House Passed the American Rescue Plan Act of 2021
House Passed the $1.9 Trillion Bill after Revisions by the Senate
The House passed the final version of the American Rescue Plan Act of 2021 this afternoon with a vote of 220 to 211, before sending it to President Biden for his signature. On March 6th, by a 50-49 vote, the Senate approved the Act after making changes to the bill which was previously passed by the House on February 27th.
The bill largely aligns with the framework put forth by President Biden before his inauguration on January 20th. It includes extensions of enhanced unemployment relief, increased funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools to help get students back into classrooms.
The bill also includes a number of tax provisions, including a third round of direct stimulus payments, enhancements of many personal credits meant to benefit people with lower incomes and children, extensions of highly popular payroll tax credits for employers first instituted at the beginning of the pandemic, and changes related to retirement plan funding.
INDIVIDUAL TAX RELIEF
The bill includes a third round of direct stimulus payments for taxpayers. The Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law in March 2020 included the first round, with $1,200 for individuals and $500 for qualifying children. In December 2020, the Consolidated Appropriations Act, 2021, provided an additional $600 stimulus payment for taxpayers and children. At the time of the second payment, many lawmakers, as well as former President Trump and then President-Elect Biden, stated that the amount should be increased to $2,000.
The American Rescue Plan Act of 2021 provides a $1,400 stimulus payment. The payments are essentially credits against 2021 taxes, but fully refundable and payable in advance (similar to the prior payments). Also, as with previous stimulus payments, this third round is subject to income limitations. Under the Senate-passed version of the bill, the amount of the payment phases out ratably for single filers with adjusted gross income over $75,000 ($112,500 for heads of households and $150,000 for joint filers). The stimulus amount phases down to $0 for single filers with $80,000 of adjusted gross income ($120,000 for heads of households and $160,000 for joint filers). These income limitations were lowered during the Senate negotiations on the bill.
Adjusted gross income amounts for the 2020 tax year are used in applying the phaseout, but 2019 amounts will be used in lieu of 2020 amounts for taxpayers who have not yet filed 2020 returns. Taxpayers who have an increase in adjusted gross income in 2020, as compared to 2019, may want to hold off on filing 2020 returns until closer to the filing deadline. This will maximize the amount of stimulus payments received since the stimulus payment could potentially be reduced by the higher 2020 adjusted gross income if filed now.
As was the case with the last two stimulus payments, amounts to which taxpayers would have been entitled, but did not receive, will be creditable when preparing 2021 tax returns in 2022. Also, amounts received based on 2019 or 2020 returns that would have been lower when 2021 returns are prepared do not have to be repaid.
Child Tax Credit
The bill includes a significant overhaul of the child tax credit, but only for the 2021 tax year. The bill increases the credit amount to $3,000 per child (or $3,600 for a child under the age of six) and makes the credit amount fully refundable. Under current law, the amount of the child tax credit is equal to $2,000 per child, but only $1,000 of that amount is refundable (meaning that the taxpayer receives the credit even if there is an insufficient amount of taxes to be credited against).
The excess of the amount of the credit over the present-law ($2,000 amount) is subject to a phase-out for modified adjusted gross income in excess of the threshold amount ($150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single filers). The credit is eliminated entirely once the present-law phaseout thresholds are reached ($400,000 for joint filers, $200,000 for all other filers).
The Treasury and IRS are directed by the bill to issue advance payments of half of the credit amount beginning on July 1, 2021. The advance payments are to be issued monthly, if feasible, or as frequently as possible if monthly payments are not feasible. The remaining half of the credit not paid in advance is received when filing 2021 returns, as the full amount is claimed on the return but reduced by the aggregate amount received in advance.
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.
Earned Income Tax Credit
The bill includes several enhancements to the earned income tax credit (EITC). Under the bill, for 2021 only, the amount of the credit is significantly increased for filers without children. The changes cause the childless EITC amount for 2021 to increase from $543 to $1,502, to increase the amount of income at which the credit is maximized to $9,820 (currently set at $7,100) and to increase the threshold for the phaseout of the credit for non-joint filers to $11,610 (currently set at $8,880).
Other changes to the EITC are made permanent. This includes the elimination of the prohibition against filers claiming the childless EITC solely because they are unable to claim the EITC for filers with children due to the lack of identification requirements. Additionally, a married but separated individual can claim the EITC as an unmarried person as long as certain requirements relating to children are satisfied. Finally, the amount of disqualifying investment income for purposes of the EITC is increased to $10,000, adjusted for inflation after 2021. The current amount of disqualifying investment income is $3,650 for 2021.
Dependent Care Assistance
The amount of the child and dependent care credit is significantly enhanced under the bill for 2021 only. Under current law, the amount of the credit is equal to 35 percent of qualified expenses for care of a qualifying individual up to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. However, the credit percentage is reduced by one point for every $2,000 of adjusted gross income in excess of $15,000, until reaching 20 percent, at which point it is no longer reduced.
The bill increases the credit to 50 percent of qualified expenses and reduces the credit percentage by one point for each $2,000 of adjusted gross income in excess of $125,000. The credit percentage is not reduced below 20 percent until adjusted gross income reaches $400,000, at which point, the reduction of credit percentage continues until reaching zero. Additionally, the amount of eligible expenses qualifying for the credit are increased to $8,000 for one individual and $16,000 for two or more individuals. Finally, the credit is made fully refundable.
In addition to the changes to the credit, the maximum exclusion of employer-provided dependent care assistance is also increased for 2021 to $10,500, or $5,250 in the case of a married taxpayer filing separately. These amounts are roughly double the maximum exclusion under current law.
These changes are applicable to 2021 only.
The bill also includes an extension of enhanced $300 weekly unemployment relief first made available in the early pandemic relief bills. The extension, originally set to expire in March, would run through early September under the bill, but with some changes. The notable change for tax purposes makes the first $10,200 of unemployment relief exempt from tax for households with up to $150,000 of income. The Senate limited jobless benefits in its modifications to the original House bill.
Exclusion of Forgiven Student Loans
The Senate bill includes an expanded exclusion of forgiven student loan amounts applicable to loans discharged after 2020 and before 2026. Under current law, forgiven student loans are only excludable given certain conditions (such as the death or disability of the borrower). However, this expansion allows for the exclusion to apply to any discharge of federal student loans for any reason during the period. The exclusion does not apply to loans discharged by private lenders.
EMPLOYER TAX RELIEF
Paid Sick and Family Leave Credits
One of the first relief measures provided by Congress in the early days of the pandemic was the payroll tax credit for employers providing paid sick and family leave, as well as a similar credit for self-employed workers. The period for which the credit could be claimed was originally set to expire on December 31, 2020, but was extended to March 31, 2021. The bill extends the applicable period to September 30, 2021. The bill also increases the limit on applicable wages for which the credit can be claimed to $12,000 from $10,000, effective after March 31, 2021.
The leave for which a credit can be claimed is also expanded by the bill to include time off to receive a COVID-19 vaccine, or to recover from a vaccine-related illness or injury. The bill will also make the credit applicable to the hospital insurance (HI) tax, and not just the old-age, survivors, and disability insurance (OASDI) taxes, effective March 31, 2021.
The bill would also reset the ten-day per employee limitation on claiming the credit. The original bill limited employers to claiming the credit for a total of ten days’ leave for an employee, and that ten-day period applied from the original start date through March 31, 2021. Under the bill, effective after March 31, 2021, a new ten-day period is available.
For self-employed persons looking to claim the credit, the number of days for which the credit can be claimed is increased to 60 days (from 50 days) under the bill, retroactively effective after December 31, 2020.
Employee Retention Tax Credit
Another highly popular provision of the original COVID-19 relief legislation is the payroll credit for employee retention. The credit was extended through June 30, 2021 by the Consolidated Appropriations Act, 2021. The bill extends the credit through the end of 2021, and, like the paid sick and family leave credit, makes it available to apply to HI taxes in addition to OASDI taxes after June 30, 2021.
A handful of other tax provisions are included in the bill, with some aimed at making health care more affordable and ensuring that pandemic-related aid does not create tax burdens on businesses receiving them.
COBRA Coverage Assistance
The bill includes premium assistance for COBRA continuation coverage through September 31, 2021. The Senate bill calls for a 100% reduction of COBRA premiums for eligible individuals (the House bill was limited to 85%). The assistance is provided by reimbursing the employer (or whoever is to receive the premiums) for unreceived premiums through a credit against HI payroll taxes (not OASDI taxes).
The bill excludes the premium reductions from income. It also includes a penalty to be paid by employers failing to provide adequate notice to former employees whose COBRA continuation period has lapsed.
Premium Tax Credits
The bill makes changes to the premium tax credit. For 2021 and 2022, the bill modifies affordability percentages used in calculating the premium tax credit to make credits available for individuals with incomes below 400 percent of the federal poverty line and increases credit amounts for those already qualified. For 2021, the bill makes advance premium tax credits available for individuals receiving unemployment compensation. And the bill eliminates the recapture provisions applicable to 2020 for taxpayers receiving excess premium tax credits.
Tax Treatment of COVID-19 Relief
The bill provides that Targeted Economic Injury Disaster Loans (EIDL) and Restaurant Revitalization Grants received from the Small Business Administration will not be subject to income tax, and the exclusion will not result in the denial of a deduction reduction of tax attributes, or denial of increase in basis.
Other Provisions of the Act
Other provisions include:
- $160 billion for vaccine and testing programs,
- $170 billion to help schools open safely,
- More than $360 billion in aid for state, local and territorial governments, including $10 billion that Senate Majority Leader Chuck Schumer added in the final moments before the bill passed,
- $25 billion to help restaurants struggling from pandemic lockdowns,
- Extension of supplemental unemployment benefits that are scheduled to run out March 14. The bill extends the weekly federal benefit of $300 a week through September 6,
- Extension of the eviction and foreclosure moratorium through September 2021,
- $25 billion to help restaurants struggling from pandemic lockdowns and closures. The bill also includes $15 billion for targeted Economic Injury Disaster Loans and an additional $7.25 billion for forgivable loans in the Paycheck Protection Program.
As this is a great deal of information that could potentially impact you or your business, please reach out to your BMSS professional with any questions you may have. We have a team of knowledgeable professionals who have been closely following these changes who may be able to provide insight and clarity for your unique situation.