Just the Tax: The American Rescue Plan
Last Thursday afternoon President Biden signed the American Rescue Plan (“ARP”), a $1.9 trillion bill designed to provide relief in the wake of COVID-19. While the bill is mind-numbingly long and contains funding for a number of pet projects, the provisions that will affect most Americans are:
Additional stimulus payments
Tax treatment of unemployment benefits
Expanded child tax credit
Expanded earned income credit
Extended unemployment benefits
Restaurant relief
Changes to marketplace insurance
The following is a high level summary of each of these provisions.
Additional stimulus payments
The largest share of the $1.9 trillion cost of the ARP goes to a third round of stimulus payments. The baseline benefit is $1,400 per taxpayer AND dependent. There are some crucial differences between the previous stimulus checks and these payments:
All dependents are now eligible for stimulus payments. Previously, if you had a child over the age of 16 or if you had an adult dependent, that dependent didn’t receive a stimulus. This time, you’ll receive $1,400 for all dependents.
If you make more than $75,000 (single) or $150,000 (joint), the phase out happens quickly - to the point that once you make $80,000/$160,000, you lose the entire stimulus.
Because of this narrow phase out range, there are some unique planning opportunities for our clients. In some cases, for married couples who make more than $150,000 in 2020, we will look into the idea of filing your tax return as married filing separately instead of married filing jointly to see if we can maximize your stimulus money. For many this strategy won’t work because the married filing separately tax rates are extremely prohibitive. However, we definitely have clients to whom we will be recommending this scenario.
The IRS is going to base your stimulus payment off of your most recently filed tax return. For those of you who have gotten your income tax information to us already who made more money in 2020 than 2019, unless you need your return for bank financing or other reasons, we will hold it until you get your stimulus money for this very reason. Similarly, for those of you who have children or friends who entered the job market in 2020, make sure you advise them not to file their 2020 tax return until they have received their stimulus check.
Alternatively, if you made less money in 2020 than in 2019 and are now under the threshold for receiving a stimulus payment, it is okay to file now so you get your payment.
IMPORTANT: The ARP has a clause that states the stimulus payments will be paid in two phases this time. In Phase 1, the IRS will take all of the data that it already has and pay stimulus payments based on that. If you haven’t filed a 2019 or 2020 tax return, you won’t get a stimulus payment. For anyone who earned less in 2020 than in 2019 and has not filed a tax return yet, there will be a second date on which the IRS pays everyone who should have received more stimulus payments/a bigger stimulus based on their 2020 filing. That date is going to be either 90 days after tax deadline day OR September 1 - whichever is earlier. What does this mean? It means that we aren’t going to have to rush to get your taxes filed for 2020, just so you can get your stimulus. You’ll ultimately get your money at a later date.
For those of you wondering when you’ll get your stimulus payment, it’s going to be soon. Some taxpayers have already received theirs. Based on this and our clients’ prior experience with stimulus payments, odds have it that everyone who is eligible will have their stimulus money by the end of March.
Tax treatment of unemployment benefits
The ARP allows for the first $10,200 in unemployment benefits to be non-taxable, but only for people who made less than $150,000 in 2020. This clause alone saves the average person who was on unemployment benefits over $1,500.
NOTE: If you or anyone you know received unemployment benefits in 2020, we strongly encourage those taxpayers to wait until the IRS has provided guidance on how to report the tax treatment of unemployment benefits received (and the corresponding tax free treatment of the first $10,200).
Expanded Child Tax Credit
If you have a child under the age of 17, you typically receive a Child Tax Credit of $2,000. The ARP is extending that Child Tax Credit to $3,600 per child under the age of 6 and $3,000 per child between the ages of 6-17. Dependents who are 18+ still receive a $500 credit.
The expanded Child Tax Credit comes with another bonus: The IRS will pay half of the Child Tax Credit on a monthly basis from July 2021-December 2021. This means that if you qualify you will receive $300 per month per child under the age of 6 or $250 per month per child between 6-17 years old from July-December.
Be aware, there is an income phase out for the expanded credit. As with the stimulus payments, you won’t receive the expanded Child Tax Credit or the advance on the Child Tax Credit if you make more than $75,000 (single) or $150,000 (joint). Those people will still get the base Child Tax Credit of $2,000, but they won’t receive the advance or the extra money.
Unlike the stimulus payments, the IRS can and will get this money back from you if you made too much money when you file your 2021 tax return. If 2020 was the only year that you were under the threshold to get the expanded Child Tax Credit, you’re going to want to opt out of the expanded credit and the advance of it. To that point, the IRS is going to set up a portal for those who have children to opt out of getting the advanced payments if you’d like.
This is going to be messy. No two ways around it. But, in the end, for the majority of families who make under $75,000/$150,000 you’ll enjoy an extra $1,000 per child this year and an additional $600 on top of that if your child is under the age of 6 in 2021.
Expanded earned income credit
For those of you who don’t have children, there is a credit called the Earned Income Credit (EIC) that is being expanded as well. Low income earners with earned income (e.g., that excludes all of you who are retired and living off of pensions, Social Security and the like. However, if you have part time jobs, you would be able to potentially qualify for EIC as well). The EIC is being nearly tripled to a maximum credit of $1,502 per year instead of $543.
Extended unemployment benefits
If you remain on unemployment at this time, your benefits were set to expire on March 14. Those benefits have now been extended through September 6. The extra federal assistance which was set to expire as well is maintained at an extra $300 per week during this time. We expect this to be the last extension of unemployment benefits.
Restaurant relief
There is $28 billion allocated for grants to eateries, which include restaurants, bars, halls, brew pubs, tap rooms, and tasting rooms. The program provides up to $5 million per restaurant or $10 million per restaurant group. $5 billion of the funding is reserved for restaurants with 2019 gross receipts of less than $500,000.
The grant funds can be used to offset expenses from February 15, 2020, through the end of 2021, including payroll, benefits, rent, utilities, cleaning, equipment, food and other costs and will operate as a SBA grant program. We will keep our restaurant clients apprised of the SBA application process and timing.
Changes to marketplace insurance
Without getting too deep in the weeds, suffice it to say that your marketplace insurance is going to feature a slightly larger subsidy if you are eligible. The threshold for qualifying for a subsidy will increase to approximately 2.5 million families. That doesn’t mean the cost of your health insurance is going to decrease right away, though. It means the cost of your health insurance is going to be potentially further subsidized by bigger tax credits - which won’t be realized until you file your 2021 tax returns.
For more information
The bill in its entirety can be found at this link.
How can we help?
Along with the strategic tax planning that we regularly engage in with each of our clients, we are carefully considering the effect of the ARP (and prior legislation). Because the act is so massive and guidance is sorely needed on some of the key provisions, we continue to ask for your patience and understanding as we help each of you plot the best strategy for taking advantage of this unprecedented legislation!
The Fine Print
We draft these Tax Tips to assist you. That said, they do not consist of tax advice nor are they intended to be a comprehensive summary of the tax law. If you have specific questions please let us know and we are always happy to assist you.