What you need to know about the new American Rescue Plan Act
New legislation was signed into law on March 11, 2021 named The American Rescue Plan Act (ARPA). This plan authorized new federal spending and a temporary yet dramatic increase in anti-poverty programs aimed to help millions of families still struggling amid the pandemic. This bill will affect many taxpayers in different ways. See how the new tax laws will affect you for this year, tax year 2020 and next year, tax year 2021.
$1400 Stimulus The American Rescue Plan authorizes a third round of $1,400 stimulus checks for each eligible person ($2,800 for couples), plus an additional $1,400 for each dependent (regardless of the dependent's age). However, as with the first and second round stimulus payments, the third-round stimulus checks will be reduced (or eliminated) for people with an income above a certain amount. Here are the income thresholds:
Single filers: The third stimulus check will start to be "phased-out" (i.e., reduced) if your adjusted gross income (AGI) is $75,000 and will completely be eliminated for AGI above $80,000
Head of Household Filers: Phase Out for AGI above $112.500 and eliminated for AGI above $120,000
For Married Filing Jointly Filers: Phase Out for AGI above $150,000 and eliminated for AGI above $160,000
The new bill earmarks $1,400 per dependent of any age, to be calculated into the checks of their parents or guardians. For the first time, 17-year-olds and adult dependents (anyone 18 or older) are also eligible for a payment as part of the new bill. This group includes around 13.5 million college students, older adults, seniors and children of all ages with certain disabilities. Non resident aliens do not qualify for the stimulus check. ***Eligible Americans who don't receive a third stimulus check, or don't receive the full amount, can claim the difference as a Recovery Rebate credit when they file their 2021 tax return next year.***
Unemployment Benefits Under the American Rescue Plan, the enhanced unemployment benefits are extended to September 6, 2021. That includes the $300-per-week of additional payments beyond the normal unemployment compensation allowed. There's also a new tax break for the unemployed. Thanks to the American Rescue Plan, the first $10,200 of unemployment benefits received in 2020 are exempt from tax for households with an adjusted gross income of $150,000 or less (although state taxes may still apply). If you already filed your taxes this year, and if you received unemployment income in 2020, CRM Tax Services can file an amendment for you. (See our Client Service Agreement for Amendment fee) However, IRS is still working on how to navigate these new tax laws in the middle of tax season. IRS strongly advises against filing an amendment right now until they issue guidance on the new laws to tax preparers and tax filers. We will keep our clients updated on IRS guidance and how to proceed once we receive notification. You can read the IRS statement here: https://www.irs.gov/newsroom/irs-statement-american-rescue-plan-act-ofwww.irs.gov/newsroom/irs-statement-american-rescue-plan-act-of-2021-2021
Child Tax Credit for Tax Year 2021 For the 2020 tax year, the returns that you're filing this year, the credit is worth $2,000 per child age 16 or younger. It also begins to disappear as income rises above $400,000 on joint returns and above $200,000 on single and head-of-household returns. For some lower-income taxpayers, the credit is partially "refundable" (up to $1,400 per qualifying child) if they have earned income of at least $2,500. That means the IRS will issue you a refund check for the refundable amount if the credit is worth more than your income tax liability. New for 2021 tax year (next year) The American Rescue Plan provides a dramatic, one-year expansion of the child tax credit for the 2021 tax year. One of the biggest changes is to the amount of the credit. For 2021, it jumps from $2,000 to $3,000 for children 6-17 years old and to $3,600 for children 6 years old and younger. The credit begins to phase out:
For single filers with adjusted gross income (AGI) above $75,000
For head-of-household filers with AGI above $112,500
For couples filing jointly with AGI above $150,000
The credit amount is further reduced under the pre-existing $200,000/$400,000 phase-out rules.
***The Child Tax Credit will be distributed differently for tax year 2021 (next year). It will be paid in monthly installments instead of one lump sum in your tax refund. For example if you have one child under 6 years old, you qualify for for the $3600 Tax Credit. You will receive $300 a month for 12 months to equal the $3600 refundable tax credit. If you have a dependent over 6 years old, you will receive $250 a month for 12 months to equal the $3000 tax credit. Child and Dependent Care Tax Credit Finding and affording childcare is one of the more difficult challenges workers are facing during the pandemic. To help address the childcare affordability crisis, the American Rescue Plan significantly expands the child and dependent care tax credit for one year. For the 2020 tax year, if your children were younger than 13, you were eligible for a 20% to 35% non-refundable credit for up to $3,000 in child-care expenses for one child or $6,000 for two or more. The percentage decreased as income exceeded $15,000. The American Rescue Plan makes a number of enhancements to the credit for the 2021 tax year. The new law makes the credit refundable for this year whereas it was not refundable in prior years. That helps lower-income people the most, since they are more likely to lose all or some of the credit's worth when it's non-refundable. It also bumps the maximum credit percentage up from 35% to 50% for 2021. More of your childcare expenses are subject to the credit, too. Instead of up to $3,000 in childcare expenses for one child and $6,000 for two or more, the American Rescue Plan allows the credit for up to $8,000 in expenses for one child and $16,000 for multiple children in 2021. When combined with the 50% maximum credit percentage, that puts the top credit for this tax year at $4,000 if you have just one child and $8,000 for more kids.
Earned Income Tax Credit (EITC) The earned income tax credit (EITC) is a refundable tax credit that provides an incentive for people to work. For 2021, many more workers without qualifying children will be able to claim this valuable credit, including both younger and older Americans. The "childless EITC" amounts will be higher, too. Plus, there are other changes that will help the bottom line for lower-income Americans as well. For the 2020 tax returns that people are filing now, the maximum EITC ranges from $538 to $6,660 depending on your income and how many children you have. But there are income limits for the credit. For example, if you have no children in 2020, your earned income and adjusted gross income (AGI) must each be less than $15,820 for singles and $21,710 for joint filers. For 2021 these limits will be raised. If you don't have a qualifying child, you must be between 25 and 64 years old at the end of the tax year to claim the EITC.
Student Loan Debt Student loan borrowers have their loans forgiven in 20 or 25 years depending on the repayment plans they are enrolled in. Prior to the the passing of the ARPA, student loans amounts that were forgiven were subject to taxation. For example, if $20,000 of your student loans were forgiven this tax year, you would have to claim that $20,000 as income on your tax return and pay taxes on that amount this year.
The American Rescue Plan adds a temporary exception to the general rule for student loans. Student loan borrowers who are on income based repayment plans (IBRs, PAYE, etc) and who are set to have their loan forgiven from 2020 through 2025 will not have to claim the forgiven student loan amount as income on their tax return. Therefore they will not be subjected to pay federal income taxes on the loan amount. (To be clear, the American Rescue Plan doesn't forgive any student loan debt. The tax exemption only applies to debt cancelled under current student loan forgiveness programs.)
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