The American Rescue Plan Act (ARPA) went into effect in March 2021. This bill introduced a $1.9 trillion COVID-19 relief package designed to help boost the economy amidst the effects of the pandemic. Among other things, the act affects tax planning for individuals who are unemployed and for people who have children. It also authorized the sending of a third round of stimulus checks. Here’s what you need to know.
How ARPA Affects Those Who Received Unemployment Benefits in 2020
The general rule is that an individual’s gross income includes unemployment compensation (Code Sec. 85(a)). However, under ARPA, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer can exclude up to $10,200 for the 2020 tax year. The same $150,000 limit applies to single, married filed jointly, and head of household filing statuses. In the case of a joint return, the $10,200 exclusion applies separately to each spouse.
Details on the Third Round of Stimulus Payments
Under ARPA, an eligible individual is allowed a refundable income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus (2) $1,400 for each dependent of the taxpayer. It should be noted that children who are or can be claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. If you are a parent and you “could” claim your child as a dependent, then you would not be eligible for the credit.
Advanced 2021 Child Tax Credit (CTC)
For 2020, the child tax credit was $2,000 for parents with children 17 and younger. Under ARPA, the credit is now expanded to $3,600 per eligible child. Instead of waiting to file your 2021 tax return next year to claim this credit, the IRS will be advancing you half of the credit you would be eligible for potentially starting in July 2021. These payments will be paid out periodically through December 2021. The other half that doesn’t arrive in 2021 will be claimed when you file your 2021 tax return (in 2022).
Child Dependent Care Credit (CDCC) for 2021
Taxpayers who have qualifying individuals can qualify to receive a CDCC if the taxpayer paid for childcare so that the taxpayer can be gainfully employed. There are two main changes that ARPA made to the CDCC. The first was that the credit is now refundable for taxpayers who have a principle place of residence in the U.S. for more than one half of the tax year. The second main change is that the dollar limit on the amount taken into account is increased to $8,000 (from $3,000) if there is one qualifying individual with respect to the taxpayer, or $16,000 (from $6,000) if there are two or more qualifying individuals with respect to the taxpayer.
Conclusion
The ARPA that was signed not only affected individuals, but it will have implications on businesses, pensions, payroll and other aspects of life. When navigating any new tax law change, it’s important to consult with a competent tax advisor to see how these rules will affect you within your context.
For more information visit: https://www.accountingweb.com/tax/individuals/how-the-american-rescue-plan-affects-families