Signed into law on March 11th, President Biden’s $1.9 trillion American Rescue Plan Act of 2021 (ARP) is the largest direct-to-taxpayer stimulus legislation ever passed, and it came just in time to save millions of Americans whose unemployment benefits were about to expire. In addition to extending unemployment relief, the ARP provides individual taxpayers and small business owners with a number of other vital financial benefits aimed at helping the country rebound from last year’s economic downturn. Of these benefits, you’ve likely already seen one of the ARP’s leading elements—the $1,400 direct stimulus payments, which went to taxpayers, children, and nonchild dependents with incomes of less than $75,000 for individuals and $150,000 for joint filers. But beyond the stimulus, the ARP comes with numerous other provisions that can seriously boost your family’s finances for 2021. To highlight the ways the ARP can impact your family’s wallet, here we’ll break down six of the legislation’s key elements. To learn about all the full array of benefits provided by the ARP, meet with us, as your Personal Family Lawyer®.
1. Child Tax Credit
If you have minor children, the ARP enhances the Child Tax Credit (CTC) in some major ways. Not only does it significantly increase the amount of the credit, but it also changes the way you can receive the money.
Under the current CTC, parents can receive a maximum tax credit of $2,000 for each qualifying child under age 17, with $1,400 of that credit being refundable. The ARP increases that credit to $3,000 a year for each child aged 6 to 17 and $3,600 for each child under 6—and both amounts are fully refundable. Parents who qualify for the full amount of $3,000 or $3,600 per child include single filers earning less than $75,000, and joint filers earning less than $150,000 annually. After this, the credit begins to phase out. However, parents who file singly and earn less than $200,000 ($400,000 for joint filers) could still claim the original $2,000 credit.
In addition to increasing the credit, the ARP also changes the way parents can access the money. Instead of applying the full amount of the credit to your income taxes at the end of the year and possibly getting a refund, you can now opt to receive the credit up front in monthly payments of $250 per qualifying child or $300 for children under age 6.
This means you can get half of the credit in the form of monthly cash payments and claim the other half when you file your 2021 taxes in April 2022. If you opt for the monthly payments, the IRS expects to send those out starting in July 2021 and lasting through December 2021. The ARP directs the Treasury Department to create an online portal that allows parents to opt out of advance payments and report any changes in income, marital status, or number of eligible children.
Note that these increases are only in effect for 2021 and will revert back to the original amounts in 2022. However, there’s currently support in both Congress and the White House for making them permanent. Check our weekly blog and IRS.gov for updates to the legislation.
2. Child and Dependent Care Tax Credit
In order to provide financial assistance to those families who pay for child care or care of an adult dependent, such as an elderly parent, the ARP increases the Child and Dependent Care Tax Credit for 2021—and for the first time, it makes the credit refundable.
For 2021, the ARP provides a tax credit for the expenses associated with the care of qualifying dependents (kids 12 or younger or a disabled adult) for a total of up to $4,000 for one dependent and $8,000 for two or more dependents. This is an increase from the max credit amounts for 2020, which are $3,000 for a single dependent and $6,000 for multiple dependents.
The IRS allows you to claim a fairly wide range of qualified expenses for such care, including the following:
Babysitters, as well as housekeepers, cooks, and maids who take care of the child
Day camps and summer camps (overnight camps are not eligible)
Before and after-school programs
Nursery school or preschool
Nurses and aides who provide care for a disabled dependent
The ARP also makes more people eligible for the credit by raising the income limit for the full credit from $15,000 to $125,000 per year. Those making between $125,000 and $400,000 are eligible for a partial credit.
As an added bonus, the credit is fully refundable for 2021, so you could get a refund for the credit even if your tax bill is zero. However, as with the changes to the Child Tax Credit, these updates are only available in 2021, unless additional legislation is passed. There are special rules for divorced couples looking to claim the Child and Dependent Care Tax Credit, so if that’s you, meet with your tax advisor for support.
3. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit for low- and middle-income workers that’s frequently overlooked—and the ARP makes the credit more valuable for many taxpayers in 2021 than ever before. The amount you can claim for the EITC depends on your annual income and the number of kids you have, but people without kids can qualify, too. For 2021, the ARP revises a number of EITC rules, and makes an increased credit available to more childless taxpayers. While in past years, childless filers could only qualify for a relatively small credit, for 2021 the ARP boosts the maximum EITC for those without children from around $540 to just over $1,500. The legislation also reduces the minimum age for a childless taxpayer to qualify, from 25 to 19, and it also eliminates the maximum age of 65 for the credit, so seniors of any age can qualify, as long as they meet the income requirements. The above changes from the ARP are only for 2021, but the law makes some permanent changes to the EITC as well.
In prior years, you couldn’t qualify for the EITC if you had more than $3,650 in investment income for the year. But thanks to the ARP, starting in 2021, you can have up to $10,000 of such “disqualified” income without losing the EITC, and for 2022 and beyond, this limit will remain and be adjusted for inflation. Below are the maximum EITC amounts for 2021, along with the maximum income you can earn before losing the credit altogether.
Additionally, just for 2021, you can calculate your EITC using either your 2019 earned income or your 2021 earned income and use whichever number gets you the bigger credit. And don't worry—if you go with the 2019 number, it has no effect on any of your other 2021 tax calculations. For example, if some or all of your income is from self-employment, using your 2019 income to calculate your 2021 EITC won’t increase your 2021 self-employment tax.
Finally, no matter the year, the EITC is fully refundable. This means you can collect the money even if you don’t owe any federal income tax. That said, calculating the credit can be quite complicated, so if you need a referral to a CPA to support you, please feel free to contact us for our favorite referrals.
4. Unemployment Benefits
While Congress extended unemployment benefits in December 2020, those benefits were set to expire in mid-March 2021, but the ARP extends unemployment benefits through September 6, 2021, offering an extra $300 a week on top of regular benefits. The legislation extends two other federal unemployment programs as well. First, the Pandemic Emergency Unemployment Compensation Program, which provides federal benefits for those taxpayers who’ve exhausted their state benefits, is now available for an additional 29 weeks, and you have until September 6, 2021, to apply. Next up, the Pandemic Unemployment Assistance Program provides benefits to those who wouldn’t normally qualify for unemployment assistance, such as the self-employed, part-time workers, and gig workers. This program is now available for 79 weeks, and as with the other benefits, you have until September 6th to get signed up. For more information on the Pandemic Emergency Unemployment Compensation Program and the Pandemic Unemployment Assistance Program, contact your state’s unemployment insurance office.
Finally, the ARP makes the first $10,200 in unemployment benefits paid in 2020 tax-free for families making $150,000 or less. Note that the ARP doesn’t provide a different threshold for single and joint filers, so both spouses are entitled to the $10,200 tax break, for a potential total of $20,400, if both spouses received unemployment benefits in 2020.
However, if your unemployment benefits exceed $10,200 in 2020, you’ll need to report the excess as taxable income and pay taxes on the amount over the limit. And if your household income is over $150,000, you’ll need to pay taxes on all of your unemployment benefits.
If you already filed your 2020 return and paid taxes on your unemployment benefits before the passage of the ARP made those benefits tax-free, the IRS plans to automatically process your refund. This means you won’t have to tax any extra steps, such as filing an amended return, to secure the refund.
5. Student Loan Relief
Under the CARES Act, federal student loan payments were paused until January 31, 2021, but the ARP extends the pause on those payments and collections through the end of September 2021. While Biden has repeatedly stated his support for $10,000 in federal student loan forgiveness, there was no student loan forgiveness included in the final version of the ARP.
That said, the ARP does offer some relief for those federal student loan borrowers who have their debt forgiven under already existing programs. Currently, federal student loan borrowers can enroll in programs that allow forgiveness after 20 or 25 years of on-time payments, but those borrowers have to pay income taxes on the amount that gets forgiven. Under the ARP, student loan debt forgiven between Jan. 1, 2021 and Jan. 1, 2026 will be income-tax free. This means that if the government forgives a portion of your student loans during this period, that amount will no longer be considered taxable income. This provision applies to those taxpayers who are enrolled in the Income Contingent Repayment (ICR) plan, which was started in 1993 and requires 25 years of repayment to qualify for forgiveness. However, this benefit does not apply to other federal student loan repayment plans, which require 20 or 25 years of repayment, but started in later years.
Additionally, thanks to the ARP, if you are a small-business owner who has defaulted on your federal student loan or are delinquent in your payments, you can now qualify for a loan from the Paycheck Protection Program (PPP), which received $7.25 billion in additional funding under the ARP. Moreover, Congress recently extended the deadline to apply for a PPP loan from March 31, 2021 to May 31, 2021. For more details or to apply for a loan, visit the Small Business Administration’s PPP website.
6. COBRA Continuation Coverage Subsidy
The ARP provides a 100% COBRA subsidy for up to six months for those workers who lost their health insurance coverage due to involuntary termination or reduction of hours during the pandemic. The ARP also allows for an extended election period for those who would be eligible to receive the subsidy but did not initially elect COBRA as well as those who let their COBRA coverage lapse.
Employees who are eligible for the subsidy, known as Assistance Eligible Individuals (AEIs), include those eligible for COBRA between November 1, 2019, and September 30, 2021, who are 1) already enrolled in COBRA, 2) those who did not previously elect COBRA, and 3) those who elected COBRA but let their coverage lapse. The subsidy does not apply to those who voluntarily terminate their employment or who are terminated for gross misconduct.
The ARP COBRA subsidy lasts from April 1, 2021 through September 30, 2021, and it applies to both insured and self-insured plans subject to COBRA, as well as self-funded and insured plans that are not subject to COBRA but are subject to continuation coverage under state law. Note that the ARP subsidy is only available to those whose initial COBRA period ends (or would have ended if COBRA had been elected/did not lapse) either during or after this six-month period. The subsidy does not lengthen the COBRA period, which typically expires 18 months after coverage was lost. This means that if an AEI’s 18-month COBRA period begins after April 1, 2021, or ends before September 30, 2021, the subsidy will be shorter than six months.
The AEIs will not receive the subsidy directly from the government. Instead, the AEIs’ COBRA premiums will be considered paid in full during this period, and the employer must pay 100% of the AEIs’ COBRA premiums. From there, the employer will receive a refundable tax credit on their quarterly payroll tax filing. If an employer's COBRA premium costs for AEIs exceed their Medicare payroll tax liability, they can file to get direct payment of the remaining credit amount.
COBRA beneficiaries who have elected COBRA and are covered under COBRA on April 1, 2021, do not need to enroll to be covered by the subsidy. For AEIs who did not initially elect COBRA or who let COBRA lapse, there will be a special enrollment period during which employers must inform AEIs of this benefit and allow them to elect coverage. This special enrollment period begins on April 1, 2021 and ends 60 days after the delivery of the COBRA notification to the employee.
A New Year Offers New Hope
With 2020 firmly in our rear-view mirror, the economy appears to be on the rebound, and things are slowly getting back to some semblance of normalcy. That said, many families continue to struggle financially, and if this includes you, you may be able to find some relief from the American Rescue Plan. While the six elements of the legislation we covered here are among the most popular, there may be other provisions we haven’t touched on that could benefit your personal situation. Watch for upcoming articles and webinars (and even in-person events!) we’ll be hosting to support you in making wise legal and financial choices for your family. Until then, contact us, as your Personal Family Lawyer®, for guidance on your family’s estate planning strategies by scheduling a Life & Legacy Planning Session today.
To learn more about our one-of-a-kind systems and services, contact our office to schedule a free personal Whole Family Life & Legacy Class or a Life & Legacy Planning Session™ today.
This article is a service of Sarah J. Nowels, Personal Family Lawyer®. At SJN Law, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office at (714)692-1738, texting Sarah at (949) 498-2203 emailing Sarah at email@example.com today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge and have your $750 deposit refunded or credited to your plan. We also pride ourselves on our continued service in seeking justice on behalf of employees whose civil rights have been violated. While we only take a couple of these cases at a time to maintian a high quality of service to our clients, if we can't help you, we will do what we can to provide you with guidance.