The third stimulus package valued at $1.9 trillion made its debut last week after President Biden signed the relief into law on Thursday, March 11, 2021. The American Rescue Plan brings a new wave of stimulus payments, tax credits, and legislative extensions with hopes of reviving the economy after a long-winded recovery. It also delivers much-needed funding to expedite vaccines and testing as we look toward the day where normalcy resumes.
Here’s what both individuals and employers need to know.
What the plan means for individuals
One of the biggest pieces of the legislation is another round of stimulus payments, which some have reported seeing pending payments as early as Friday afternoon. This time, both taxpayers and dependents will receive the same amount. The checks will be based off of $1,400 for individuals with adjusted gross income (AGI) less than $75,000 ($150,000 married filing jointly). Phase-out amounts are set to cap as AGI reaches $80,000 for single filers ($160,000 married filing jointly) and will be determined based on your most recently filed tax return, either 2019 or 2020.
In some cases, it may be advantageous for married couples to file separately this year to maximize stimulus money if your combined AGI is greater than $150,000. This strategy will not work for everyone, as the married filing separately tax rate brackets can be prohibitive.
If you claim a dependent, the latest legislation includes a stimulus check for ALL dependents. The definition is broadened to include 17-year-olds, college students, elderly dependents, and disabled adult dependents. Under previous relief packages, taxpayers only received a stimulus check for dependents under the age of 16.
There is a clause noted in the plan that states stimulus payments will be rolled out in two phases. In the first phase, the IRS will distribute payments based on data from recent tax returns. If you had less income in 2020 than 2019 and qualify for a stimulus payment, but have not yet filed a 2020 tax return, the IRS plans to allocate those payments at a later day, closer to the summer months.
Child Tax Credit
For 2021, the plan expanded the child tax credit and raised the total credit amount for eligible taxpayers from $2,000 per child to $3,600 per child under the age of 6 and $3,000 per child between the ages of 6-17. Under previous law, 17-year-old dependents were excluded from the credit, so this addition is a welcome change for families. The plan also made the credit fully refundable.
Individuals with income less than $75,000 AGI and married couples with $150,000 AGI will be eligible to reach the credit, with gradual phase-outs until the maximum threshold is reached at $95,000 for individuals and $170,000 for married couples. Taxpayers whose income exceeds this threshold will still be eligible to claim the standard $2,000 child tax credit on their 2021 return.
The expanded child tax credit also comes with another advantage. The IRS plans to distribute half of the credit in advance through monthly payments from July through December. This means that qualifying taxpayers will receive $300 per month per child under the age of 6 and $250 per month per child between the ages of 6-17. The remaining balance would then be claimed as a credit on your 2021 tax return. You can, of course, opt out if you wish.
Unemployment benefits are now partially non-taxable for individuals who were out of work in 2020. Those with income levels less than $150,000 can receive a tax exemption from the first $10,200 in unemployment benefits. If a 2020 tax return was already filed, it’s possible that an amended return will need to be filed in order to recoup these taxes.
For those currently on unemployment, benefits have been extended through September 6 and will continue to include an extra $300 per week.
Child and Dependent Care
Effective for 2021 only, the child and dependent care tax credit saw a bump in qualifying expenses up to $8,000 (from $3,000) for one child and up to $16,000 (from $6,000) for two or more children. The credit is worth 50% of eligible expenses based on household income level of $125,000, where phase-out amounts over $400,000 may be reduced under 20%.
Additionally, the plan also increases the employer-provided dependent care flexible spending accounts from $5,000 to $10,500 for 2021. Employees can contribute pre-tax income to pay for expenses related to day care facilities, nanny services, or in-home senior care.
Earned Income Tax Credit
For 2021, recent legislation nearly tripled the maximum Earned Income Tax Credit (EITC) that grants low-income earners a tax break. The credit amount for workers who do not have children was increased from a maximum of $543 to $1,502. The age limit to claim the credit was also eliminated, now allowing all full-time students to capture the credit as well as anyone over the age of 65. This credit, however, does not apply to those who are retired collecting pensions and Social Security, etc., but it may apply if you have a part-time job.
Workers who do claim dependent children could see a refundable EITC of up to $6,728 depending on filing status, income level, and number of children.
Since the EITC is based on earned income, the plan grants a temporary lookback provision to 2019 to calculate eligibility.
The plan included an extra $25 billion for emergency rental relief available for renters who are suffering from hardship and extended the eviction and foreclosure moratorium and continued forbearance for federally guaranteed mortgages. This extension goes through Sept. 30, 2021.
Forbearance is extended for multifamily property owners through June 30, 2021 if the property is backed by Fannie Mae and Freddie Mac. Owners of multifamily properties such as apartment buildings, townhomes, condominiums, and duplexes will receive additional time to enter into a forbearance agreement, and when doing so, landlords must also make tenants aware—in writing—that they cannot be evicted if rent isn’t paid while the property is in forbearance.
What the plan means for businesses
Some of the hardest hit businesses are still bearing the brunt of the downturn and operating under limited capacity restrictions or remain closed altogether. This plan addresses the sectors that continue to face economic hardship. It also gives tax credits to employers who continue to offer the optional paid sick leave and those who continue to retain employees even though revenue is down. Here’s what businesses need to know.
Employee Retention Credit
The Employee Retention Credit (ERC) is being extended through Dec. 31, 2021. For employers, this credit is one of the most valuable pieces of legislation recently passed in the Consolidated Appropriations Act, 2021.
The ERC comes in the form of a refundable payroll tax credit for businesses, and as of a few months ago, businesses are now able to retroactively claim the credit alongside a PPP loan taken in 2020 (although, no double dipping allowed). In 2021, more businesses are able to qualify for the credit because the percentage of qualified wages increased, the gross receipts eligibility was lowered, and the definition of a large employer was relaxed, among others. More details on this will follow later.
Support for Small Businesses
The Small Business Administration is receiving an additional $7.25 billion in funding to support the PPP loan program and the ongoing demand of small business loan requests. The PPP program has also been expanded to include a broader business base, including nonprofits and digital news services. And although the program received additional money, the new legislation did not extend the application deadline of March 31. As commonly experienced, the timeline from application to funding takes a few weeks, putting applicants right up against the deadline.
New grants and funding are also going to offer a helping hand to support targeted sectors that have been the hardest hit, such as restaurants, shuttered venue operators, and businesses in low-income communities.
Also, for business owners who have 11 or fewer employees and experienced a 50% decrease in business, the Economic Injury Disaster Loan is providing a $5,000 tax-free advance for qualifying businesses.
Extension of Paid Sick and Family Leave Credits
Lastly, employers may continue to provide optional federal emergency paid sick and family leave (Families First Coronavirus Response Act) through Sept. 30, 2021 and receive dollar-for-dollar compensation with tax credits.
It’s important to note that as of April 1, 2021, the clock resets for employees who may have already used their allotted 10 days for sick leave or their 12 weeks for family leave; it also increases the aggregate cap on paid leave from $10,000 to $12,000.
If you have any questions on the new American Rescue Plan, please reach out to an advisor at (805) 963-7811, and we’ll assist you in maximizing the available relief for you and your business.