Overview of ARPA Tax Provisions for Individuals
On March 11, 2021, President Biden signed H.R. 1319, the American Rescue Plan Act of 2021 (ARPA), a $1.9 trillion legislative package to assist businesses and individuals impacted by the pandemic.
For individual taxpayers, the legislation includes additional $1,400 economic recovery impact payments to eligible individuals, funding for vaccine testing and distribution, significant expansions of the child tax credit and other refundable tax credits, extension of enhanced unemployment benefits, and $350 billion in aid to state and local governments.
We have provided highlights of the provisions below and encourage you to coordinate with your Keiter tax advisor to discuss considerations that may apply to your situation and related planning actions.
2021 Individual Recovery Rebate/Credit
Under ARPA, an eligible individual is allowed an income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus (2) $1,400 for each dependent of the taxpayer. The credit is refundable. Although the credit is technically for 2021, the law treats the rebate as an overpayment for 2019 (or 2020, if the return for that year has been filed). The IRS will issue the rebate as soon as possible during 2021 and will make the payments electronically where possible. The amount of credit allowable on an individuals 2021 tax return must be reduced by the advance rebate payments received by the taxpayer during 2021.
Phaseout of Individual Recovery Rebate/Credit
The amount of the credit is ratably reduced (but not below zero) for taxpayers with adjusted gross income (AGI) of over:
- $150,000 for a joint return;
- $112,500 for a head of household; and
- $75,000 for all other taxpayers.
The credit is completely phased out (reduced to zero) for taxpayers with AGI of over:
- $160,000 for a joint return;
- $120,000 for a head of household; and
- $80,000 for all other taxpayers.
Child Tax Credit Expanded for 2021
Before ARPA, the child tax credit (CTC) was $2,000 per “qualifying child.” A qualifying child was defined as an under-age-17 child, whom the taxpayer could claim as a dependent (i.e., a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year), and who was a U.S. citizen or national, or a U.S. resident.
The $2,000 CTC is phased out for taxpayers with modified adjusted gross income (AGI) of over $400,000 for joint filers, and $200,000 for all other filers.
Under ARPA, for tax year 2021, the CTC is temporarily expanded as to eligibility, and amount, as follows:
- The definition of a qualifying child is broadened to include a child who hasn’t turned 18 by the end of 2021. Thus, for 2021 only, 17-year-olds are qualifying children for the CTC.
- The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year). But, the increased credit amounts are phased out at modified AGI of over $75,000 for singles, $112,500 for heads-of-households, and $150,000 for joint filers and surviving spouses, at a rate of $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold. This phaseout is limited to the temporarily increased amounts for 2021 (i.e., to $1,600 per child under age six, and $1,000 per child age six or older), and doesn’t apply to the $2,000 of CTC permitted under existing law. After applying this phaseout, the taxpayer’s $2,000 of CTC is subject to the phaseout rules under existing law.
- The CTC is fully refundable for 2021 for a taxpayer (either spouse for a joint return) with a principal residence in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.
Additional note: The IRS must establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 CTCs, from July 2021 through December 2021. Each advance payment is 1/12 of an “annual advance amount” for the calendar year. If the IRS determines it’s not feasible to make monthly advance payments, they may make advance payments based on a longer interval and adjust the amount of the advance payment accordingly.
Child and Dependent Care Credit Enhanced and Made Refundable
An individual taxpayer who has one or more qualifying individuals (certain dependents) may qualify to receive a credit for expenses the taxpayer paid (“employment-related expenses”) for the care of the qualifying individual(s) so that the taxpayer can be gainfully employed.
Before ARPA, the expenses taken into account in determining the credit could not exceed $3,000 for one qualifying individual or $6,000 for more than one.
The credit was 35% of employment-related expenses for taxpayers whose adjusted gross income (AGI) for the tax year was $15,000 or less. So, the maximum credit was $1,050 ($3,000 x 35%) if there was one qualifying individual and $2,100 ($6,000 x 35%) if there were two or more qualifying individuals. The percentage referred to here is called “the applicable percentage.”
The applicable percentage was decreased by one percentage point for each $2,000 (or fraction thereof) of additional AGI until it was reduced to 20%. The 20% credit applied when AGI was over $43,000.
The credit was nonrefundable and was subject to the limit on nonrefundable personal credits based on the taxpayer’s tax liability.
ARPA makes several changes that apply for tax years that begin in 2021
Refundable. The child and dependent care credit is refundable for taxpayers who have a principal place of abode in the U.S. for more than one-half of the tax year.
Increase in limits. For tax years beginning in 2021, the dollar limit on the amount taken into account is increased to $8,000 (from $3,000) if there is one qualifying individual with respect to the taxpayer, or $16,000 (from $6,000) if there are two or more qualifying individuals with respect to the taxpayer.
The applicable percentage is increased to 50%, reduced by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s AGI for the tax year exceeds $125,000.
For taxpayers with AGI of $125,000 or less, the maximum amount of the credit is $4,000 ($8,000 x 50%) for taxpayers with one qualifying individual and $8,000 ($16,000 x 50%) for taxpayers with two or more qualifying individuals.
The applicable percentage decreases one percentage point for every $2,000 by which the taxpayer’s AGI exceeds $125,000 until AGI reaches $185,000. The applicable percentage is 20% for taxpayers with AGI greater than $185,000 but not greater than $400,000. For taxpayers with AGI above $400,000, the applicable percentage again decreases one percentage point for every $2,000. Thus, for taxpayers with AGI greater than $440,000, the credit is phased out completely.
Unemployment Received in 2020 Partially Excluded from Income for Some Taxpayers
An individual’s gross income includes unemployment compensation. Unemployment compensation includes any amount received under a law of the U.S. or of a state.
Under ARPA, in the case of any tax year beginning in 2020, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer does not include so much of the unemployment compensation received by the taxpayer (or, in the case of a joint return, received by each spouse) as does not exceed $10,200.
The same $150,000 limit applies to returns with a filing status of joint, head of household, or single. However, in the case of a joint return, the $10,200 exclusion applies separately to each spouse.
Qualifying individuals that filed their 2020 tax return and included unemployment compensation in their gross income should file an amended return.
Student Loan Discharges
Before ARPA, Code Sec. 108 provided exceptions to the general rule requiring the inclusion of cancellation of indebtedness (COD) income from the discharge of student loans for:
(a) discharges in exchange for a provision requiring certain work for a certain period by certain professionals (e.g., a doctor in a public hospital in a rural area), or
(b) discharges on account of the death or total and permanent disability of a student.
ARPA excludes from gross income certain discharges of student loans after December 31, 2020, and before January 1, 2026. The “student loan discharge” exclusion applies to these types of loans:
(1) Loans provided expressly for post-secondary educational expenses if the loan was made, insured, or guaranteed by a federal, state, or local governmental entity or an eligible educational institution.
(2) Private education loans.
(3) Any loan made by any educational institution qualifying as a 50% charity (for purposes of the income tax charitable deduction) if the loan is made under an agreement with any governmental entity (described in item (1)) or any private education lender that provided the loan to the educational organization, or under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt charitable organization.
(4) Any loan made by an educational organization qualifying as a 50% charity or by an tax-exempt organization to refinance a loan to an individual to assist the individual in attending any educational organization but only if the refinancing loan is under a program of the refinancing organization which is designed as described in item (3).
The discharge of a loan made by either an educational institution or a private education lender is not excluded under the above rules if the discharge is on account of services performed for either the organization or for the private education lender.
We closely monitor new and changing tax regulations so we can help Executive, Entrepreneurs, and Family Offices make timely tax planning decisions. If you have any questions on the new legislation or other tax matters, please reach out to your Keiter Opportunity Advisor, Email | Call: 804.747.0000. We are here to help.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.