The American Rescue Plan (ARPA) was signed by President Biden on March 11, 2021, making it the fourth Act signed into effect since the pandemic began a little over a year ago. While the Acts have been beneficial to the majority of taxpayers, the ever-changing legislation has made it hard for people to follow how it all affects them individually. The ARPA extends and expands on the provisions found in the Families First Coronavirus Relief Act (FFCRA), the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the Consolidated Appropriations Act (CAA).
Fun stuff, right? We thought so too! So let’s take a deeper look at some of the major changes.
Third Stimulus Payment
The American Rescue Plan Act (ARPA) provided for a third round of stimulus, $1,400 per qualifying individual. Unlike the first and second rounds, qualifying dependents are eligible for the third round; like the first and second rounds, however, this stimulus payment is not taxable. The stimulus is actually an advance of the Recovery Rebate Credit, and this third round is based on your 2020 tax return; if your 2020 return wasn’t filed and processed before the IRS started sending out the third round of checks, the IRS will use your 2019 return to determine eligibility and calculate your payment.
Provided you haven’t filed your 2020 tax return and your 2019 adjusted gross income (AGI) was higher than your 2020 AGI, don’t panic! If you file and process your 2020 return after the IRS processes the stimulus payments but before August 16, 2021, the IRS will send you a second payment for the difference between any payment you received and what it should have been based on your 2020 return. If you file after that date, you can still claim the credit on your 2021 tax return.
Had or expecting a new bundle of joy in 2021? Congrats! And still no reason to panic…you can claim the Recovery Rebate Credit on your newest addition when you file your 2021 tax return.
Unemployment Compensation
It’s no secret that this past year has been hard in many ways for individuals and their families. Individuals that had never filed for unemployment benefits found themselves furloughed or laid off with no clue what the future would hold. Previous coronavirus-related acts provided an additional $600 per week benefit on top of the normal state benefits and even gave eligibility to those traditionally ineligible to receive unemployment benefits; the American Rescue Plan Act (ARPA) extended this benefit through September 6, 2021.
In addition to the extended Pandemic Unemployment Assistance (PUA) the ARPA provided that the first $10,200 of unemployment compensation per an individual would not be taxable, if your AGI is less than $150,000. If you are over the limit, none of the unemployment compensation is excluded from taxable income. If you are married filing jointly each spouse is eligible to exclude $10,200 of unemployment if you meet the eligibility requirements jointly.
Temporary Expansion of Child Tax Credit
There were significant enhancements made to the child tax credit (CTC) by the ARPA. Under current legislation the CTC was $2,000 per a qualifying child and was phased out if your AGI was over $200,000 ($400,000 if married filing jointly). A qualifying child was defined as an under age-17 child whom you could claim as a dependent, major bummer to parents with a senior in high-school in most cases.
The American Rescue Plan Act (APRA) temporarily expanded the CTC for 2021 to broaden the definition of a qualifying child to include 17 year-olds and to increase the CTC to $3,000 per qualifying child ($3,600 for children under age 6), both subject to their own set of phase-out rules. If you aren’t eligible to claim an increased CTC in 2021, you can still claim the regular $2,000 credit, subject to the existing phase-out rules. The CTC is also fully refundable in 2021.
These changes not only make the CTC more valuable but also make it more available to taxpayers with qualifying dependents in 2020.
Payroll Provisions of the ARPA
There were several changes to payroll credits that are important for business owners and self-employed individuals to understand. The below credits were all extended and/or expanded on in the ARPA:
- Paid Sick and Family Leave Credits
- Employee Retention Credit
- Unemployment Provisions
- Paycheck Protection Program Modifications
- Earned Income Credit
- Benefits Related Provisions
Obviously all of these credits don’t apply to all business owners and/or self-employed individuals, but it’s important to understand which ones do and how you can benefit from the expanded provisions of the ARPA.
Dazed and confused?
All of these legislative changes have been enacted with the common goal of helping small businesses and individual taxpayers survive the unprecedented effects of a global pandemic, but that doesn’t make it easy to understand. Our team works diligently to stay up-to-date on legislative changes and how those changes affect our clients. We provide in-depth planning and consulting services to help you proactively understand and mange your individual situation. If you have any questions on how these changes might affect you or your employees, or are in need of a Knoxville CPA firm for any other reason, please feel free to contact us directly.
