March 18, 2021
Helicopter money is back and many Americans have received their latest stimulus check. While direct payments have received the most attention to date, there are other important and consequential details to the “American Rescue Plan of 2021”. This the first big piece of tax legislation by the new administration, and it’s a big one. $1.9 Trillion in fact. That’s right, trillion with a big T. The bill also includes increased child tax credits, dependent and child care credits, extensions for unemployment benefits, and increased Premium Assistance Tax Credits for those who are buying health insurance from the state exchange. Also included is a tax credit for employers to offset the cost of COBRA coverage for 3 months for employees who involuntarily severed employment. While no direct student loan forgiveness provision was included, it certainly looks like it will be revisited soon. I’ve already talked about stimulus checks in a recent blog, so I’m not going to go into great detail here.
If you haven’t received a payment because your 2019 AGI was too high, you may still be in line based on where you finished in 2020. The IRS is using the most recent AGI on file. If your income was lower in 2020 and you are under the phaseout range, you’ll be moved to the Additional Payment Determination Date, which should be mid-August. The IRS will review your 2020 AGI, and payments will be made based on that amount. But remember, this is 2021 legislation, so you have one last chance based on your 2021 AGI when you file your 2021 taxes next year. There will be NO clawback for payments made. If you receive a check and your 2021 income is over the phaseout limit, you will not need to pay it back.
CHILD TAX CREDIT
I want to provide a couple of highlights around the child tax credit as well. This is one that has changed a couple of times over the past few years. Before the Tax Cuts and Jobs Act of 2017, the Child Care Credit was only $1,000 per child. That legislation raised the amount to $2,000. The American Rescue Plan will again raise the credit to $3,000 per child ages 6 and up and $3,600 per child under age 6. These higher credits are however subject to an income phaseout range starting at:
Joint filers- up to $150k
Head of Household- up to $112,500
All other filers- up to $75k
The phaseout reduces benefits by $50 per $1000 in income above the threshold. The phaseouts are only applicable to the new enhanced benefits under the American Rescue Plan. In addition, this legislation will include children under the age of 18 versus 17 which was the case previously. Another important detail is that these enhanced credits are fully refundable for 2021. In the past these credits were only partially refundable. What that means simply, is that these funds are eligible to be paid in the form of a tax refund, regardless of total tax liability. So think, higher tax refund checks. In addition, the plan is to pay taxpayers 50% in advance starting with monthly payments in July. Taxpayers beware, because this credit is subject to repayment if payments received in advance are more than the actual allowable credit for 2021.
CHILD AND DEPENDENT CARE TAX CREDIT
The Child and Dependent Care Tax Credit is also being enhanced by increasing the amount of allowable expenses used to calculate the credit. In fact that number is being more than doubled. In conjunction, the applicable percentage is also being increased for 2021 and phaseouts start at a much higher income. Taxpayers may see up to 4 times the credit that they realized in 2020! Similar to the Child Tax Credit, the American Rescue Plan also makes this generally non-refundable credit, you guessed it, fully refundable.
The American Rescue Plan also makes some enhancements to unemployment compensation. Many of the unemployment benefits from previous relief will be extended, and may additionally designate up to $10,200 per individual, of unemployment benefits received in 2020 to be tax free.
The legislation also provides subsidies to employers for COBRA benefits provided to terminated employees. This allows individuals to maintain their existing health insurance through September 2021 at no cost. The former employer will pay the premiums and will be reimbursable to the employer in the form of refundable payroll credits.
There are also included in the package, enhancements to the Premium Assistance Tax Credit for individuals who buy health insurance through state exchanges.
STUDENT LOAN FORGIVENESS
Additionally, student loan forgiveness from 2021 through 2025 will be income tax-free. This is not the wide sweeping student loan forgiveness that many were expecting or that was being promised by certain lawmakers, but it does set the stage for further legislation. Historically discharged debt could be included in taxable income. So, doing someone a favor by forgiving their debt, could presumably create a tax burden that is unmanageable for many. The provision included in the American Rescue Plan seem to be laying the groundwork for upcoming changes to the tax code.
Notably missing from this piece of legislation is a Federal Minimum Wage increase, and the popular RMD holiday of 2020. As of now, be prepared to take required minimum distributions for 2021.
As you can see, there is a lot going on here, and this is by no means comprehensive. After all, this is only about 1/3 of the 1.9 trillion dollars spent.