A Comprehensive Guide to the American Rescue Plan of 2021
President Joe Biden signed into law the American Rescue Plan of 2021, a $1.9 trillion COVID-19 relief package, on March 11. There are several tax breaks and financial benefits for both individuals and businesses.
Highlights of the American Rescue Plan
A third round of stimulus checks will be sent to eligible individuals over the next several weeks. Individuals with adjusted gross incomes (AGIs) of $75,000 or less (and couples with AGIs of $150,000 or less) will receive the full payment of $1,400, and will be phased out for AGIs over those amounts. The payments phase down to $0 for single filers with AGIs of $80,000 and $160,000 for joint filers. An additional $1,400 will be included for each dependent.
The amount of the stimulus payment is based on the individual’s 2020 federal tax return or the 2019 tax return will be used for taxpayers who have not yet filed 2020 returns.
Child Tax Credit
The Child Tax Credit for the 2021 tax year increases to $3,600 per child (up from $2,000) under 6 and $3,000 per child older than 6 and under 18.
Single filers making up to $75,000 and married couples earning up to $150,000 get the full credit. The excess credit amount phases out by $50 for every $1,000 of modified AGI above the threshold amount. The amount of credit remains at $2,000 until the present law phaseout thresholds are reached of $200,00 for single filers and $400,000 for joint filers.
The increased Child Tax Credit amount (the $1,000 or $1,600 amount) is phased out for taxpayers with modified AGI of over $75,000 for singles ($112,500 for heads-of-households and $150,000 for joint filers). After applying the phase-out rule to the increased amount, the remaining $2,000 of Child Tax Credit is subject to the existing phase-out rules (The $2,000 of credit is phased out for taxpayers with modified AGI of over $200,000/$400,000 for joint filers).
Half of the higher credit would go to taxpayers as monthly checks from July through December. The remaining half is claimed on an individual’s tax return filed in 2021. If a taxpayer isn’t eligible to claim an increased Child Tax Credit in 2021, they can still claim the regular $2,000 CTC, subject to the existing phase-out rules.
Taxpayers won’t be required to pay federal taxes on the first $10,200 of their unemployment benefits received in 2020. The special provision applies to those who made less than $150,000 in adjusted gross income in 2020.
Some unemployment benefits are also extended to September 6. These include:
- Increases the total number of weeks of benefits available to individuals who cannot return to work safely from 50 to 79
- Federal supplement of $300 a week
- 53 weeks of federal unemployment insurance benefits after the state benefits end, up from 24 weeks
- Additional $100 weekly payment, aimed at people who are both self-employed and earn wages through another employer
For student loans discharged between December 31, 2020, and January 1, 2026, those who qualify to have their loan forgiven or canceled no longer have to pay income tax on the forgiven debt.
The Employee Retention Credit
This tax credit is extended from June 30 until December 31, 2021. The Employee Retention Credit rate of credit at 70% continues for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. This means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.
Employer-Provided Dependent Care Assistance
In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).
Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.
Only for 2021, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately). This provision is effective for tax years beginning after December 31, 2020.
Paid Sick and Family Leave Credits
Changes under the American Rescue Plan apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also increases the limit the amount of paid leave wages an employer may claim a tax credit for from $10,000 to $12,000.
Effective March 31, 202, employers are allowed to provide employees who already took 10 days of emergency leave under the FFCRA with an additional 10 days of emergency leave. The leave for which credit can be claimed is also expanded to include time off to receive a COVID-19 vaccine, or to recover from a vaccine-related illness or injury.
Grants to Restaurants
Eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.
If you have questions about how the American Rescue Plan impacts you and your business, contact us today to discuss your situation.
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