On March 11, 2021 President Biden signed into law The American Rescue Plan Act of 2021. It provides a third rounds of stimulus payments and other tax advantages to eligible individuals and families. Let’s discuss some of the highlights that will affect significant numbers of people.
The first benefit is another stimulus check for up to $1,400 per eligible individual. Eligibility has been expanded to include all dependents in the household. Previously, only children under the age of 17 were eligible. Now college-age children and parents who are claimed as dependents will be eligible. The phaseout of these payments is much faster than for previous rounds of stimulus payments. The phaseout begins for individuals at $75,000 of Adjusted Gross Income (AGI) and for married couples at $150,000. The payments will be fully phased out for individuals at $80,000 and $160,000 for married couples.
For practical purposes, these phase-out and dependent eligibility will be based on one’s 2019 income tax returns. If one doesn’t qualify based on 2019 income amounts, the payment may still be available as a tax credit on one’s 2021 income tax return as the stimulus payment is in actuality an advance payment of a 2021 tax credit.
A second benefit is the treatment of unemployment compensation as taxable income. For taxpayers with AGI of less than $150,000, the first $10,200 of unemployment compensation will be tax-free. If married filing jointly, both spouses can exclude the first $10,200 of their unemployment compensation. The $150,000 income limit applies to all tax filers and there is no phaseout. The $150,000 phase out threshold includes unemployment compensation paid.
For taxpayers who have already filed their 2020 income tax returns, there is no need to file an amended return. The IRS will recalculate your taxes with the exclusion and will send you a refund check.
Maryland usually taxes unemployment benefits. However, unemployment compensation received in 2020 and 2021 is not taxed by the state for single filers with federal AGI of $75,000 or less or $100,000 or less for married filing jointly filers.
A third benefit is the enhancement to the Child and Dependent Care Tax Credit for 2021. Prior to 2021, the dependent care credit was calculated using a maximum of $3,000 of expenses for one qualifying child and $6,000 when the taxpayer has two or more qualifying children. Those expenses limits have been raised to $8,000 and $16,000 respectively. The maximum applicable percentage has been increased from 35% to 50% and also the phaseout thresholds have been raised.
A final benefit is the increase in the Child Tax Credit from $2,000 to $3,000 ($3,600 for children under six).
While these provisions will benefit most lower income families and individuals, they will also benefit higher-earning families whose incomes were reduced in 2020 or 2021 due to Covid-based events. With phaseouts affecting families with incomes in the mid-$100,000s, proper planning is encouraged in order to take advantage of these benefits.
James J. Denora, CPA, CFP®