How does the American Rescue Plan impact individual taxpayers?

The latest Covid-relief bill – the $1.9 trillion American Rescue Plan Act of 2021 (ARPA) – was signed into law by President Biden, and it provides several provisions specifically beneficial to restaurant owners and to small business owners and individuals in general.

Much of the ARPA extends and expands on the provisions from earlier Covid-relief legislation, including the Families First Coronavirus Relief Act (FFCRA), Coronavirus Aid, Relief and Economic Security (CARES) Act, and the Consolidated Appropriations Act, 2021 (CAA).

As you would expect with bill of this magnitude, the law is very complex, and we will continue to monitor guidance from the Small Business Administration and keep you posted on how the various provisions will impact you. In the meantime, below is a little more about how the ARPA will impact individual taxpayers:

Individual Recovery Rebates/Credit

A new round of economic impact payments will be sent to qualifying individuals. The recovery rebate credits are $1,400 for individuals ($2,800 for married taxpayers filing jointly), and another $1,400 for each dependent, including college students and qualifying relatives who are claimed as dependents. The credits will begin phase out for those individuals earning more than $75,000 and will phase out completely for individuals earning over $80,000. (The phaseout for taxpayers married filing jointly will be $150,000 and end at $160,000). The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.

Child Tax Credits

The child tax credit has been expanded from $2,000 per qualifying child to $3,000 per child under the age of 18, and $3,600 for children under age 6 by the end of 2021. The increased credit phases out for married taxpayers filing jointly with an income over $150,000 ($75,000 for individual filers), with the expanded portion of the credit reducing by $50 for each $1,000 of income over those limits. One of the changes, includes taxpayers’ potential to having some of the child tax credit refundable.

Unemployment Benefits

The first $10,200 in unemployment benefits are tax free in 2020 for individuals earning less than $150,000 a year. The same $150,000 limit applies to returns filed jointly, as head of household, or with single status. However, in the case of a joint return, the $10,200 exclusion applies separately to each spouse.

Earned Income Credit (EIC)

Some of the key changes to EIC are:

  • New 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 is increased to 15.3%, 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.

Student Loan Discharge

ARPA excludes from gross income certain discharges of student loans after December 31, 2020, and before January 1, 2026.

Premium Tax Credit

ARPA includes some changes to the premium tax credit for 2021 and 2022 by changing the applicable percentage amounts under Code 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.

Nina Daigle, CPA, is a partner with Antares Group, Inc. She can be reached at ndaigle@antarescpas.com.