Impact to individual taxpayers under the American Rescue Plan Act
On 11 March 2021 President Biden signed into law the American Rescue Plan Act of 2021 (ARPA). The ARPA provides additional relief to individuals who continue to be impacted by the COVID-19 pandemic, and includes the following provisions related to individual taxpayers:
- Additional economic impact payment and recovery rebate credit
- Partial exclusion of unemployment compensation received in 2020
- Child tax credit expanded for 2021
- Child and dependent care credit enhanced and refundable
Economic impact payment and recovery rebate credit
Under previously enacted legislation, eligible individuals were granted a 2020 recovery rebate credit that was advanced to taxpayers based on their 2018 or 2019 income. The actual credit, however, is determined based on 2020 income. Two rounds of economic impact payments have already been disbursed to individual taxpayers.
The ARPA grants eligible individuals a third refundable tax credit of USD 1,400 for single filers and USD 2,800 for joint filers, plus USD 1,400 for each dependent of the taxpayer. The ARPA credit is for the 2021 tax year; however, the rebate amount is advanced based on 2019 income, or 2020 income, if the 2020 tax return has already been filed. The credit begins to phase out when the single filer’s adjusted gross income (AGI) exceeds USD 75,000 or when the joint filers AGI exceeds USD 150,000. The credit completely phases out when a single filer’s AGI exceeds USD 80,000 and when a joint filer’s AGI exceeds USD 160,000.
An eligible individual for the third economic impact payment does not include a nonresident alien or an individual who may be claimed as a dependent on another taxpayer’s return.
For the 2020 tax year, a taxpayer may exclude up to USD 10,200 of unemployment compensation from gross income if the taxpayer’s modified adjusted gross income (MAGI) is less than USD 150,000. The income limit applies to all filing types and there is no phaseout. For joint filers, the income exclusion applies separately to each filer. Taxpayers filing a Form 1040-NR are not allowed to exclude unemployment compensation for their spouse. This exclusion applies only to the taxpayer’s Federal income tax filing. State taxation of unemployment compensation varies State by State and should be reviewed for each applicable State.
Note: Since the ARPA was signed into law on 11 March 2021 some taxpayers may have already filed their 2020 Federal income tax return and included the unemployment compensation that was paid to them during 2020. The Internal Revenue Service (IRS) has advised taxpayers who have already filed their 2020 return to not amend their return. The IRS will issue additional guidance regarding this issue. For individuals who haven’t filed yet the IRS is providing a worksheet for paper filers and is working with the software industry to update current tax software to account for this change.
Child tax credit
Under the ARPA, the child tax credit amounts and eligibility requirements for the 2021 tax year have been expanded. The credit is increased from USD 2,000 to USD 3,000 per qualifying child (USD 3,600 for children under six years of age). The definition of a qualifying child has been expanded to include a dependent child who has not reached age 18 by the end of 2021. For a taxpayer who has a principal place of abode in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year, the credit is fully refundable.
The additional USD 1,000 credit amount per qualifying child (USD 1,600 per qualifying child under six years of age) begins to phase out when a single filer’s MAGI exceeds USD 75,000 (USD 150,000 for joint filers).
After application of the phase out rules for the temporarily increased credit amount, the remaining USD 2,000 of credit is subject to the phase out rules under existing law(USD 200,000 for single filers and USD 400,000 for joint filers).
Child and dependent care credit
The child and dependent care credit has also been expanded for the 2021 tax year. For taxpayers with one qualifying individual, the maximum credit is increased from USD 1,050 to USD 4,000. Taxpayers with two or more qualifying individuals have a maximum credit of USD 8,000 (increased from USD 2,100).
The credit begins to phase out when the taxpayer’s AGI exceeds USD 125,000 and the credit is refundable for taxpayers who have a principal place of abode in the U.S. for more than one-half of the tax year.