ARP is largely aligned with the framework put forth by President Biden prior to his inauguration.
On March 6, 2021, the Senate voted along party lines to approve the American Rescue Plan Act of 2021. The House approved the Senate version on March 10. At the speed of light, President Biden signed the bill into law on March 11. Celebration signing is scheduled for March 12, with a prime-time televised address scheduled for March 11 to inform voters of some of the benefits to be delivered to them as a result of the American Rescue Plan.
The $1.9 trillion American Rescue Plan Act of 2021 (ARP) represents the largest direct-to-consumer stimulus legislation ever, and just in time to rescue Americans whose unemployment benefits are close to expiration. Many other relief provisions were also set to expire after their extension by the Consolidated Appropriations Act in late December 2020, which we wrote about in this Alert, and ARP will now further extend.
ARP is largely aligned with the framework put forth by President Biden prior to his inauguration. It includes extensions of enhanced unemployment relief, increased funding for COVID-19 testing and vaccination programs, aid to state and local governments and school assistance to help get students back into classrooms.
ARP also includes many tax provisions, including a third round of direct stimulus payments, enhancements of many personal tax credits, extensions of the payroll tax credits for employers first instituted at the beginning of the pandemic and changes related to retirement plan funding. In this Alert, we focus on some of the most impactful tax provisions.
Individual Tax Relief
Recovery Rebates, aka Stimulus Payment (Payments of $1,400 will be made for taxpayers, children and nonchild dependents with adjusted gross income for individuals and joint filers less than $75,000 and $150,000, respectively.)
ARP includes a third round of direct stimulus payments for taxpayers, similar to the Coronavirus Aid, Relief and Economic Security (CARES) Act of March 2020, discussed in a prior Alert, and the Consolidated Appropriations Act.
ARP provides a $1,400 ($2,800 for married filing joint taxpayers) stimulus payment. They are essentially advance payments of recovery rebate credits against 2021 taxes, but fully refundable and payable in advance, as were the prior payments. Also like previous stimulus payments, this third round is subject to income limitations. Under the final version of the bill, the amount of the payment phases out ratably for single filers with adjusted gross income over $75,000 ($112,500 for heads of households and $150,000 for joint filers). The stimulus payment completely phases out for single filers with $80,000 of adjusted gross income ($120,000 for heads of households and $160,000 for joint filers). Unlike prior cash payments, the additional amount is allowed for any dependent and not only for children under the age of 17.
Adjusted gross income amounts for the 2020 tax year are used in applying the phaseout, but for taxpayers who have not filed their 2020 tax returns, 2019 amounts will be used instead.
TAG Tip: If your 2020 adjusted gross income is expected to be less than 2019, it may be beneficial to file your 2020 tax returns now.
As with the last two stimulus payments, amounts taxpayers would have been entitled to but did not receive will be creditable when preparing 2021 tax returns in 2022. Also, amounts received based on 2019 or 2020 returns that would have been lower when 2021 returns are prepared do not have to be repaid.
The $1,400 is available for taxpayers, children and nonchild dependents with an associated Social Security number. The Treasury and IRS are granted authority to provide payments to nonfilers based on available information.
Child Tax Credit (ARP increases the amount from $2,000 to $3,000 per child ($3,600 for under age 6), increases the age of qualifying children to age 17 and for 2021 only, and makes the child tax credit fully refundable for 2021.)
ARP includes an expansion of the child tax credit for the 2021 tax year. Under prior law, the amount of the child tax credit was equal to $2,000 per child, but only $1,000 of that amount is refundable. The excess of the credit amount over the prior law’s $2,000 was phased out by $50 for every $1,000 of modified adjusted gross income in excess of the threshold amount ($150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single filers). Once the excess amount was eliminated, the credit remained at $2,000 until the prior law’s phaseout thresholds were reached ($400,000 for joint filers, $200,000 for all other filers).
The Treasury and IRS are directed to issue advance payments of half the credit amount beginning July 1, 2021. The advance payments are to be issued monthly, if feasible, or as frequently as possible if not feasible. The remaining half of the credit will be received when filing 2021 returns, as the full amount is claimed on the return but reduced by the aggregate amount received in advance.
In the case of a taxpayer who received advance payments in error (for example, where a 2019 or 2020 return indicated a dependent child who is no longer a dependent in 2021), ARP provides a "hold-harmless" provision, protecting taxpayers from paying back overpayments of up to $2,000 per child. The full $2,000 amount is ratably reduced for taxpayers with income above threshold amounts ($40,000 for single filers, $50,000 for head of household filers and $60,000 for joint filers). The $2,000 is completely eliminated for taxpayers with income double the applicable threshold amounts, and the entire overpayment will be required to be paid back.
Child and Dependent Care Assistance (The child and dependent care tax credit is increased for 2021 to $4,000 for one child or $8,000 for two or more.)
The child and dependent care credit amount is significantly enhanced (including making the credit fully refundable) for 2021 only. Under prior law, the amount was equal to 35 percent of qualified expenses for care of one qualifying individual up to $3,000 or $6,000 for two or more qualifying individuals. However, the credit percentage was reduced by one percentage point for every $2,000 of adjusted gross income in excess of $15,000, capping out at 20 percent.
ARP increases the credit to 50 percent of qualified expenses and reduces the credit percentage by one point for each $2,000 of adjusted gross income over $125,000. Then, the credit percentage is not further reduced below 20 percent until adjusted gross income reaches $400,000, at which point the percentage reduction continues until reaching zero. Additionally, the amount of expenses qualifying for the credit are increased to $8,000 for one individual and $16,000 for two or more individuals. As a result, for taxpayers with adjusted gross income of $125,000 or less, the maximum credit amount is $4,000 ($8,000 times 50 percent) for taxpayers with one qualifying individual and $8,000 ($16,000 times 50 percent) for taxpayers with two or more qualifying individuals.
In addition to the changes to the credit, the maximum exclusion of employer-provided dependent care assistance is also increased for 2021 to $10,500, or $5,250 in the case of a married taxpayer filing separately. These amounts are roughly double the maximum exclusion under current law.
TAG Tip: A new population of taxpayers may be eligible for this credit in 2021 as the increase in the phaseout level from $15,000 to $125,000 will entitle those earning up to $125,000 to the entire credit.
Unemployment Relief (The $300 supplemental unemployment benefits continue through September 6, 2021, and makes the first $10,200 in unemployment benefits tax-free for 2020 for households making less than $150,000 per year.)
ARP also includes an extension of the enhanced $300 weekly unemployment relief, first made available in the early pandemic relief bills. The extension, originally set to expire in March, will run through early September under the bill, but with some changes―most notably the first $10,200 of unemployment benefits being tax-free for households with up to $150,000 of income. Interestingly, ARP does not provide a different threshold for single and joint filers and both spouses are entitled to consider $10,200 of their unemployment compensation nontaxable, for a total of $20,400 if both spouses receive such benefits.
TAG Tip: Before you file for tax year 2020, apply this tax-free relief. If you already filed, it is unclear presently if the IRS will automatically adjust 2020 tax returns to apply this relief. If the IRS does not, file an amended federal 2020 tax return to secure a tax refund.
Exclusion of Forgiven Student Loans (ARP does not provide for student loan forgiveness. However, ARP does classify as tax-free discharged student loan between December 30, 2020, and January 1, 2026.)
ARP includes an enhanced exclusion of forgiven student loan amounts applicable to loans discharged after December 31, 2020, and before January 1, 2026. Under prior law, forgiven student loans were only excludable given certain conditions (such as the death or disability of the borrower). However, this expansion allows for the exclusion to apply to any discharge of federal student loans for any reason during the period. The exclusion does not apply to loans discharged by private lenders.
Employer Tax Relief
Paid Sick and Family Leave Credits
One of the first relief measures provided by Congress at the onset of the pandemic (through the Families First Coronavirus Response Act) was the payroll tax credit for employers providing paid sick and family leave, as well as a similar credit for self-employed workers. ARP extends the period when the credit can be claimed to September 30, 2021. The bill also increases the limit on applicable wages for which the credit for paid family leave can be claimed to $12,000 from $10,000, effective after March 31, 2021.
Eligible leave for the credit is also expanded to include time off to receive a COVID-19 vaccine or to recover from a vaccine-related illness or injury. ARP also makes the credit applicable to the Medicare tax, and not just the old-age, survivors and disability insurance (OASDI) taxes, effective March 31, 2021.
For self-employed persons looking to claim the credit, the number of days the credit can be claimed for increases from 50 to 60 days under the bill, retroactively effective after December 31, 2020.
Employee Retention Tax Credit
Another highly popular provision of the original COVID-19 relief legislation is the payroll credit for employee retention. The credit was extended through June 30, 2021, by the Consolidated Appropriations Act, 2021. ARP extends the credit through the end of 2021, and like the paid sick and family leave credit, makes it available to apply to Medicare taxes in addition to OASDI taxes after June 30, 2021.
Retirement Plan Funding
ARP includes several changes meant to help employers meet funding obligations for pension plans. For multiemployer plans, ARP provides delays in applying changes to funding plans or schedules, and also delays designation as a plan in critical or endangered status in 2020 or 2021. ARP provides a longer investment loss amortization period for multiemployer plans, effective for plan years ending on or after February 29, 2020.
For single-employer plans, ARP provides a longer period for amortizing funding shortfalls, effective for plan years beginning after December 31, 2019, from seven years to 15 years. ARP also provides for an extension of funding stabilization measures for single employer plans, also effective for plan years beginning after December 31, 2019.
Even more significantly, ARP provides a freeze beginning in 2030 to the inflation-adjusted increases to the annual contribution limit to defined contribution plans, the annual defined benefit limit and the maximum limit on compensation that may be taken into account when determining the limit on contributions and benefits of an employee. For 2021, these amounts are $58,000, $230,000 and $290,000, respectively. The annual inflation adjustments would continue normally until 2030.
COBRA Coverage Assistance
ARP includes premium assistance for COBRA continuation coverage through September 30, 2021. The bill calls for a 100 percent reduction of COBRA premiums for eligible individuals. The assistance is provided by reimbursing employers for unreceived premiums through a credit against Medicare payroll taxes (not OASDI taxes).
Continuation coverage premium assistance is excludable from income. It also includes a penalty for employers failing to provide adequate notice to former employees whose COBRA continuation period has lapsed.
Premium Tax Credits
ARP makes changes to the premium tax credit. For 2021 and 2022, it modifies affordability percentages used in calculating the premium tax credit to make credits available for individuals with incomes below 400 percent of the federal poverty line and increases credit amounts for those already qualified. For 2021, ARP makes advance premium tax credits available for individuals receiving unemployment compensation in 2021. The bill also eliminates the 2020 recapture provisions for taxpayers receiving excess premium tax credits.
Deductible Compensation for Highly Paid Employees
For years following 2026, a corporation’s five highest paid employees will be subject to a cap of $1 million for purposes of deductible compensation.
Tax Treatment of COVID-19 Relief
ARP provides that Targeted Economic Injury Disaster Loans and Restaurant Revitalization Grants received from the Small Business Administration will not be subject to tax, and the exclusion will not result in the denial of a deduction, reduction of tax attributes or denial of basis increase.
Restaurant Relief (which can also be used alongside the Paycheck Protection Program, Economic Injury Disaster Loans and the Employee Retention Tax Credit)
ARP includes the Restaurant Revitalization Fund, which will provide $28.6 billion in debt-free, grant program relief for small and mid-sized restaurants and will operate as a Small Business Association grant program. “Restaurants” are broadly defined and includes caterers, brewpubs, taprooms and tasting rooms. The program provides for up to $5 million per individual restaurant or $10 million per restaurant group. $5 billion of the $25 billion total is reserved for restaurants with less than $500,000 in gross receipts in 2019.
The grant funds can be used to offset expenses from February 15, 2020, through the end of 2021, including payroll, benefits, rent, utilities, cleaning, equipment, food and other costs.
The American Relief Plan further complicates the 2020 tax filing season and will certainly complicate 2021 tax planning. And while President Biden just signed the new legislation on March 11, we would not be surprised if a second reconciliation bill is introduced later this year, which could include proposed tax increases for both corporations and high-net-worth taxpayers, along with other potential revenue raising items. So stay tuned, stay flexible and stay in touch with us.
For More Information
If you would like more information about this topic or your own unique situation, please contact any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.