President Biden signed the American Rescue Plan into law today. The bill will provide $350 billion for state, local, and tribal governments, $10 billion for critical state infrastructure projects, $14 billion for the distribution of a vaccine, and $130 billion to primary and secondary schools. The bill also includes $30 billion for transit agencies, $45 billion in rental, utility and mortgage assistance, and billions more for small businesses and live performance venues.

Here are more details of what is included in the American Rescue Plan for individuals. We are only going to highlights areas where new information is available in this alert. Please reference our first alert on the subject for more details.

As we already explained, stimulus payments will be $1,400 for most recipients. Those who are eligible will also receive a payment of $1,400 for each child, including babies born in 2021.

To qualify for the full $1,400, a single person must have an adjusted gross income (AGI) of $75,000 or below. For heads of household, adjusted gross income must be $112,500 or below, and for married couples filing jointly it is $150,000 or below.

To be eligible for a payment, a person must have a Social Security number.

Payments phase out as AGI rises. For single filers, the checks decrease to zero at $80,000. For heads of household, the cutoff is $120,000 and for joint filers it is $160,000. Payments for children decrease in the same way.

College students and older individuals who qualified taxpayers claim as dependents are eligible. The payment goes to the taxpayer, not the child or older individual.

The most recent tax year on record at the IRS will be used to determine eligibility. If you have already filed your taxes this year, it would be 2020. If not, it would be 2019. If you receive a stimulus payment based on your 2019 tax return, but the income that will be reported on your 2020 return will be too high, you will not have to return the money. If you will become eligible once you file your 2020 return, you can claim a $1,400 credit when you file your 2021 taxes. Or, since the Treasury Department can make supplemental payments until September, it is possible that you will be sent a stimulus check after you file your 2020 return. 

The recovery rebate credit is available if you were eligible but did not receive a previous stimulus check. You can claim it on your 2020 return. 

As we already shared with you already, enhanced federal pandemic unemployment compensation (FPUC) payments of $300 per week will be made until September 6, 2021. The first $10,200 in unemployment payments are nontaxable for households with incomes under $150,000. 

In addition, benefits through FPUC, which covers the self-employed, gig workers, part-timers and others who are typically ineligible for regular unemployment benefits, will be available for a total of 79 weeks, up from 50 weeks through September 6. Benefits through the Pandemic Emergency Unemployment Compensation (PEUC) program for people who exhaust their regular state benefits will be available for a total of 53 weeks through September 6, up from 24 weeks.

The bill extends an extra $100 weekly mixed-earner supplement through September 6. This payment helps people who have a mix of income from both self-employment and wages paid by other employers, because they receive a lower state-issued benefit based on their wages.

The $300 FPUC supplement does not have to be included when calculating eligibility for Medicaid and the Children’s Health Insurance Program. The mixed earner supplement will be counted.

This year the child tax credit will increase to as much as $3,000 per child ($3,600 for ages 5 and under). The age limit for qualifying children is increased to 17, from 16. Families eligible for the full credit would get payments of up to $300 per child per month from July through December 31, 2021. The amount is gradually reduced for couples earning over $150,000 and individuals earning over $75,000 per year. 

You can elect to receive some of the credit as an advance on your 2021 taxes. The American Rescue Plan makes the credit fully refundable, which means you can receive money from it as a tax refund even if your tax bill is reduced to zero. And half of that money can be advanced to households over the next six months (based on their 2020 tax information, or 2019 if that was unavailable). Payments are expected to begin in July.

Married couples who have modified adjusted gross income up to $150,000, heads of household up to $112,500 and single filers up to $75,000 can receive the full value of the new benefit.

However, the extra amount above the original $2,000 credit (either $1,000 or $1,600 per child depending on their age) is reduced by $50 for every $1,000 in modified adjusted gross income (MAGI) that exceeds those levels. The extra amount will be phased out at about $170,000 for joint filers with one child age 6 to 17. At that point, the tax credit levels out at $2,000, and is subject to the usual income limits of $400,000 for married filers and $200,000 for singles.

The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.

The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.

The taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase taxable income by the excess of the advance payment amount over the actual credit allowed. But taxpayers who's modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.

The bill requires the establishment of an online portal to allow taxpayers to opt out of receiving advance payments and update information about their income, marital status, and number of qualifying children.

The tax credit for child and dependent care would increase for 2021 from a maximum of $1,050 for one child and $2,100 for two or more children to $4,000 and $8,000. The credit would also be fully refundable, which means you get a refund, even if it is more than what you owe.

The credit will be calculated by taking up to 50% of the value of eligible expenses subject to certain limits, depending on your income. The bill also makes the credit fully refundable, which means you can collect the money as a refund even if your tax bill is zero.

The American Rescue Plan increases the income level at which the credit begins to be reduced. In past years, that started at an adjusted gross income of $15,000, but for this year the full value of the credit will be available to households making up to $125,000.

Previously, the credit was not further reduced below 20%, regardless of income. But for this year, the bill will begin to reduce the credit below 20% for households with income of more than $400,000.

The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

For 2021 only, the bill will increase for childless households the size of the earned-income tax credit, which helps those at the lower end of the income scale and makes more taxpayers eligible. The maximum credit amount for childless people increases to $1,502, from $543.

The bill also broadens the age range. For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.

Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.

People who otherwise would be eligible but whose children do not have Social Security numbers will be permitted to claim the version of the credit available to childless households. This change will be permanent.

Taxpayers will not be disqualified for the credit in 2021 until they have investment income of $10,000, up from $2,200. This change will be permanent, with the $10,000 threshold indexed to inflation.

The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.

Married but separated people can be treated as not married for the purpose of the credit if they do not file a joint tax return. This applies only if the taxpayer lived with a qualifying child for more than half of the taxable year and did not have the same principal home as the spouse at least six months of the year. A separation decree or agreement would also suffice if the individual did not live with the spouse by the end of the taxable year. This change will be permanent.

The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA). These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.

The act increases the limit on the credit for paid family leave to $12,000.

The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.

The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.

The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.

The credits are expanded to allow 501(c)(1) governmental organizations to take them.

The act codifies the employee retention credit and extends it through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and it allows eligible employers to claim a credit for paying qualified wages to employees.

Under the act, the employee retention credit would be allowed against the Medicare tax.

The act expands the premium tax credit for 2021 and 2022 by changing the applicable percentage amounts. Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.

As we previously told you, the Centers for Disease Control and Prevention (CDC) will receive $7.5 billion to track, administer, and distribute COVID-19 vaccines. Another $46 billion would go toward diagnosing and tracing COVID-19 infections, and $2 billion is for buying and distributing various testing supplies and personal protective equipment (PPE). We learned today that the bill requires Medicaid to cover vaccines and COVID-19 treatments for free.

The bill will also allow women who have given birth to stay on Medicaid, the government health insurance program for the poor, for a full year after delivery, instead of two months.

For 2021 only, you can set aside $10,500 in a dependent care account instead of the normal $5,000. Employers can decide not to offer this option. 

Per the relief bill, the government would pay the entire COBRA premium from April 1 through September 30 for people who have lost a job or had their hours cut.

A person who qualified for new, employer-based health insurance someplace else before September 30 loses their eligibility for the no-cost coverage. And someone who left a job voluntarily is also not eligible.

Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.

Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.

Under new Sec. 139I, continuation coverage premium assistance is not includible in the recipient’s gross income.

The legislation eliminates an income cap that limits who is eligible for Affordable Care Act (ACA) tax credits to reduce monthly insurance premiums purchased on the healthcare exchange. The premiums for those plans will cost no more than 8.5% of your modified adjusted gross income. These changes will last through the end of 2022 and do not require people to re-enroll to access the lower prices.

The plan also attempts to get more states to expand Medicaid under ACA. For states that do, the federal government will pay a larger percentage of their other Medicaid costs.

We addressed in our previous alert that the bill provides $25 billion for emergency rental assistance and $5 billion is for emergency housing vouchers for people experiencing homelessness, survivors of domestic violence, and victims of human trafficking. We learned today that $5 billion would be set aside to help struggling renters pay their utility bills,

In addition, the bill provides nearly $10 billion to help homeowners struggling with mortgage payments, utility bills, and other housing costs. Roughly $100 million will be dedicated to housing counseling, which will help both homeowners and renters remain in their homes. 

The plan extends the federal eviction moratorium to September 30. It also allows people with federally guaranteed mortgages to apply for forbearance until September 30.

Typically, the IRS may reduce a taxpayer’s refund to offset back child support, past-due tax debt, and other federal or state liabilities. The IRS can offset or take a person’s refund to satisfy those debts. The third round of stimulus payments will not allow the IRS to do this. However, private debt private collection could happen in certain circumstances.

The act amends Sec. 162(m), for years after 2026, to add a corporation’s five highest-compensated employees (besides the employees already covered by Sec. 162(m)) to the list of individuals subject to the $1 million cap on deductible compensation.

The act extends the Sec. 461(l) limitation on excess business losses of noncorporate taxpayers for one year, through 2027.

The act also repeals Sec. 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis.

The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants.

The act temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.

We expect additional information will be made available on specific provisions of the American Rescue Plan and will update you accordingly. 

Please visit our COVID-19 Resource Page for more alerts. Learn about our COVID-19 Recovery Services.

Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at Richard.Higgins@McCarthy.CPA. I can be reached at Marty.McCarthy@McCarthy.CPA As always, we are happy to help.

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).