How the American Rescue Plan Affects Familiesby
The American Rescue Plan went into effect in March 2021. Among other things, the act affects tax planning for individuals who are unemployed and for people who have children. It also authorized the sending of a third round of stimulus checks. Here's what you need to know.
On March 11, President Biden signed into law the American Rescue Plan Act (ARPA) of 2021. This bill introduced a $1.9 trillion COVID-19 relief package designed to help boost the economy amidst the effects of the pandemic. This article will focus on those who received unemployment benefits as well as shed some insight on how ARPA affects individuals and their dependents.
How ARPA Affects Those Who Received Unemployment Benefits in 2020
The general rule is that an individual’s gross income includes unemployment compensation (Code Sec. 85(a)). Under ARPA, unemployment received in 2020 is partially excluded from income for certain taxpayers.
However, under ARPA, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer can exclude up to $10,200 for the 2020 tax year. The same $150,000 limit applies to single, married filed jointly, and head of household filing statuses. In the case of a joint return, the $10,200 exclusion applies separately to each spouse.
Details on the Third Round of Stimulus Payments
Under ARPA, an eligible individual is allowed a refundable income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus (2) $1,400 for each dependent of the taxpayer. It should be noted that children who are or can be claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. If you are a parent and you “could” claim your child as a dependent, then you would not be eligible for the credit.
Unlike the hard $150,000 limitation amount on unemployment benefits for different filing statuses, there is a phaseout of the third stimulus payment if your income exceeds a certain amount:
Phaseout of credit. The amount of the credit is ratably reduced (but not below zero) for taxpayers with AGI of over:
- $150,000 for a joint return;
- $112,500 for a head of household
- $75,000 for all other taxpayers
The credit is completely phased out (reduced to zero) for taxpayers with AGI of over:
- $160,000 for a joint return
- $120,000 for a head of household
- $80,000 for all other taxpayers (Code Sec. 6428B(d), as added by ARPA Sec. 9601(a))
Another feature for ARPA is an advanced rebate of this credit during 2021. Much like the 2020 Recovery Rebate Credit, each individual who was eligible for 2019 is treated as having made an income tax payment for 2019 equal to the advanced refund amount for 2019.
This “advanced refund amount” is the amount that would have been allowed as a credit based on your 2019 tax return. You can check your third round of Economic Impact Payment here.
But what if I had added an additional dependent or my marital status changed in 2020?
The general rule is that the IRS will determine a credit based how you filed your tax return in 2019. However, if you filed your 2020 tax return when the IRS determines the amount of the rebate, the information on the 2020 return is used to determine the amount of the rebate. So if you were married, had children, or had your income change significantly between 2019 and 2020 (for better or for worse), you’ll need to consult with your tax advisor as to what the implications are with the timing of this rebate.
What if I haven’t filed a 2019 or 2020 income tax return yet?
The IRS will determine the amount of the rebate using information available to it and will determine the amount on their own.
Advanced 2021 Child Tax Credit (CTC)
For 2020, the child tax credit was $2,000 for parents with children 17 and younger. Under ARPA, the credit is now expanded to $3,600 per eligible child. Instead of waiting to file your 2021 tax return next year to claim this credit, the IRS will be advancing you half of the credit you would be eligible for potentially starting in July 2021. These payments will be paid out periodically through December 2021. The other half that doesn’t arrive in 2021 will be claimed when you file your 2021 tax return (in 2022).
What if I don’t file a return because my income is below the reporting threshold, but I do have eligible children to claim?
You should file your 2020 tax return to report your dependents on your return to notify the IRS that you are eligible for the credit.
When is the deadline to file a return to notify the IRS in time to obtain a credit?
Much like the third stimulus payment, the information will be based on 2019’s tax return if the IRS does not have your 2020 return processed.
What if the IRS advances me a credit that I’m not entitled to? For example, what happens my ex-spouse claims the child in 2020 (and subsequently receives the advance CTC), but I claim the child in 2021?
The 2021 CTC is not flexible like the stimulus checks have been. If you received more money than you were entitled to, then you would have to pay it back. The IRS should be creating a portal by July 1 where you can update your personal information (and potentially even update children born in 2021 to receive more of a credit) to notify the IRS of what advanced CTC you should be entitled to.
Child Dependent Care Credit (CDCC) for 2021
Taxpayers who have qualifying individuals can qualify to receive a CDCC if the taxpayer paid for childcare so that the taxpayer can be gainfully employed. There are two main changes that ARPA made to the CDCC. The first was that the credit is now refundable for taxpayers who have a principle place of residence in the U.S. for more than one half of the tax year. The second main change is that the dollar limit on the amount taken into account is increased to $8,000 (from $3,000) if there is one qualifying individual with respect to the taxpayer, or $16,000 (from $6,000) if there are two or more qualifying individuals with respect to the taxpayer.
The ARPA that was signed not only affected individuals, but it will have implications on businesses, pensions, payroll and other aspects of life. When navigating any new tax law change, it’s important to consult with a competent tax advisor to see how these rules will affect you within your context.
Joe Abesamis is a redemptive CPA who exists to fix what is wrong in the public accounting profession. Since 2007, he has worked in various firms where billable hours were valued over outcomes, profits came before people, and men became machines. He wants to reverse the curse and provide hope for a brighter future to the profession. Joe aims to...