On Wednesday, March 10, 2021, the House approved the American Rescue Plan (ARP) as it came back to them modified slightly by the Senate a couple of days ago. The 628-page piece of legislation reaches broadly across several segments of society to provide funding and relief to individuals, organizations, and state and local governments. The President is expected to sign the bill on Friday afternoon, March 12, but we wanted you to have the highlights as soon as possible, as the vote in the House was the last major hurdle before receiving an assured signature from the White House.

The price tag on the ARP lands at $1.9 trillion and it was passed along party lines. The following are some of the most significant income tax related points from the bill.

Probably the most talk-about measure is another round of Economic Impact Payments, also known as stimulus checks. The checks are $1,400 per taxpayer and per dependent. This is a significant increase from the two previous rounds of payments, particularly due to the eligibility of all dependents and not just those 16 and younger.

While the availability has been expanded relative to dependents, it has also been significantly limited based on income. The phase-out range for singles begins at $75,000 and ends at $80,000. Double these amounts to $150,000-$160,000 for joint filing folks. This means that single taxpayers making over $80,000 and married taxpayers making over $160,000 will not be eligible for this round of payments.

The IRS is going to base your stimulus payment off your most recently filed tax return. Because there is no claw-back provision, meaning the IRS won’t ask for the money back (except for instances of fraud), if your 2019 income qualifies you for the payment and if there’s any chance your 2020 return would creep into or exceed the phase-out limits, we recommend waiting until checks are cut before filing your 2020 return.

For those whose income decreased significantly in 2020 such that they are now eligible for a stimulus check when they weren’t before, there is no significant urgency to hurry up and file. There is a clause in the ARP that provides the IRS with a second date on which they will evaluate whether all checks have been appropriately distributed, again based on the most recent tax records they have. This date is slated as the earlier of 90 days after the tax deadline OR September 1. So, there remains plenty of time to file your 2020 return and still be eligible for the stimulus check within calendar year 2021.

You have probably caught wind by now of a provision in this new law that allows $10,200 of unemployment compensation to be considered tax-free on Adjusted Gross Income up to $150,000. This applies to your 2020 unemployment income only and at this point only applies to your federal return. The good news is that this $10,200 exclusion applies per individual. So, married taxpayers filing jointly can exclude $20,400 of 2020 unemployment income. The downside is the $150,000 income limit. This is a $150,000 income limit for everybody, both singles and marrieds. And in true cliff fashion, if you go $1 too far, you’re over the edge and receive no benefit.

If by chance you or someone you know has already filed their tax return and was on unemployment in 2020, there is a good chance that return will have to be amended in order to recoup these taxes. This hasn’t been established yet, but it would be the ordinary way to handle this, barring some significant exception from the IRS.

What does this mean in practical terms for your 2020 tax return if you received unemployment compensation? If you’re over the limit, it means nothing since you won’t get the benefit anyways. If you’re below the cut-off, it means we can’t actually file your return until the IRS writes the formal regulations on how it’s going to handle this, implements it into the tax code, gets information to the tax software companies, and the companies have the time to incorporate this into their software packages. At best we’re looking at a couple of weeks (early April?). It’s possible we’re looking at April 15^th or later. The IRS has been resolute to date that an extension like last year would not be forthcoming, but it strains credulity how they could handle this change along with all of their other responsibilities and still maintain an April 15^th deadline. It is by no means a given that another automatic extension is coming, but we are actively watching for it and we will let you know as soon as possible if this occurs.

If you have a child under the age of 17, you typically receive a Child Tax Credit of $2,000. The ARP is extending that Child Tax Credit to $3,600 per child under the age of 6 and $3,000 per child between the ages of 6 – 17. Dependents who are 18+ will continue to qualify for the $500 credit. This change is for tax year 2021 only, though there is discussion of making it permanent at some point.

An additional, related bonus is that half of this credit will be paid out by the IRS between July and December 2021. For children ages 6 and under, this means a monthly payment of $300. For those children ages 6 – 17, the monthly payment will be $250. The difference will be claimed with your 2021 tax filing next spring, as normal.

Note that there is both an income limit ($75,000 singles, $150,000 marrieds) and a claw-back provision. If you expect your 2021 income to exceed the threshold based on your filing status, please discuss this with us as you could be required to pay some of this back (or simply get a smaller credit when you file, increasing your 2021 tax liability in April 2022). We will also send out another Eblast on this topic in the coming weeks once the IRS sets up a new portal for taxpayers who would like to opt out of receiving this additional credit. This is going to be messy for some, but it will also benefit many of you. Please come to us for an early mid-year review in May or June to let us examine your situation so we can better assess how this will impact your tax position.

If you remain on unemployment at this time, your benefits were set to expire on March 14. Those benefits have now been extended through September 6. The extra federal assistance will remain at $300 per week during this time. Many believe that this will be the final extension of unemployment benefits.

These items are accurate as we know them as of March 10, 2021. We remind you again that these provisions have passed through Congress but have not been signed into law as of this Eblast. The President is expected to sign this bill on Friday, March 12. As we continue to digest the final text, we will send out updates and resources that we believe will be most beneficial to you. We appreciate the opportunity to work with you and for you as we all unpack and work through these changes together.