COVID-19 Relief: Highlights of the American Rescue Plan Act

March 12, 2021 - The $1.9 trillion coronavirus relief bill that was signed into law Thursday, March 11th contained many significant tax and targeted relief provisions in addition to the $1,400 stimulus checks that generated most of the headlines. Here are some key elements of the American Rescue Plan Act (ARP) that taxpayers should be aware of.

Direct Payments to Individuals

The ARP provides a direct, tax-exempt Recovery Rebate payment of $1,400 per person ($2,800 for married taxpayers filing jointly), plus $1,400 for each dependent in 2021. An individual with an adjusted gross income (AGI) up to $75,000 is eligible for the full amount, as are married couples with incomes up to $150,000. The size of the benefit shrinks rapidly for those earning more, and is phased out completely for individuals with AGIs of $80,000 or more ($160,000 for couples).

Unless taxpayers have already filed their 2020 tax returns, the act uses their 2019 AGI to determine eligibility. Taxpayers who have not yet filed their 2020 returns, and whose incomes changed significantly between 2019 and 2020, might want to consider how the timing of their 2020 returns could affect their eligibility.

The first direct deposits should start arriving within a few weeks for those taxpayers whose bank information is already on file with the IRS. Those who need paper checks or debit cards will receive their payments over the next several months.

The ARP also extends federal unemployment benefits (which were scheduled to expire March 14) through Sept. 6, 2021, although the amount is reduced to $300 per week. It also makes the first $10,200 in unemployment benefits tax-free in 2020 for households making less than $150,000 per year. This could impact some taxpayers who have already filed their 2020 tax returns and an amended return might be necessary.

Other Assistance for Individuals

In addition to direct payment of stimulus checks and unemployment benefits, the ARP also contains numerous provisions that will affect individuals’ personal tax returns. These include:

  • Increasing the amount of the Child Tax Credit. For 2021, the credit increases to $3,600 for each child under age 6, and $3,000 for children ages 6 to 17. Families eligible for the full credit (individuals earning $75,000 per year or couples earning $150,000 or less) are to receive the credit in monthly installments beginning in July 2021. These advanced monthly payments will equal 50% of the credit and the remaining credit the taxpayer will be able to claim on their 2021 tax return.  Families not eligible for the increased benefit may still qualify for the previous $2,000 per child credit.
  • Enhancing the Child and Dependent Care Tax Credit. The ARP makes the credit fully refundable and increases the maximum rate.
  • Increasing the maximum amount of the Earned Income Tax Credit. The act also includes other changes designed to make it easier for taxpayers without children to claim the credit.
  • Creating a tax credit for COBRA health insurance premiums. This refundable tax credit will apply to some COBRA continuation coverage premiums paid between April 1 and Sept. 30, 2021.
  • Increasing premium tax credits under the Affordable Care Act.
  • Extending the tax exclusion for student loan forgiveness through 2025.

The ARP also allocates money for COVID-19 testing and vaccinations, and provides additional financial support for a broad range of federal, state, and local government programs targeted to individuals, such as the Supplemental Nutrition Assistance Program, the Low Income Home Energy Assistance Program, and emergency rental assistance and housing vouchers, among many others.

Support for Businesses and Not-for-Profit Organizations

The ARP expands or extends a number of programs designed to help businesses and not-for-profit organizations survive the pandemic. For example, it provides an additional $7.25 billion for Paycheck Protection Program (PPP) loans through the U.S. Small Business Administration, $15 billion for the Targeted Economic Injury Disaster Loan (EIDL) program, and $28.6 billion for a new grant program for food and drink establishments. It also expands PPP eligibility to include charities that employ fewer than 500 employees per physical location.

In addition, several provisions of the ARP will affect business tax returns in 2021. These include:

  • Extending the Employee Retention Credit through the end of 2021.
  • Extending tax credits for paid sick and family leave through Sept. 30, 2021. The act also increases the amount of wages for which an employer may claim the credit to $12,000, and extends the time for which self-employed taxpayers can claim the credit to 60 days.
  • Excluding EIDL grants from taxable income.

The highlights listed here represent just a small overview of the many significant provisions contained in the 628-page act. It also should be noted that, although there are exceptions, many of the personal and business tax law provisions in the ARP are scheduled to expire at the end of this year unless Congress takes additional action. 

If you have any questions or would like more information on the American Rescue Plan Act, please contact your tax professional at Dermody, Burke, and Brown, CPAs.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.