By: Joseph Goldy, AAMS®
With President Biden signing the American Rescue Plan legislation into law last week, here is a high-level look at some of the bill's main provisions. There are many nuances to each of the major points highlighted, and this article only scratches the surface. As always, it is wise to consult with your financial advisor and tax professional to determine what you qualify for depending on your specific situation.
Stimulus Checks
The third round of stimulus checks will be going out to individuals for $1,400 per person, plus an additional $1,400 per dependent. Including dependents is a notable change, rather than just children who were eligible for the Child Tax Credit as in the past. This new definition of who qualifies for a stimulus payment opens the eligibility criteria. However, it is essential to note that countering this increased eligibility are income thresholds that phaseout much faster than previous economic stimulus payments. The new phaseout ranges are:
Single and Married Filing Separately: $75,000 - $80,000
Head of Household: $112,500 - $120,000
Married Filing Jointly: $150,000 - $160,000
Additionally, since the stimulus payment criteria are based on either 2019 or 2020 AGI depending on when you file and when the IRS begins issuing checks, there are other alternatives to be aware of to maximize your stimulus payment. Specifically, if your income was drastically lower in 2020 than in 2019 and you have not filed yet, consult your tax advisor for more detail around your options so that you know the relevant deadlines.
Lastly, if you receive a stimulus payment based on when the IRS issues the checks and what year's AGI they use, then it turns out that your income was above the income thresholds in 2021; there is no IRS clawback of any funds previously received.
Child Tax Credit
The Child Tax Credit is enhanced, providing for $3,000 per child plus an additional $600 for children under 6. Unfortunately, the extra credit amount's qualifying income thresholds are much lower than the standard Child Tax Credit AGI thresholds of $200,000 for individuals and $400,000 for joint filing. The income limits that apply to the enhanced credit are $75,000 for single filers, $112,500 for head of household, and $150,000 for those filing jointly.
For those who qualify for the enhanced credit amounts, the American Rescue Plan makes the entire amount a refundable credit rather than just a portion being refundable under the standard Child Tax Credit rules.
An exciting provision for those who qualify for this additional Child Tax Credit amount is that the IRS will pay 50% of the eligible amount in advance from July 1st, 2021, through December 31st. However, if your 2021 AGI winds up exceeding a specific safe harbor threshold, you may be responsible for paying back the amount forwarded.
Child and Dependent Care Tax Credit
Changes to this credit include increasing the amount of eligible expenses from $3,000 for one child ($6,000 for two) to $8,000 for one ($16,000 for two). This modification is a significant increase from previous years and will potentially provide a much more substantial benefit for some taxpayers.
Traditionally, only a portion of the credit has been refundable; however, the amounts noted above are fully refundable for 2021. Further, the Applicable Percentage Amount, used to calculate the credit based on expenses, has been increased from the usual 20% to 50%. The income threshold to qualify for the higher percentage has been expanded and does not start to phase out until $125,000, regardless of filing status, rather than $15,000 when phaseout usually begins.
Unemployment Compensation
Regular unemployment compensation is extended until September 6th, along with the Federal Pandemic Unemployment Compensation payments of $300. Likewise, the Pandemic Unemployment Assistance has been extended for self-employed and gig workers. Additionally, up to $10,200 of unemployment compensation is potentially tax-free for those whose AGI is less than $150,000 in 2020.
Health Insurance Subsidies
For those laid off, COBRA is often a lifeline for maintaining health insurance benefits. The cost of premiums can be prohibitive since the individual pays the employer-subsidized portion of the premium. However, under the American Rescue Plan, those COBRA premiums may be potentially 100% covered from April through September. For those shopping for insurance through the marketplace, the American Rescue Plan is also changing the amount of income someone needs to spend to qualify before Premium Assistance Tax Credits begin to kick in. The exact thresholds are beyond the scope of this article. Still, for anyone shopping for insurance through the state health insurance marketplace, this is a benefit that could provide significant savings. A calculator to help determine the amount of your benefit is located here.
Student Loan Debt
There is no specific student loan forgiveness provision in the American Rescue Plan. However, for student loan debt discharged between 2021 through 2025, it is no longer considered "taxable income" as it usually would be. This section is significant because many believe it is a precursor for future student loan forgiveness legislation. By eliminating the classification of forgiven student loan debt as income, we may soon see some form of student loan forgiveness by executive order, or more likely, through legislative action.
Other Notable Features of the American Rescue Plan
An additional $7 billion was added to the Paycheck Protection Program
No extension for Required Minimum Distribution relief in 2021
No increase in the Federal minimum wage amount
$28 billion was allocated to the Restaurant Revitalization Fund which will provide grants to qualifying businesses in need
Author’s Bio
Joseph Goldy, CFP®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.