As is often common after a national election, a new administration brings a new set of priorities, resulting in new legislation to implement those priorities… for which the Internal Revenue Code is still one of the most common ways for government policy to be implemented. And so, as the Biden administration closes out its second month, this week ushers in its first major piece of tax legislation: the American Rescue Plan of 2021, intended to drive economic stimulus and provide fiscal relief in response to the ongoing COVID-19 pandemic.
The lead of the American Rescue Plan is another (third) round of so-called “Stimulus Checks”, in an amount of $1,400 per eligible individual. Though notably, eligibility in this cycle has been expanded from including ‘just’ children under the age of 17 to all dependents in the household (which can include children in the later years of high school, or in college still claimed as dependents, as well as parents who are claimed as dependents). At the same time, though, the phaseout limitations of the new stimulus checks are more restrictive, with a near-cliff-style phaseout (starting at $75,000 for individuals and $150,000 for married couples) so sharp that some families could see marginal tax rates in excess of 100% through the phaseout range! Which in turn, will require a special focus on navigating a series of three checkpoints that households can pass through to potentially be eligible (based on their 2019, 2020, or 2021 tax returns).
In addition to stimulus checks, the American Rescue Plan also significantly expands the Child Tax Credit, from $2,000 to $3,000 (and up to $3,600 for children under the age of 6), a slightly higher age threshold that will allow 17-year-old children to qualify in 2021, a new system that will pay a portion of the Child Tax Credit in advance over the last 6 months of the year… and yet another set of phaseout thresholds (again at $75,000 for individuals and $150,000 for married couples) for the new Child Tax Credit amount (while the original $2,000 base amount of the Child Tax Credit still phases out at higher thresholds of $200,000 and $400,000, respectively).
Other notable aspects of the American Rescue Plan include a significant increase in the Dependent and Child Care Credit (including higher eligible expense limits and Applicable Percentage amounts that be claimed); new extensions on various Unemployment Compensation benefits that were otherwise set to expire; increases in the Premium Assistance Tax Credit for households buying health insurance from the state exchanges (including coverage down to the first dollar for lower-income households below 150% of the Federal poverty level, and new eligibility for the tax credit for households with income above 400% of the Federal Poverty Level if health insurance exceeds 8.5% of their AGI); and a new provision that provides a 100%(!) tax credit to employers to offset the cost of COBRA coverage for 3 months for any employees who are involuntarily unemployed.
Notably, most of the new provisions under the American Rescue Plan are for 2021 only (or in limited cases, until 2022 as well), making them only “temporary” relief. However, the potential remains for additional tax legislation in the coming months as well, raising the question of whether some of the changes – particularly to the Child Tax Credit – may become a permanent feature of tax law in the future. And the potential for even more tax planning opportunities for clients through the remainder of 2021!