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American Rescue Plan's Individual Tax Breaks

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The signing of the American Rescue Plan comes just a few days before extended unemployment benefits were scheduled to start running out. There are several tax breaks for individuals to take note of.

Mar 11th 2021
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After contentious debate in Congress, President Biden finally signed the $1.9T American Rescue Plan (ARP) into law on March 11.

The final version of the American Rescue Plan contains a bevy of tax-related provisions for individuals. Here are six tax breaks of particular interest to many taxpayers.

    

1. Cash Payments

Over the last year, Congress has authorized not one, not two, but three economic stimulus package payments. The latest one is generally “bigger and better” than the others.

The current maximum payment, which is exempt from federal income tax like the other two, is $1,400 per individual, or $200 more than the highest previous payment. Plus, clients are in line for an extra $1.400 payment for each and every dependent—even for college students and qualified older relatives.

However, as with the previous payments, this one is also subject to a phase-out, based on income. Moreover, the new payment disappears even faster than before. It is no longer available for single filers earning more than $80,000 or joint filers above $160,000 (as opposed to $100,000 and $200,000, respectively in the previous stimulus plan).

White House Press Secretary Jen Psaki said eligible Americans will start to receive $1,400 stimulus checks "as early as this weekend." If the IRS underpays your client or skips them by mistake, they can claim the applicable credit on their 2021 tax return.

2. Unemployment Benefits

Don’t give up hope if the pandemic has forced your client out of work. The new law extends the weekly $300 unemployment benefit “kicker” through September 6, at least for the time being. This issue may be revisited.

What’s more, the ARP retroactively exempts from tax the first $10,200 of unemployment benefits received in 2020, if your client has household income under $150,000. Usually, such benefits are subject to federal income tax. This avoids an unexpected tax disaster on 2020 returns for certain taxpayers.

3. Child Tax Credit

The new law significantly enhances the Child Tax Credit (CTC) and expands it to include substantially more taxpayers. But these changes are only effective for the 2021 tax year.

For starters, the maximum credit is increased from $2,000 for each qualified child under age 17 to $3,600 for children under age six and $3,000 for those who are least 17 year old at the end of the year. Furthermore, the credit for 2021 is fully refundable. Only $1,400 of the $2,000 credit is refundable in 2020.

One drawback: The higher credit begins to phase out at lower income levels. On 2020 returns, the CTC begins to phase out at $200,000 for single filers and $400,000 for joint filers. For 2021, the phase out begins at $75,000 for single filers and $150,000 for joint filers. However, families affected by the new phase-out ranges can elect to claim the $2,000 credit under the prior rules.

Finally, taxpayers won’t have to wait long to realize the benefits of the increased CTC. The IRS will begin sending advance monthly payments of up half of the allowable 2021 CTC in July through December.

4. Dependent Care Credits

Under the new law, the dependent credit is boosted for a broad segment of the population. Generally, the maximum current credit for qualified expenses of caring for children under age 13 is $600 for one child and $1,200 for two more children.

For 2021—and 2021 only—the ARP increases the maximum credit to $4,000 for one child and $8,000 or more children for a family an AGI of $125,000. However, upper-income households with an AGI of more than $400,000 will see their credit reduced.

Furthermore, the dependent care credit for 2021 is refundable if the family resides in the U.S. for more than half of the year.

5. Student Lan Debt Forgiveness

In the normal course of events, cancellation or forgiveness of a loan triggers taxable income. But previous legislation provided a tax exemption from cancellation of debt (COD) income for certain student loans.

Now the ARP expands the COD tax break. Generally, it creates an exemption for most student loans—including both public and private student loans—made from 2021 through 2025. However, if a loan is forgiven in exchange for services provided by the debtor, this tax break doesn’t apply.

6. Flexible Spending Accounts

Fast on the heels of other legislative changes for flexible spending accounts (FSAs), the ARP increases the amount that can be contributed to a dependent care FSA. For 2021, a participating employee can fund the plan with up to $12,500 of contributions, more than double the current $5,000 limit.

Contributions are made on a pre-tax basis and distributions are exempt from tax if used to pay for qualified expenses. Under the prior changes, participants may also benefit from enhanced rules for carryovers of unused amounts at the end of the plan year and mid-year elections.     

Conclusion

Is that all? Not by a long shot. The new law contains various other tax breaks for individuals, including an expansion of the Earned Income Tax Credit (EITC) and health insurance premium credits and COBRA payments for ex-employees, plus other benefits for the business sector. We will continue to focus on new law provisions throughout the year. 

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