American Rescue Plan Act (ARPA) of 2021

The American Rescue Plan Act (ARPA) of 2021 was recently passed. Below, please find a few items that may affect your individual income tax returns.

  1. Unemployment received in 2020 is partially excluded from income for some taxpayers – $10,200 of unemployment income will be excluded from gross income if your adjusted gross income for the tax year is less than $150,000. The $150,000 limitation applies to returns filed jointly, head of household, or single status. The IRS is in the process of providing guidance on how to correct affected 2020 tax returns that have already been filed.
  2. Individual recovery rebate credit – Starting in 2021, an eligible individual is allowed an income tax credit of $1,400($2,800 for eligible individuals filing joint returns) plus $1,400 for each dependent of the taxpayer. The dependent includes a qualifying child and a qualifying relative. The amount of the credit is ratably reduced for taxpayers with adjusted gross income over $150,000 for married filing jointly, $112,500 for head of household and $75,000 for all other taxpayers. Each eligible individual will receive an advance payment based upon their 2019 or 2020 income tax return, whichever has been filed.
  3. Child tax credit expanded for 2021 – For tax year 2021 the age for qualifying child has been broadened to include a child who is 17 and has not yet turned 18 by the end of 2021. The child tax credit is increased to $3,600 for children under age 6, $3,000 for all other children ages 6-17. This increased credit is phased out at modified adjusted gross income of $75,000 for single, $112,500 for head of household, and $150,000 for joint filers and surviving spouses. The phase out is at a rate of $50 for each $1,000 over the applicable threshold. The phaseout is limited so that it only applies to the temporarily increased amounts for 2021 and doesn’t apply to the $2,000 of child tax credit permitted under existing law. Additionally, the IRS must establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 child tax credits in July 2021 through December 2021. Each advance payment is 1/12 of an annual advance amount for the calendar year. But, if the IRS determines it is not feasible to make monthly advance payments, it may make payments based on a longer interval and adjust the amount of the payment accordingly. Taxpayers who receive advanced child tax credit payments from the IRS in excess of their actual child tax credit allowable must repay the excess amounts when filing their 2021 income tax returns.
  1. Expansion of the earned income tax credit for taxpayers with no qualifying children – The act changes the wording to make the minimum age for the earned income credit be 19 years old. Additionally, the $4,220 earned income amount is increased to $9,820 and the $5,280 phaseout amount is increased to $11,160. Lastly, the act removes the requirement for identification numbers for qualifying children. Thus, an individual will be eligible for the earned income tax credit who does not have any qualifying children as long as their income levels meet the requirements.
  2. Individuals may base their 2021 earned income credit on their 2019 earned income – taxpayers may substitute their earned income for 2019 if that 2019 amount is greater than the taxpayer’s earned income for 2021.
  3. Child and dependent care credit enhanced and made refundable – For 2021, the dollar limit on the amount taken into account is increased to $8,000 (from $3,000) if there is one qualifying individual and $16,000 if there are two or more qualifying individuals. The applicable percentage is increased to 50%, reduced by 1% point for each $2,000 by which the taxpayer’s adjusted gross income for the tax year exceeds $125,000.
  4. Premium tax credit for 2021 and 2022 for taxpayers with household income over 400% of federal poverty line are made eligible for credit – The applicable percentage tables have changed to reduce the amount of repayment that taxpayers will have to pay. Additionally, taxpayers who received too much in advanced premium tax credits in 2020 will not have to repay the excess. The IRS will provide guidance on how the premium tax credit repayments already filed in 2020 will be refunded.
  5. Premium tax credit increased for taxpayers receiving unemployment compensation in 2021 – taxpayers who received unemployment income will receive an increase in their premium tax credit on their 2021 returns.
  6. Student loan discharges – The act excludes from gross income certain discharges of student loans after December 31, 2020 and before January 1, 2026.

If you have any questions on the above information please contact our office.

Westbrook CPA