The American Rescue Plan Act (ARPA) was signed into law on March 11, 2021. The new law will provide roughly $1.9 trillion in much-needed financial relief to individuals, businesses, not-for-profit organizations, and state and local governments during the pandemic. Here are some of the key ARPA provisions that will affect federal income taxes for some people in 2020 and 2021.
Key Changes for Individuals
The new law includes the following tax and financial provisions for individuals and families:
Additional EIPs. A third round of economic impact payments (EIPs) will provide $1,400 for eligible individuals ($2,800 for married couples) and $1,400 for each qualifying dependent. For this round of EIPs, qualifying dependents may include individuals over 16. However, the income caps for receiving these payments has been significantly reduced from the caps that applied to prior EIP payments. These payments generally will be based on your 2019 tax return, unless you've already filed your 2020 return.
Expanded and partially exempt unemployment benefits. Federal unemployment benefits of $300 per week have been extended through September 6, 2021. In addition, taxpayers who report less than $150,000 of adjusted gross income (AGI) may exclude up to $10,200 of unemployment benefits from gross income for tax years beginning in 2020. Married couples with AGI of less than $150,000 may exclude up to $20,400 of unemployment benefits if both spouses received these benefits in 2020.
Expanded and increased Child Tax Credit (CTC). This credit has been expanded for 2021 to include qualifying children under age 18, and for eligible taxpayers, the amount has been increased from $2,000 to $3,000 per qualifying child ($3,600 for children under age 6 at year end).
The increased CTC is subject to lower phaseout thresholds than the original $2,000 credit per qualifying child, however. So, for 2021, the credit is subject to two sets of phaseout rules. To be eligible for the full payment, you must have a modified AGI of under $75,000 for singles, $112,500 for heads-of-households and $150,000 for joint filers and surviving spouses. The credit phases out at a rate of $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold.
Under the new law, eligible taxpayers will receive advance payments of the child tax credit for the year, rather than waiting until next year's tax season to start benefiting from the credit. The IRS has been directed to create a program to make monthly payments (generally by direct deposits) equal to 50% of eligible taxpayers' 2021 CTCs, from July through December 2021.
If you aren't eligible to claim an increased CTC for 2021, because your income is too high, you may be able to claim the regular CTC of up to $2,000, subject to the existing phaseout rules.
Expanded EITC. The earned income tax credit (EITC) has been increased for certain people without children for 2021. The new law also eliminates the age cap for older workers and raises the income threshold for this credit.
Enhanced child and dependent care credit. For 2021, this credit will be refundable, and the amount will increase for eligible taxpayers. For taxpayers with AGI of $125,000 or less, the maximum amount of the credit for 2021 is $4,000 for one qualifying child or dependent ($8,000 for two or more qualifying children and dependents). The credit is phased out at higher income levels.
Exclusion for student loan forgiveness. Partial and full discharges of certain student loans given after December 31, 2020, but before January 1, 2026, may be exempt from federal income tax.
Key Changes for Businesses
The new law includes the following tax-related provisions for businesses and self-employed individuals:
Expanded Employee Retention Tax Credit. This credit has been extended through the end of 2021 (before the law, it had been scheduled to end on June 30). It's also been expanded to apply to recovery startup businesses that launched after February 15, 2020, and have average annual gross receipts under $1 million.
Increased exclusion for employer-provided dependent care assistance. The exclusion for assistance provided under a qualified dependent care assistance program has been increased to $10,500 ($5,250 for married people who filed separate returns) for 2021.
Exclusion for EIDL advances. Eligible small businesses that receive targeted Economic Injury Disaster Loan (EIDL) advances may exclude the amounts received from gross income for federal tax purposes. Because these advances are treated as tax-exempt income, they will be allocated to partners or shareholders and increase their bases in their ownership interests.
Exclusion for restaurant revitalization grants. Businesses that provide food or drinks — such as restaurants, food trucks and bars — may receive restaurant revitalization grants from the U.S. Small Business Administration. These grants are excluded from gross income for federal tax purposes. Because these amounts are treated as tax-exempt income, they will be allocated to partners or shareholders and increase their bases in their ownership interests.
Expanded limit on compensation for public companies. A public company's compensation deduction is limited to $1 million per year for compensation paid to any covered employee. Under the new law, for tax years that begin after December 31, 2026, the definition of "covered employee" only includes the corporation's principal executive officer, principal financial officer, the eight other highest-paid employees. (Previously, the definition included only the three other highest-paid employees.)
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 ARPA pushes back the expiration date by one year to the end of 2026.
The COVID-19 pandemic has affected every household and business in some way. This article only covers some of the provisions in the 628-page new law. If you or your business have suffered financial losses, contact your HK tax advisor at 330-453-7633 to discuss resources under the ARPA that may be available to help you with recovery.