Last Thursday, President Biden signed into law the American Rescue Plan. Many have received $1,400 for themselves, a spouse, and any dependent claimed on the latest tax return. If IRS has not yet processed your 2020 tax return, the payment is based on the 2019 dependents claimed and adjusted gross income. If your 2020 tax return has been processed, the payment is based on that. For the first time, you will receive payment for your dependent college students.
If you added dependents in 2020 or 2021 and received a stimulus payment without an amount for that dependent, you are eligible to receive a payment for that dependent. We are not sure if you will need to wait until your file your 2021 tax return to get that amount or if IRS will “catch up” sometime later this year. Based on what they did for the first stimulus payments, you may have to wait until you file your 2021 tax return. IRS has yet to announce how this is going to be handled.
Many other provisions are part of the American Rescue Plan:
Child Tax Credit:In 2020 and prior years, you received a child tax credit for any child under 17 of $2,000 as part of your federal tax return. For those with children under the age of 6, that credit has been increased to $3,600 for 2021. For children between the ages of 6 and 17, the credit has increased from $2,000 to $3,000. The age of 17 has been added to this credit. Currently, this increase is only for one year and not later years.
Also new, you will now be able to receive part of this credit in advance. The intention is that you will be able to receive up to ½ of the eligible credit as an advance payment. IRS is in the process of determining how those monthly payments will be issued. An individual can also opt-out of the advance payments and wait until filing the 2021 tax return to receive the total amount.
The income limits to claim the child tax credit remain in place. If you receive advance payments and are ineligible to claim that child as a dependent, you will have to pay these dollars back. This situation can arise with divorced parents who alternate claiming dependents. You may want to turn down the advance payments if you are in this situation. There are income limits to those that would have to pay back advance payments even if they cannot claim the dependency exemption.
IRS is still working on setting this system up, and we do not know when these monthly payments will start. They are developing an online portal that will allow you to opt-out of the advance payments and update marital status and dependent changes. We anticipate this will be available soon, but there is no further information available at this time.
Child Care Credit: The American Rescue Plan also increased the child-care credit to $4,000 per child. In past years, this credit has been up to $2,100. Income eligibility has also increased, allowing for more individuals to qualify for the larger credit amount.
The American Rescue Plan increases the amount an individual can contribute to a dependent care flexible spending account from $5,000 to $10,000. An employer must opt into allowing this option before you can make these adjustments.
Earned Income Credit (EIC): The EIC was increased for childless individuals. Individuals are now eligible at age 19 for the credit if they are not full-time college students; previously, it was age 25. The upper age limit of age 65 has also been eliminated, making those of any age are now eligible to claim the EIC. To qualify for this credit, you must have earned income, wages, or self-employment income within the income limits.
Married filing separate individuals with qualifying children not eligible to claim head of household are eligible to receive the EIC if they did not live with a spouse for the last six months of the year. This is a permanent change.
EIC eligibility remains for those with investment income up to $10,000. Previously the limit was $3,650. This is a permanent change and will be indexed for inflation. The last change related to EIC is being able to use your 2019 income both in 2020 and 2021 to determine the income eligible for the EIC.
Unemployment Benefits: For those eligible to receive unemployment benefits, the increased benefit amount of $300 remains in place until September 6, 2021. For self-employed individuals who also have some employer wages, the increased benefit amount of $100 remains in place. To be eligible to receive unemployment benefits, your employer cannot be allowing you to return to work because they remain closed or are not returning to a full workforce.
If you cannot return to work because of children being home or other Covid related issues, but your employer has work for you, technically, you are not eligible for unemployment. The employer is required to report that they have work for you, and you will no longer be eligible for unemployment. You would be eligible for the paid family leave act and to receive partial payment through this benefit.
The American Rescue Plan also made the first $10,200 of unemployment benefits received during 2020 tax-free for federal income tax purposes. We are waiting to see which states will follow and allow the exclusion and which states will continue to have this be taxable income.
If you have already filed your 2020 claiming your unemployment benefits as income, IRS has requested that you not file an amended return yet. They are working on a process that might automatically adjust and refund the amount of tax paid. We also suggest that you do not do anything until New York, Pennsylvania, or the state you live in makes its own determination.
This exclusion is currently only for the 2020 tax return.
Health Insurance Changes: Included in the Rescue Plan are two provisions for health insurance.
For those currently paying COBRA premiums because of being laid off, the government will pick up the entire cost of the premiums between April 1 and September 30. If a person becomes eligible for other insurance, they must accept that insurance, and the government will no longer pay the COBRA premium. If you voluntarily left your job, you are not eligible for your COBRA premium to be paid. An employer must have laid you off to be eligible.
There will be lower premiums for those receiving health care through the Market Place or a federal exchange. The maximum premium will be 8.5% of your modified adjusted gross income. If you have not signed up through an exchange yet for insurance, open enrollment is in place until May 15. This income limitation remains in effect until the end of 2022.
Housing Provisions: For those having difficulty paying their rent or mortgage payments, there is rental and mortgage payment assistance available. There are funds allocated to convert motels and other properties to shelters for the homeless.
Student Loan Debt: There is no forgiveness of debt within this bill. If you have your loan forgiven for other reasons, you will not be required to pay taxes on the amount forgiven for any amounts forgiven between January 1, 2021, and December 31, 2025. There is still discussion about President Biden forgiving $10,000 of student loan debt for individuals. It has not yet passed and become law.
The $1.9 trillion-dollar American Rescue Plan also includes funds for infrastructure projects, art organizations, and environmental causes. There are also funds set aside for schools to help get children back to in-person learning and support hospitals and other health care organizations. Municipalities will get some funding, and there is funding to help with vaccine distributions. The details regarding how the funds will be distributed and what conditions will be placed on receiving funds are just starting to be filtered out to the public.
Many individuals are going to see significant dollars coming into their pockets. Some need these funds because they are in survival mode since they are not working or have reduced income. For others, their income has not changed throughout the pandemic. If you fall into this group, use this windfall to improve your future life. Pay down debt to free up future income. Invest in your future by funding a retirement account or a college fund for a growing child. Consider doing Roth conversions and getting taxes paid today to have tax-free income in the future. Help your future by making necessary home improvements or taking classes to improve or learn new skills.
We can understand that this government spending is necessary to get us through the pandemic. We are also concerned about how the increased debt is going to impact future taxes. We must start preparing ourselves for what I believe is going to be a significant tax increase.
