Tax Provisions of New Stimulus Package

The House of Representatives voted Wednesday to approve a $1.9 trillion Covid relief plan, a top legislative priority for President Joe Biden.

Having passed both houses of Congress, the stimulus package will now be sent to President Joe Biden to be signed into law. The President is expected to enact and sign the legislation by March 12th.

Known as the American Rescue Plan Act (“ARPA”), the final bill contains the following applicable tax provisions:

Third Round of Stimulus Checks

A third round of stimulus payments is expected to be on the way later this month.

The payments are included in the ARPA and are worth up to $1,400 per person, including dependents. So a couple with two children could receive up to $5,600. Unlike prior rounds, families will now receive the additional money for adult dependents over the age of 17.

Individuals who earn at least $80,000 a year of adjusted gross income, heads of households who earn at least $120,000 and married couples who earn at least $160,000 will be completely cut off from the third round of stimulus payments – regardless of how many children they have.

The amount of your third stimulus check will be based on either your 2019 or 2020 return. If your 2020 tax return isn’t filed and processed by the time the IRS is ready to send the third stimulus payment, the IRS will use information from the 2019 tax return. If the 2020 tax return is already filed and processed when the IRS starts to process the payment, then the stimulus check will be based on information found on that return. 

As with the first and second round of stimulus checks, individuals won’t have to pay tax on their third stimulus check. Stimulus checks will be advance payments of the recovery rebate tax credit for the 2021 tax year. As such, they aren’t included in taxable income.

Unemployment Benefits

The ARPA includes a provision to waive taxes on the first $10,200 in unemployment insurance benefits for those who made less than $150,000 in adjusted gross income in 2020.

If both individuals in a married couple who file taxes jointly received unemployment insurance benefits in 2020, each will see taxes waived on the first $10,200 of that income — for a total of $20,400 — as long as their combined adjusted gross income is less than $150,000.

The ARPA also extended the additional $300 in unemployment insurance benefits set to expire on March 14^th, through September 2021.

Once the bill is law, the U.S. Department of the Treasury and the IRS will be tasked with issuing guidance to taxpayers on what to do depending on their situation, something that could take weeks.

If you already filed your 2020 return but had unemployment income and would have benefitted from the new ARPA, there’s a chance the IRS will take care of updating your information and sending you any money owed. If that happens, it would mean those people do not have to take any action to update their tax returns.  

Child Tax Credit

The ARPA raises the $2,000 Child Tax Credit to $3,000, set the credit at $3,600 for parents of children under age 6 and make parents of 17-year-olds eligible. It would also make the credit fully refundable, so low-income households would get the full benefit, no matter how little they earn. For a household with a 4-year-old and 7-year-old that doesn’t earn enough to pay income taxes, the plan would boost their maximum child tax credit to $6,600 from $2,800.

The proposal would also authorize periodic payments, so that the credit becomes a near-universal child allowance like those in some other countries instead of part of a lump-sum tax refund.

While the package would make the child tax-credit changes only for one year, it is broadly expected that Democrats will seek to make them permanent in the future.

Earned Income Tax Credit

The Earned Income Tax Credit (“EITC”) helps support working individuals and parents by supplementing a fixed percentage of their household income until the maximum credit is reached. The maximum credit increases for each child, with the 2021 tax year payments being $3,618 for one child, $5,980 for two children and $6,728 for three or more children.

While it’s been applauded as a necessary boost to parents with low to moderate incomes, it’s been criticized for doing little for those without children. For tax year 2021, the maximum credit for individuals without children will be $543.

However, the ARPA would nearly triple that credit to about $1,500 and increase the fixed percentage from 7.65 to 15.3 percent for the 2021 tax year. It also increases the phaseout amount from $5,280 to $11,610, the same amount that is applied to people with children. The phaseout amount threshold is when the payments begin to gradually decrease to zero.

Along with expanding payments, it would expand eligibility by changing the age requirements. The package lowers the minimum age from 25 to 19 for individuals who aren’t students, 24 for students and 18 for those who qualify as a former foster youth or homeless youth and eliminates the maximum age, which was set at 65. It also boosts the disqualification investment income to $10,000, from $3,650.

Child and Dependent Care Credit

The ARPA makes the child and dependent care credit, effective for 2021 only, fully refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.

The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Employee Retention Credit

The ARPA extended the employee retention credit (“ERC”) through December 31, 2021. The credit remains fixed at 70% of qualified wages up to $10,000 per calendar quarter. Moreover, employers remain eligible for the credit if they experience a 20% year-over-year decline in quarterly gross receipts or a full or partial suspension of business due to an applicable governmental order. 

Furthermore, certain small startups (each a “recovery startup business”) that began operating after February 15, 2020, will be eligible for a maximum credit of $50,000 per quarter, even though the business has not experienced an eligible decline in gross receipts or been subjected to a full or partial suspension.

Funding for Restaurants and Shuttered Venues

The ARPA includes nearly $29 billion to create a grant program that provides direct relief to restaurants.

Another $15 billion will be added to the Shuttered Venue Operators Grants program, created by the previous economic aid package. The grants are intended to help those who run museum, theater, concert and other venues that had to shut down due to Covid restrictions. The bill also allows such operators to apply for PPP loans in addition to these grants.

Student Loan Forgiveness

The Student Loan Tax Relief Act, which is part of the ARPA, would temporarily end taxation on forgiven student loans after Dec. 31, 2020, and before Jan. 1, 2026.

We will issue additional Alerts as further guidance becomes available. During this crisis, your LMC professional is available if you have questions related to the latest updates on this topic.