On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into Law. The Act includes a number of tax provisions, including a third round of direct stimulus payments, enhancements to the child tax credit and the extension of payroll tax credits for employers.

The American Rescue Plan Act of 2021 provides a $1,400 stimulus payment. The payments are essentially credits against 2021 taxes, but fully refundable and payable in advance (similar to the prior payments). Also, like previous stimulus payment this round is subject to income limitations. The amount of the payment phases out for single filers with adjusted gross income over $75,000, $112,500 for heads of households and $150,000 for joint filers.

  

The $1,400 is available for all persons for whom a Social Security Number is associated, and is $1,400 for taxpayers, children, and non-child dependents. 

The Act includes a significant overhaul of the child tax credit, but only for the 2021 tax year. Under the prior law, the amount of the child tax credit is equal to $2,000 per child, but only $1,400 of that is refundable. The Act increases the amount to $3,000 per child and $3,600 for children under the age of six. The bill also increases the maximum age of qualifying children to include 17-year old children. The increase in the amount of credits phases-outs for adjusted gross income over $150,000 ($112,500 for head of household and $75,000 for single filers).

The Treasury and IRS are directed by the Act to issue advance payments of half of the credit amount beginning on July 1, 2021. The advance payments are to be issued periodically in equal amounts through the end of 2021. The remaining half of the credit not paid in advance is received when filing your 2021 tax return.

The amount of the child and dependent care credit is significantly enhanced under the Act for 2021 only. The Act increases the credit to 50 percent of qualified expenses, and reduces the credit percentage by one point for each $2,000 of adjusted gross income in excess of $125,000. The credit percentage will not be reduced below 20 percent until the adjusted gross income reaches $400,000. Additionally, the amount of eligible expenses that qualify for the credit is increased to $8,000 for one individual and $16,000 for two or more individuals.  

The Act also includes an extension of the enhanced $300 weekly unemployment relief first made available in an earlier pandemic relief bill. The extension, originally set to expire in March 2021, now runs through early September 2021. One notable change, for tax purposes, makes the first $10,2000 of unemployment relief received in 2020 exempt from tax for household with less than $150,000 of income.

Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to their return, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.

Another provision of the original COVID-19 relief legislation is the payroll credit for employee retention. The credit was extended through June 30, 2021 by the Consolidated Appropriations Act, 2021. The Act extends the credit through the end of 2021. This credit applies to the Medicare tax, but it does not apply to Social Security taxes, after June 30, 2021. 

Back in October 2020, we were excited to reveal to our clients our brand new logo. As the months have progressed, we have started to publicly roll out our rebranding. Many of you may have noticed this change already in our newsletter.