AGI exceeds the applicable threshold amount. The applicable threshold amount is: (1) $75,000 in the case of single individuals; (2) $112,500 in the case of individuals filing as head of household; and (3) $150,000 in the case of married individuals that file a joint tax return.

Earned Income Tax Credit

For 2021, the ARP expands the earned income tax credit for childless taxpayers by:

• Reducing the minimum age at which a childless taxpayer can qualify for the credit from age 25 to, in most cases, age 19;
• Eliminating the maximum age at which a childless taxpayer can qualify for the credit;
• Increasing the credit percentage for a childless taxpayer to 15.3 percent of earned income from 7.65 percent of earned income;
• Increasing the amount of earned income eligible for the credit from $4,220 to $9,820 (and, thus, increasing the maximum credit amount to $1,502 ($9,820 x 0.153)); and
• Increasing the phase-out threshold from $5,280 to $11,610.

Dependent Care Tax Credit

For 2021, the ARP expands the dependent care tax credit by:

• Making the credit refundable for taxpayers that have a principal place of abode in the United States for more than one-half of the taxable year;
• Increasing the amount of employment-related expenses eligible for the credit from $3,000 to $8,000 in the case of one qualifying dependent and from $6,000 to $16,000 in the case of two or more qualifying dependents;
• Increasing the credit percentage from 35 percent of eligible employment-related expenses to 50 percent of such expenses (and, thus, increasing the maximum credit to $8,000 in the case of two or more qualifying dependents); and
• Increasing the threshold where the credit begins to phase-out from $15,000 of AGI to $125,000 of AGI.

However, taxpayer’s with 2021 AGI of $440,000 or more will receive no credit.

Employer-Provided Dependent Care Assistance

For 2021, the ARP increases the amount of employer-provided dependent care assistance that can be excluded from an employee’s gross income from $5,000 ($2,500 in the case of a married individual that files a separate return) to $10,500 ($5,250 in the case of a married individual that files a separate return).

Student Loan Forgiveness

The ARP changes the federal income tax treatment of student loan forgiveness in 2021 through 2025 by excluding from gross income the full or partial discharge of student loan debt. The loans eligible for this tax treatment are loans:

• Made expressly for “post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower;” and
• That were made, insured, or guaranteed by the federal government (including federal agencies), State governments, colleges and universities, and private education loan lenders.

Exemption of Unemployment Compensation from Federal Income Tax

The ARP exempts from federal income tax up to $10,200 of unemployment compensation received in 2020 by taxpayers whose AGI for 2020 is less than $150,000. In the case of married individuals filing a joint tax return, it appears that each spouse can exclude up to $10,200 of unemployment compensation (for a total exclusion of $20,400), but that the less-than-$150,000-AGI threshold still applies to the couple’s joint AGI.

Extension of Limitation on Excess Business Losses

The APR extends for one year the limitation under IRC Section 461(l) on excess business losses. Thus, this limitation will now apply for 2021 – 2026.

For more detailed information about specific tax provisions of the ARP, contact us. We are here to help.

© 2021