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We apologize in advance for the tax speak in this update. Sometimes it’s hard to remove the tax language and maintain accuracy. Please stay with us for the next three minutes and reach out if there are any points that need additional clarity.

This is part one of a series we are writing to keep you informed on the American Rescue Plan Act of 2021 (ARPA), the legislation that President Biden signed into law on March 11, 2021.

While we are planning to provide more insight over the next few months on how this legislation impacts you, in today’s article we will attempt to summarize the most important components of the new legislation.

The Quick Summary: The American Rescue Plan Act of 2021 (ARPA) is an extensive relief bill that includes changes to income and payroll taxes, expansion of unemployment benefits, and another round of stimulus payments. Like the two relief bills that preceded it, this new law is extensive, with significant implications on businesses and tax payers.

Partial Exclusion of 2020 Unemployment Compensation – The ARPA provides an exclusion from income on the first $10,200 of unemployment compensation received per taxpayer if the taxpayer’s adjusted gross income (“AGI” – remember this term for today’s update!) is less than $150,000. Once AGI reaches $150,000, all unemployment compensation will be taxable. This cutoff at AGI of $150,000 applies to all taxpayers, regardless of filing status.

Recovery Rebates and Stimulus Payments - One of the most important provisions of the ARPA relates to additional stimulus payments that will be sent to individuals. These payments are $1,400 ($2,800 for joint filers) plus $1,400 for each dependent on the taxpayer’s return. Unlike the prior stimulus payments, all dependents claimed on a return will be included, regardless of age.  Just like the prior recovery rebate checks, there is a phase-out range based on AGI. The AGI phase-out ranges are:

  • Joint filers: $150,000 to $160,000

  • Head-of-household filers: $112,500 to $120,000

  • All other filers (single, married-filing-separately): $75,000 to $80,000

Checks will be issued based on the latest tax return that has been filed and processed. This rebate check will be reconciled on your 2021 individual income tax return in the form of a credit. In other words, if you do not receive the third stimulus check and you qualify to receive it, you will receive it through your 2021 tax return.

Individual Changes - Some of the more significant tax law changes from the ARPA relate to the child tax credit. For 2021 the credit has been increased to $3,000 per child ($3,600 for a child under the age of six) and is now fully refundable. The new law also increased the age of qualifying children from 16 to 17. As with many other provisions, there is a phase-out based on AGI in excess of threshold amounts.

It is important to note that half of this credit will be paid out in the form of an advance starting on July 15, 2021 and will be made monthly through the second half of the year. If the advanced payments you receive exceed the amount you qualify for on your 2021 tax return you will need to repay any excess amount. We will have more details on this later in the year once the IRS puts the system in place to handle these advanced payments.

Other provisions in ARPA that also impact individual filers include:

  • Expanded Child Dependent Care Credit – For 2021 only, the credit was made fully refundable and it was increased to 50% of qualified expenses. The credit will be reduced gradually down to 20% of qualified expenses as your AGI exceeds $125,000 and gradually phased out completely after your AGI reaches $400,000. The amount of eligible expenses qualifying for the credit have been increased to $8,000 for one individual and $16,000 for two or more individuals.

  • Premium Tax Credit – The change in ARPA applies to 2021 and 2022 for the premium tax credit for health insurance. The credit is now available to individuals with higher incomes and increases the credit amount for those already qualified. For 2021 only, advance premium tax credits will be available for individuals receiving unemployment compensation.

If you have any questions about how these changes will impact you please reach out to us. 

Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

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