The big news of the past week is Congress passed the American Rescue Plan of 2021. This is the third stimulus plan since the Covid-19 pandemic began a year ago. This legislation authorizes $1.9 trillion in additional government spending to help households, state governments, educational institutions, and the broader economy. A lot was in this plan, and the dollar amounts and spending priorities were a bit controversial. Nevertheless, today’s article will skip any political commentary and simply try to shed some light on the provisions most likely to affect you.
The benefit that will put the most money in the most taxpayers’ pockets is a third round of “stimulus checks.” This time, Uncle Sam will be sending $1,400 per eligible individual. There was a lot of press regarding phasing out eligibility based on income much more quickly, but less press devoted to the fact that in other ways eligibility was expanded. Prior stimulus checks only covered adult taxpayers and their children, ages 16 and younger. The new stimulus checks will provide $1,400 for all dependents on your tax return regardless of age (e.g., college students, parents who are claimed as dependents).
Naturally, if you make too much money, you may not be eligible. or you may receive a reduced stimulus check. Those income phase-out ranges are:
- Single Filers and Married Filing Separate: $75,000 – $80,000
- Head of Household: $112,500 – $120,000
- Married Filing Joint: $150,000 – $160,000
Let’s look at an example. Suppose you are a married taxpayer with three dependents. You would receive $1,400 x 5 = $7,000 provided your adjusted gross income (AGI) were below $150,000. You would not receive any stimulus check if your AGI were above $160,000, or a partial stimulus if your income were between $150,000 – $160,000.
Note: The original stimulus benefits in the CARES Act in March 2020 phased out eligibility much slower. That benefit was reduced by $5 for every $1,000 that your income exceeded the threshold.
Which Year’s Tax Return Determines Eligibility and When Will I Get My Check?
The IRS will use your most recently filed tax return to determine your eligibility. For many taxpayers, that will be 2019. If you qualified based on your 2019 income, you will receive your stimulus and will not need to pay it back, even if you subsequently file your 2020 return and your 2020 AGI is above the threshold.
Suppose your 2019 income is too high (above the phase out), but you then file your 2020 return and your 2020 income qualifies you for a stimulus check or a larger check than you originally received. The American Rescue Plan introduces something called the Additional Payment Determination Date. This date is 90 days after the tax-filing deadline for 2020 returns. The tax filing deadline was extended to May 17th, so the Additional Payment Determination date is August 15, 2021. Taxpayers filing their 2020 tax returns prior to the Additional Payment Determination Date will have their Recovery Rebate amounts that were originally calculated based on 2019 AGI, recalculated based on the newly reported 2020 AGI. The IRS will send an additional stimulus “check” to the taxpayer after filing their 2020 return to make up any difference if the 2020 AGI qualified them for a larger stimulus than the 2019 AGI.
You might be wondering what happens if you file your 2020 return after the Additional Payment Determination Date (August 15th, 2021), since taxpayers have the right to extend their tax return deadline to as late as October 15th, 2021. The ramifications are you will forfeit the ability to use your 2020 tax return to qualify for a stimulus check.
Suppose you did not qualify based on your 2019 or 2020 tax return. You have one more chance. The last chance to qualify for an American Rescue Plan stimulus payment is based on your 2021 income, but, of course, you will be waiting for over a year before you file that tax return to receive any money.
Child Tax Credits
In addition to stimulus checks, the American Rescue Plan significantly expanded the Child Tax Credit for 2021, from $2,000 to $3,000 per child (and up to $3,600 for children under the age of 6). There are a fair number of additional details to be aware of, such as:
1) The enhanced Child Tax Credit is for 2021, and phase outs are based on 2021 income. The applicable thresholds are the same as they were for the stimulus checks.
- Joint Filers: $150,000
- Head of Household: $112,500
- All other filers: $75,000
However, the phase out works differently. The enhanced portion of the tax credit (from $2,000 to $3,000 for kids age 6 and over, and from $2,000 to $3,600 for children under 6) will be phased out by $50 for every $1,000 you are over the threshold.
2) 17-year-old children will qualify for the credit in 2021, whereas it was 16 and below for past years.
3) The original $2,000 base amount of the Child Tax Credit still phases out at higher thresholds of $200,000 and $400,000, as in prior years.
4) The regulation instructs the IRA to pay out 50% of the 2021 Child Tax (in advance) monthly over the last 6 months of 2021 (July – Dec). Eligibility will initially be determined based on the taxpayer’s most recently filed tax return (2019 or 2020). However, if actual 2021 income ends up being too high (e.g., you should have been fully or partially phased out), then any Child Tax Credit that had been paid out already will be clawed back when the 2021 return is filed. Ouch! (Note: There are some exceptions to the clawback rule, but they are complex and rarely apply, so will not be covered here).
5) The entire Child Tax Credit for 2021 is “refundable.” That means even if you did not owe or pay any taxes, you are entitled to the credit, and the government will pay it to you just like a tax refund.
Other Provisions of the American Rescue Plan
The American Rescue Plan was over 600 pages and contained lots of spending support for States, vaccination efforts, schools, and infrastructure. This article will not cover any of that. Nor will it cover some other provisions affecting individuals, such as:
- A significant increase in the Dependent and Child Care Credit
- New extensions on various Unemployment Compensation benefits
- Increases in the Premium Assistance Tax Credit for households buying health insurance from the state exchanges
- A new provision that provides a 100% tax credit to employers to offset the cost of COBRA coverage for 3 months for any employees who are laid off
Most of the new provisions under the American Rescue Plan are for 2021 only. However, some provisions could be made permanent, or additional tax legislation could be passed later this year (e.g., student loan forgiveness).
We will keep you posted!
Questions? Comments? Email me: Jeremy@svwealth.com
Disclosure: The information in this article is for educational purposes only and should not be construed as tax advice.