The American Rescue Plan Act, a $1.9 trillion stimulus bill, was passed and signed into law by President Biden on March 11, 2021. Aimed at assisting with the economic shortcomings of the pandemic, this legislation covers a broad base of pandemic-related initiatives.
At Austin Asset, we make it a priority to unpack recent legislation and understand the impact on our clients financially. Concerning the American Rescue Plan Act, we will discuss the key elements of this bill, and how it could have financial implications in your life and the lives of others. In doing so, we will address the impact of this bill on the following key areas: stimulus payments, the Child Tax Credit, Child and Dependent Care Tax Credit, unemployment aid, COBRA, and the expansion of PPP loan eligibility for businesses.
The American Rescue Plan Act included direct stimulus payments of $1,400 to eligible individuals with an AGI of $75,000 or less ($150,000 or less for MFJ). If you are below these thresholds, you will receive the full amount. However, if you exceed the AGI threshold of $80,000 for single filers or $160,000 for married filing jointly, you will not receive any of the $1,400 stimulus payment. Alternatively, if your AGI is in between the two numbers in the phaseout range, you will receive a reduced stimulus payment. This new stimulus package also expands the eligibility from children under 17 to include all dependents in the household. This includes college students or adult dependents.
It is important to note that the IRS will determine your stimulus eligibility based on your 2019 tax return, or 2020 tax return if filed. To receive the stimulus payment, you must not be a dependent of another taxpayer and have a valid social security number. As far as the payment timeline is concerned, the IRS designated March 17, 2021 as the official stimulus payment date.
Most people who are eligible for the stimulus payment will receive their payment via direct deposit if this information is already on file, requiring no action on their end. On the other hand, if you are eligible for a stimulus payment, but your direct deposit information is not on file, you will receive payment in the form of a check or debit card. If you receive a debit card in the mail, which is called the Economic Impact Payment Card, it should come in a white envelope with the U.S. Department of Treasury seal. The IRS said this will be a Visa card with MetaBank listed on the back of the card. If you would like to track the status of your stimulus payment, the IRS has a “Get My Payment” page where you can discover more information specific to your stimulus payment.
Child Tax Credit
The American Rescue Act also temporarily expanded on the Child Tax Credit for 2021. Households with children under the age of 6 (as of 12/31/21) can claim a $3,600 credit, and children ages 6-17 are eligible for a $3,000 Child Tax Credit. The thresholds for the Child Tax Credit are below:
- Joint Filers: $150,000
- Head of Household: $112,500
- Other filers: $75,000
Another unique detail regarding the passage of this stimulus bill is that the Child Tax Credit is a fully refundable credit for 2021, which means that you can receive the full tax refund, even if it makes your total tax liability negative.
Although a 2021 tax credit, the IRS is instructed to pay out half of one’s estimated Child Tax Credit for 2021 in equal payments between July 1, 2021 and December 31, 2021. The IRS will base their estimates on the last tax return on file.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit can potentially be claimed if you paid expenses for the care of a qualifying individual. Historically, the total expenses to calculate the credit were based on $3,000 in expenses for one qualifying individual, or $6,000 for two or more qualifying individuals. Your eligible expenses are multiplied by your “Applicable Percentage” to find the actual credit amount that you are entitled to. After the passage of the American Rescue Plan, the following changes to the Child and Dependent Care Tax Credit apply:
- Raised eligible expense limit to $8,000 of expenses for one qualifying child and $16,000 of expenses for two or more qualifying children.
- Increased the maximum Applicable Percentage from 35% to 50%.
- Changed its non-refundable status to become a fully refundable credit.
- Established $125,000 (regardless of filing status) as the AGI where the credit will begin to phase out. There are two sections of where the phaseout occurs:
- Between 125k and 185k, the Applicable Percentage phases out from 50% to a 20% floor at 185k.
- At 400k, the 20% Applicable Percentage is reduced by 1% for every $2,000, which means that individuals and couples will not be able to receive any of the Child and Dependent Care Credit if their AGI exceeds $440,000.
Unemployment Compensation and COBRA
Here are the highlights of how the American Rescue Act affected unemployment compensation benefits:
- Extended Federal subsidies to states providing unemployment benefits to individuals through September 6, 2021.
- Continued the Pandemic Unemployment Assistance program (created by the CARES Act) forward through September 6, 2021. This program allows certain workers to be eligible for unemployment compensation that would otherwise be ineligible.
- Increased the weekly unemployment compensation amount to be received by an individual by $300.
- Included a retroactive provision, excluding $10,200 of unemployment compensation in 2020 from tax, given that the uniform $150,000 AGI limit was not exceeded across all filing statuses.
- Implemented COBRA subsidies so that those involuntarily terminated from employment can receive health insurance from their previous employer at zero cost from April through September 2021. Employers will receive a refundable payroll credit as reimbursement.
PPP Loans for Businesses
Unfortunately, many businesses have suffered financially during the pandemic. In response to this, the American Rescue Plan expanded eligibility for the Paycheck Protection Program loans for the first or second draw. As a result, more non-profits will be eligible to apply. The Paycheck Protection Program, which offers forgivable loans to small businesses due to the pandemic, will receive $7.25 billion as a result of the legislation. The American Rescue Plan did not extend the March 31, 2021 application deadline. If you are curious whether or not your business is eligible for a PPP loan between now and March 31, more information can be found here through the U.S. Small Business Administration.
We hope that this information has given you insight into the major inner workings of this bill. If you have any questions, we will enjoy having a conversation, as we continue to live out our mission to provide authentic advice.
By: Austin Asset