Many Americans have received or will receive their $1,400 stimulus check, but there is a lot more to the American Rescue Plan Act (ARPA) signed into law on March 11 by President Biden. It is important to know how to plan for any changes that may affect you.
The Act allocates money for the health crisis, including funds for vaccinations, protective equipment and the reopening of schools as well as money for the economic crisis caused by the pandemic. Economic support is directed to businesses and the transportation and restaurant industries, but mainly to individuals in the form of stimulus checks and enhanced tax credits for 2021.¹
The individual checks for $1,400 per taxpayer and per dependent are really advance recovery rebate credits on your 2021 tax return. This time the definition of eligible dependents is much broader and includes older high school and college students and any other relatives who are dependents. The phase- out ranges on income are improved, so review your 2020 tax return to see if you are eligible.
The Act also expands the child tax credit in three ways for 2021 only. First, 17-year-olds are considered children. Second, ARPA increases the current $2,000 child tax credit to $3,000 per child ($3,600 for children under 6). There is a two-tiered phase out, one for children over the age of 6 and one for under age 6.
Also, only in 2021, ARPA makes the normally nonrefundable child and dependent care credit refundable. This means taxpayers will receive a benefit from the credit even if they have no tax liability. The Act also increases the expenses eligible for the credit from $3,000 to $8,000 for one qualifying individual, and from $6,000 up to $16,000 for two or more qualifying individuals. The income levels at which the credit rate begins to be reduced has also seen significant increases. In past years, the 35% rate applied to individuals with AGI under $15,000. However, for this year, the 50 percent credit rate is available to households making up to $125,000 of AGI. The Act also increases the dependent care assistance plan exclusion from $5,000 to $10,500 for 2021.
ARPA includes several changes to the earned income credit (EIC) for certain separated spouses and individuals with no children. The phaseout was also increased as well as the threshold for investment income. Temporarily, taxpayers are allowed to use their 2019 income instead of 2021 in figuring the credit amount.
Unemployment insurance payments will remain at $300 for an additional 25 weeks, through September 6, 2021. The Act retroactively excludes up to $10,200 per taxpayer of unemployment benefits from taxation for those with AGI under $150,000.
Other enhancements include extending the family and sick leave credits and employee retention credit, COBRA continuation coverage credit, lower health insurance premiums through exchanges, expansion of premium tax credits, Economic Injury Disaster Loan grants, student loan forgiveness will be tax-free and there an extension on rental assistance.
There are many hidden gems in this Rescue Plan, so be on the lookout for credits you may be eligible to receive and increases in phase-out rules that should help on 2021 income taxes. The more knowledgeable you are, the more you can potentially benefit from these changes.
1. The Journal of Financial Planning
This article is informational only and is not designed to include all law changes, nor is intended as tax or legal advice. Please consult with your tax professional for information specific to your situation.
Patricia Kummer has been a Certified Financial Planner professional and a fiduciary for over 35 years and is Managing Director for Mariner Wealth Advisors, an SEC Registered Investment Adviser. Please visit www.marinerwealthadvisors.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Suite 500, Overland Park, KS 66211.