On March 11, 2021, President Biden signed the American Rescue Plan (“The Act”) into law. The Act provides $1.9 trillion of relief and is the third COVID-19 bill signed to help Americans since last March. The Act allocates money for stimulus payments and unemployment benefits, vaccines, schools, small businesses, and more. The following is a summary of the more significant tax provisions.
The new law includes the following tax and financial provisions for individuals and families:
Qualified individuals with adjusted gross income (AGI) up to $75,000 and married taxpayers filing a joint return with AGI up to $150,000 will receive $1,400 per person. An additional $1,400 payment will be paid for each dependent.
The stimulus payment phases out for individuals with AGI between $75,000 and $80,000, and couples with AGI between $150,000 and $160,000. The phase-out amounts are based upon 2020 income but if the 2020 return has not yet been filed, 2019 income will be used.
The enhanced Federal unemployment insurance payment will continue at $300 per week through September 6, 2021. In addition, although unemployment insurance benefits are generally taxable, The Act provides that the first $10,200 in unemployment insurance payments is nontaxable for households with AGI below $150,000. For married taxpayers filing a joint return, the $10,200 exclusion applies to each spouse. The exclusion only applies to the 2020 tax year.
For tax years beginning in 2021, The Act increases the child tax credit from up to $2,000 per child under the age of 17 to $3,600 for each child younger than 6 and $3,000 for each child age 6 through 17 for qualifying families for one year. The increased credit begins to phase-out at AGI of $75,000 for single taxpayers and $112,500 for married taxpayers filing joint returns. The phase-out only applies to the increased credit amount. Therefore, taxpayers subject to the phase-out will still be eligible for the pre Act credit. The IRS is directed to establish a program to make monthly advance payments equal to 50% of the credit amount beginning in July, 2021.
Child and Dependent Care Credit
For tax years beginning in 2021, eligible expenses have increased from $3,000 per qualifying child to $8,000 per qualifying child.
The new law includes some of the following tax-related provisions for businesses and self-employed individuals:
Employment Tax Relief
The employer credit with respect to paid sick and family leave is extended through September 30, 2021. The employee retention credit is extended through December 31, 2021.
Paycheck Protection Program (PPP)
The Act adds $7.25 billion to the Paycheck Protection Program which is slated to end on March 31, 2021.
This loan program will also allow more nonprofits to apply, which includes groups that engage in advocacy and some limited lobbying. Larger nonprofits will also be eligible.
Extension of Limitation on Excess Business Losses
Noncorporate taxpayers are currently subject to a limit on excess business losses of $250,000 ($500,000 for a married joint-filing couple). These limits are adjusted annually for inflation. Losses that are disallowed under this rule are carried forward to later tax years, then they can be deducted under the rules that apply to net operating losses.
Previously, the CARES Act temporarily suspended the excess business loss rule for losses arising in tax years beginning in 2018 through 2020. This limitation comes back into play for 2021 and was scheduled to expire at the end of 2025. The American Rescue Plan pushes back the expiration date by one year to the end of 2026.
The American Rescue Plan has a number of other provisions. If you have any questions about the legislation and how it may affect you and/or your business, please contact your MWE professional or call us at 516-747-2000.