It’s hard to believe that it hasn’t even been one full year since passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act was among the first of several major Acts designed to keep the economy moving and provide important funding to those who were thought to have needed it most.
At $1.9 trillion, the American Rescue Plan Act of 2021 (ARPA) is only slightly larger than the $1.8 trillion CARES Act. Where the CARES Act included some hugely significant relief — including Paycheck Protection Program (PPP) loans, the retail glitch fix, the elimination of the limitation on Excess Business Losses for three years, the easing of the limitation on the deduction of Excess Business Losses for three years, and the five-year carry back net operating loss deductions — under the ARPA, it is likely that fewer taxpayers will see additional relief of that size.
The ARPA provides funding for a host of government agencies to expand the nature and scope of the social safety net. In addition to providing for some COVID-19-related needs, the ARPA’s goals include reducing child poverty, feeding the hungry, sustaining public transit, allowing schools to confidently reopen, helping to repair state and local government finances, fixing income inequality, and even saving multi-employer (union) pension plans. The ARPA itself provides little insight as to specifics on how these dollars are to be spent in furtherance of these goals. Those decisions will be left to the government agencies that will receive the additional funding.
This article will focus primarily on the small handful of provisions affecting income and payroll tax-related changes, stimulus checks and unemployment benefits — most of which will have a modest, but important and possibly critical, impact to affected individuals.
The $1,400 per person recovery rebate
This is probably the single most-often discussed component of the ARPA — a stimulus payment of up to $1,400 per person. That’s $2,800 if you file a joint return, plus another $1,400 for each of your dependents.
The stimulus payment is not unlimited, though. Generally, if you are single, you are eligible for the entire credit if your adjusted gross income is no greater than $75,000, but the credit is fully phased out once your AGI hits $80,000. The phase-out range for couples filing a joint return is from $150,000 to $160,000. If filing as Head of Household, the phase-out is from $112,500 to $120,000.
For example, a single dad with three kids and AGI of $112,500 would be entitled to a stimulus payment of $5,600 (four at $1,400 each). Let’s see what would happen if he earned an additional $7,500. First, filing as head of household, the additional earnings eliminate the Recovery Rebate altogether, costing him $5,600. At that income level, he is in the 24% federal income tax bracket, costing him another $1,800. And, of course, there’s FICA and Medicare at 7.65% for another $574 tax hit. All told, the $7,500 of additional earnings would cost this taxpayer $7,974 even before considering the state income tax consequence.
Similar to last year, the IRS will calculate an initial recovery rebate based on your 2020 personal income tax return if it has been processed already (otherwise, it will use your 2019 return). The IRS is expected to begin sending these checks to taxpayers within a few weeks.
- If you are entitled to a recovery rebate amount based on your 2019 income but would be entitled to less based on 2020, you may want to delay filing your 2020 return.
- The IRS is required to process the first round of recovery rebate checks in a matter of days. There will be a second round of checks later this summer. If, based on your most recently filed return at that time, you are entitled to more, the excess should be sent to you at that time.
- Do not be overly concerned if you aren’t entitled to an advance rebate check based on your most recently filed return but would be based on your 2021 adjusted gross income — you can claim a credit for the “shortfall” on your 2021 income tax return.
- Please keep a record of the amount of recovery rebate received, as it needs to be reconciled with your 2021 return.
If your 2021 income increases and the formula produces less credit than what you receive in advance from the IRS, you do not need to repay the difference.
Due largely to the pandemic, unemployment was high last year. There may have been more Americans collecting unemployment in 2020 than ever before. Many are still hurting. Weekly unemployment benefits have already been enhanced to provide an additional $300 per week benefit through March 14. The ARPA extends the $300 per week additional stipend through September 6. It also further extends the period for which unemployment benefits may be received to 79 weeks (up from 50).
Additionally, the ARPA makes up to the first $10,200 of unemployment benefits not subject to federal income tax — but in an effort to get the tax savings into the pockets of affected taxpayers as soon as possible, this provision only applies to unemployment benefits received in 2020. Each spouse can get this benefit with respect to their own unemployment benefits whether filing jointly or separately. Note that the benefit is lost entirely with adjusted gross income of $150,000 or more.
- Are you one of the 50 million or so taxpayers who already filed your 2020 return? If so, and if you reported any unemployment compensation on that return, you can either file an amended (or superseded) return or forego the refund you are entitled to. There is no option to claim this benefit in 2021 instead, nor is there any direction for the IRS to make this change for you.
- Only taxpayers with AGI (including unemployment) of less than $150,000 are eligible to treat unemployment compensation as non-taxable. Unlike similar provisions in the tax law, the $150,000 threshold is the same for singles as it is for couples; it is not cut in half for married couples filing separately, and the threshold is a cliff. If your AGI was $149,999, then up to $10,200 of your unemployment is tax free. If your AGI was just $1 higher, then unemployment is fully taxable.
Child tax credit
Prior law provided for a partially refundable child tax credit of up to $2,000 per dependent child under age 17. Under the ARPA, the credit is now fully refundable and has been increased to $3,600 for each child under age six and $3,000 for children age six through and including age 17.
Making the child credit more interesting, the IRS has been instructed to develop a program to pay monthly cash advances to taxpayers of 1/12th of the annual estimated credit from July through December of this year.
The child credit begins to be phased out at modified gross income of $75,000 (single), $112,500 (head of household) and $150,000 (joint). At a 5% phase-out rate, you would lose 5 cents of the credit for every dollar of income in excess of those amounts.
- On your 2021 tax return, you will need to reconcile the advance payments received to the actual credit you are entitled to. If you received too much, then the excess is generally taxable.
- The IRS has been directed to set up an online portal allowing taxpayers to either opt out of the advance payments or to provide relevant information that would modify the amount of those payments.
Other familial credits
The eligibility qualifications for the Earned Income Tax Credit have been expanded, as has the maximum amount of the credit. For 2021, only the Dependent Care Assistance credit has been expanded in terms of eligibility and amount, and it is potentially refundable. The exclusion for employer-provided dependent care assistance has been increased to $10,500 for 2021.
- Since cafeteria plan benefits generally need to be elected before the beginning of the tax year, it’s unclear whether or not employees will be allowed to change their Dependent Care Assistance election under those plans.
- Affected plans will need to be amended in order to accommodate the increased benefit amount.
Student loan forgiveness
Despite a lot of talk about forgiving all or a portion of outstanding student loan balances, the Act contains no such provision. However, certain loans discharged in 2021 through 2025 are excluded from taxable income.
Extension of excess business loss limitation
The Tax Cuts and Jobs Act limited the amount of excess business losses a noncorporate taxpayer could deduct in any one year for 2018 through 2025. The CARES Act suspended that provision for 2018 through 2020. Rather than extending the suspension of this loss limitation, the ARPA keeps the suspension through calendar 2020 but extends the loss limitation for one year — so it now applies through 2026.
The Employee Retention Credit
The Employee Retention Credit (ERC) was originally due to expire December 31, 2020. The Consolidated Appropriations Act, 2021 extended the expiration date to June 30, 2021, and made the credit noticeably more beneficial to eligible employers. The ARPA extends the expiration date again, this time through December 31, 2021.
Some small start-up businesses were not eligible for the credit but now may be able to claim the ERC of up to $50,000 per quarter for the third and fourth quarters of 2021.
A new category of severely distressed employers (90% reduction in gross receipts quarter-over-quarter) can now include all wages paid to employees as qualified wages for purposes of calculating this credit, but it’s also limited to the third and fourth quarters of 2021.
The Small Business Administration (SBA) has been charged with administering a new, $28.6 billion Restaurant Revitalization Fund for 2021, $5 billion of which is specifically allocated to restaurants with 2019 gross receipts of less than $500,000 — and the first 21 days of the program will prioritize small businesses owned by women, veterans, and socially and economically disadvantaged individuals.
The fund will provide revitalization grants to qualified restaurants, limited to the lesser of the decline in gross receipts from 2019 to 2020 or $10 million, but no more than $5 million per location.
Additionally, the Act provides that to the extent the grant proceeds are used to cover payroll, mortgage, rent, utilities, maintenance, operational costs, paid sick leave and supplies, the grant proceeds will not be taxable and, importantly, the related expenditures will still be deductible.
COBRA continuation coverage
If you are eligible for and elect COBRA due to involuntary termination of employment or reduction of hours, then to the extent your coverage period includes any portion of April 1 through September 30, 2021, you may be eligible for subsidized coverage. The ARPA provides a subsidy of your COBRA premiums for whatever portion of the six-month period you are eligible for and have elected COBRA coverage.
Unlike other provisions of the ARPA, this subsidy is not means-tested. You can qualify regardless of your income level, but the subsidy will end when you become eligible to participate in a group health plan of a new employer (or if your hours are increased and you become eligible under your current employer’s plan).
- Due to the very short timeframe between passage of the ARPA and the subsidy period, there will be a slew of required paperwork between insurance companies, employers and eligible former employees.
- If you think you are eligible for the subsidy but do not get confirmation from the insurance company that your premium subsidy is effective, we encourage you to pay the premium on a timely basis in order to reduce risk of loss of your coverage.
- You are required to notify the group health plan if you cease to be eligible for the subsidy due to eligible coverage under another group plan or Medicare before the end of the subsidy period.Failure to notify the plan can result in penalties of $250 or more.
Questions about the American Rescue Plan Act?
Although one may have hoped that there would not be as many ambiguities in the ARPA as there have been in prior COVID-19 relief measures, many believe that significant future guidance from Treasury is going to be required.
If you need assistance with any of the provisions in the ARPA, contact Wipfli.
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