Signed into law on March 11, 2021, the American Rescue Plan Act (ARPA) provides $1.9 trillion of economic relief with many provisions targeted towards the pandemic such as: direct stimulus payments of $1,400, increasing the child and dependent care credit, and extends the employee retention credit through 2021. Below is a brief summary of key provisions.
ADDITIONAL ECONOMIC IMPACT PAYMENTS
Under ARPA, eligible taxpayers are provided an additional refundable tax credit. This credit is $1,400 per taxpayer ($2,800 for married taxpayers filing jointly). It also includes an additional $1,400 per qualifying dependent, including college students.
The credit is phased out starting at $75,000 of adjusted gross income and completely phases out at $80,000. The range for married filing jointly is $150,000 and ends at $160,000. For heads of household, the range is $112,500 to $120,000.
CHILD TAX CREDIT
The American Rescue Plan Act extends the credit for 2021 and makes 17-year-olds eligible as qualifying children. The fully refundable credit has increased to $3,000 per child ($3,600 under the age of 6). The child tax credit amount phases out for taxpayers with an adjusted gross income over $150,000 for married taxpayers filing jointly ($112,500 for heads of households and $75,000 for others) and reduces the credit by $50 for each $1,000 over AGI limits.
EMPLOYEE RETENTION CREDIT
Introduced under the original CARES Act and updated in the Consolidated Appropriations Act, the refundable tax credit allowed an employer to claim a tax credit of 70% of wages paid to an eligible employee. It also expanded the availability of the credit for employers with 101-500 employees. Employers who have over 500 employees may claim the deduction only for the wages paid to employees who were laid off or furloughed.
The American Rescue Plan codifies this and extends the credit through the end of 2021.
As a reminder, employers can get immediate access to the credit by reducing employment tax deposits that were otherwise required to be made. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
FAMILY AND SICK LEAVE CREDITS
Originally in the Families First Coronavirus Response Act, the family and sick leave credits have codified and extends the family and sick leave credits to September 30, 2021. These credits apply to coronavirus-related paid sick leave or for leave due to vaccination and vaccine-related illness. ARPA increases the credit to $200/day (to a maximum total of $12,000 for each individual). The total number of days for self-employed individuals has been increased to 60.
CHILD AND DEPENDENT CARE CREDIT
The child and dependent care credit’s purpose is to help offset the costs associated with caring for a child or dependent, like daycare. The ARPA has made this credit refundable and other changes effective for 2021 only.
The credit is worth up to $4,000 for a qualifying individual ($8,000 for two or more)
The credit is worth 50% of eligible expenses, up to a limit based on income
The credit reduction starts at $125,000 AGI
Credit is reduced below 20% of eligible expenses for households over $400,000 AGI
Please contact your trusted advisor at Reese Henry to discuss the impact that the American Rescue Plan Act may have on your tax situation.