On March 10, 2021, Congress passed the $1.9 trillion American Rescue Plan Act of 2021 (ARPA), providing more relief to businesses and individuals affected by the pandemic. ARPA was signed into law by President Biden on March 11, 2021. The information below highlights the tax benefits for individuals. Please note that you should consult your tax advisor before taking any action.
Unemployment benefits of $300 per week will be available until September 6, 2021, with the first $10,200 in unemployment benefits being tax-free for households with a total income of up to $150,000. For joint filers, the $10,200 would be excluded for each spouse.
Child tax credit
The child tax credit for 2021 will be refundable and will increase to $3,000 for eligible children aged six to 17 and $3,600 for eligible children under the age of six when the calendar year ends.
Individual filers with an adjustable gross income (AGI) of up to $75,000, heads of households with an AGI up to $112,500 and married couples with a joint income of up to $150,000 will receive the full tax credit. Phase-out limits begin above those income levels.
Taxpayers who do not qualify for the higher 2021 child tax credit because of their income can still claim the existing credit of $2,000 per child, as long as they do not exceed the AGI limit of $200,000 for individuals and $400,000 for couples filing jointly.
Advance payments for those who qualify for the 2021 child tax credit are scheduled to begin on July 1, 2021. They will be paid out through monthly checks between July and December 2021. The remailing half can be claimed when filing 2021 tax returns.
Child and Dependent Care Expenses
The credit for qualifying expenses, including daycare, were previously capped at 35% of $3,000 for one child or 35% of $6,000 for two or more children. That has been increased in 2021, covering 50% of qualifying dependent care expenses up to $8,000 for one child and $16,000 for two or more children. Families with an AGI of less than $125,000 will fully qualify for this refund. Those with an AGI of between $125,000 and $400,000 will get a partial refund of these expenses.
Earned Income Tax Credit (EITC)
The EITC will be expanded for 2021 to benefit low-paid workers without children in their homes. The maximum credit that can be claimed will be increased to $1,502 from the original $543, and the income cap will be raised from $16,000 to $21,000. The minimum age was decreased to age 19 (or age 24 for students). The maximum age cap was removed. Taxpayers who earned more in 2019 than 2021 may use their 2019 income to determine their EITC. The credit phaseout percentage increases to 15.3% and the income level where the credit reaches its peak rises from $4,220 to $9,820, with phaseout beginning at $11,610 instead of $5,820.
Paid Sick Time
The refundable paid sick time and paid family leave credits that were introduced by the Families First Coronavirus Response Act (FFCRA) have been extended and will now be in effect until September 30, 2021. From April 1, 2021 until September 30, 2021, the limit on eligible wages will be $12,000, up from $10,000.
In addition, the number of eligible paid sick days resets after March 31, 2021, so another 10 days of qualifying sick leave will be available between April 1, 2021 and September 30, 2021.
Qualifying student loans that are discharged between 2021 and 2025 will be excluded from income, but certain exclusions will apply.
There will be a third round of stimulus payments through the Act, applicable to those with the following adjusted gross income (AGI). The AGI will be based on 2020 federal tax returns if those have already been filed. Otherwise, 2019 AGI information will be used.
- $1,400 for single taxpayers (earning up to $75,000) and heads of households (earning up to $112,500).
- $2,800 for married couples who file jointly (with income up to $150,000).
- $1,400 for dependents of any age
Payments will be phased out faster than in the previous stimulus, with individuals earning $80,000 or more and married couples earning $160,000 or more not qualifying for the stimulus.
If you have any questions about how the American Rescue Plan Act of 2021 can help you or your business, please call your Smith & Howard tax advisor at 404-874-6244. We are here to help you understand how ARPA benefits you.