2021 American Rescue Plan Act

The American Rescue Plan Act (the Act) approved by Congress on March 9, 2021 not only extends the current $300 weekly federal unemployment assistance through September 6, with the potential for some of those payments to be excluded from taxable income, it also includes substantial increases in child tax and earned income credits, $1,400 rebates for a large segment of the population, expanded dependent care assistance, an extension of refundable payroll tax credits for employers paying emergency sick and family leave to employees affected by COVID-19 and similar special payroll tax credits for self-employed individuals, an exclusion from income for certain student loan forgiveness, an additional year under which noncorporate taxpayers can take deductions for excess farm and business losses, an extension of the paycheck protection program (PPP) to certain entities not previously included in the program, and tax-free restaurant revitalization and economic injury disaster loan (EIDL) grants.

Specifically, the Act:

• Provides $1,400 rebate checks for individuals ($2,800 in the case of joint returns and $1,400 for dependents) to be phased out for individuals with adjusted gross income of $75,000 – $80,000 ($150,000 – $160,000 for married filing jointly and $112,500 – $120,000 for head of household);

• Extends the time period for which individuals are eligible for additional federal unemployment assistance of $300 so that instead of such assistance expiring on March 14, 2021, it does not expire until September 6, 2021;

• Provides that up to $10,200 ($20,400 for joint return filers) of unemployment assistance received in 2020 may be exempt from tax depending on the individual’s income for the year;

• For 2021, increases the child tax credit amount, increases the age at which a child qualifies for the credit; increases the refundable amount of the child tax credit, provides a program for distributing the credit monthly, and provides for payments to be made to “mirror code” territory for the cost of such territory’s child tax credit;

• For 2021, nearly triples the amount of the earned income tax credit (EITC) available for workers without qualifying children, expands the eligible age range for individuals who qualify for the EITC, increases the amount of investment income an individual can have before being ineligible for the EITC, allows the credit in the case of certain separated spouses, modifies the disqualified investment income test, provides a special rule for calculating the EITC, and provides payments to U.S. possessions for the cost of their EITC;

• For 2021, enhances the child and dependent care tax credit by making it refundable, increases expenses eligible for the credit, increases the maximum rate of the credit, increases the applicable percentage of expenses eligible for the credit; and increases the exclusion from income for employer-provided dependent care assistance;
• Allows taxpayers other than corporations to deduct excess farm losses and excess business losses through 2027, instead of through 2026;

• Extends the refundable payroll tax credit for paid sick time and paid family leave payroll tax credits for both employers and self-employed individuals through September 30, 2021;

• Expands the paid family leave credit to allow employers to claim the credit for leave provided to obtain a COVID-19 vaccine or to recover from an injury, disability, illness, or condition related to a COVID-19 immunization, resets the ten-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee, and increases the value of the credits by the amount equal to the OASDI and HI employer-share tax imposed on qualified paid family and medical leave wages for purposes of this credit;

• Extends the employee retention credit to January 1, 2022;

• Temporarily expands the premium tax credit provided under Code Sec. 36B, modifies the applicable percentages used to determine the taxpayer’s annual required share of premiums, and provides a special rule allowing a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 to be treated as an applicable taxpayer;

• Repeals the election to allocate interest, etc. on a worldwide basis;

• Excludes from income the receipt of EIDL grants;

• Excludes from income the receipt Restaurant Revitalization Grants;

• Lowers the threshold for Code Sec. 6050W reporting for third party settlement organizations;

• Modifies the tax treatment of student loans forgiven in 2021 through 2025 to provide that certain discharges are not includible in income;

• Expands the limitation on the deductibility of certain executive compensation; and

• Extends access to PPP loans to certain nonprofit entities as well as internet publishing organizations.

2021 Recovery Rebates to Individuals

Section 9601 of the Act adds Code Sec. 6428B to provide a refundable tax credit in the amount of $1,400 per eligible individual.

Eligible Individuals: An eligible individual is any individual other than (1) a nonresident alien, (2) a dependent of another taxpayer, and (3) an estate or trust. The credit is $1,400 per taxpayer ($2,800 in the case of a joint return) and $1,400 per dependent of the taxpayer for the tax year. For purposes of the recovery rebate, the term “dependent” has the same meaning given the term by Code Sec. 152 and thus can include a qualifying relative. The credit begins phasing out starting at $75,000 of adjusted gross income (AGI) for an individual ($112,500 for heads of household and $150,000 in the case of a joint return or surviving spouse) and is completely phased out where an individual’s AGI is $80,000 ($120,000 for heads of household and $160,000 in the case of a joint return or surviving spouse).

Advanced Payment Based on 2019 or 2020 Tax Returns: The provision also provides for the Department of Treasury to issue advance payments based on the information on 2019 tax returns or 2020 tax returns if the taxpayer has filed a tax return for 2020. If an advance payment is issued to a taxpayer based on the 2019 return, and the taxpayer files his or her 2020 tax return before the earlier of (1) 90 days after the 2020 calendar year filing deadline, or (2) September 1, 2021, the taxpayer will receive an additional payment equal to the excess (if any) of the amount to which the individual is entitled based on the 2020 return over the amount of the payment made based on the 2019 return. The “2020 calendar year filing deadline” means the date specified in Code Sec. 6072(a) with respect to returns for calendar year 2020 (i.e., April 15, 2021), determined after taking into account any period disregarded under Code Sec. 7508A if such disregard applies to substantially all returns for calendar year 2020. Solely for purposes of advance payments, a tax return is not treated as filed until the return has been processed by the IRS.

Valid Identification Numbers Generally Required: A taxpayer is not eligible for the recovery rebate unless the taxpayer includes a valid identification number on the tax return for the tax year. A valid identification number means a social security number (SSN) or, in the case of a dependent who is adopted or placed for adoption, the dependent’s adoption taxpayer identification number. For married taxpayers filing jointly, where the social security number of only one spouse is included on the tax return for the tax year, the payment amount is reduced to $1,400, in addition to $1,400 per dependent with a valid identification number. However, a special rule applies to members of the armed forces. For married taxpayers filing jointly, the payment amount is $2,800 if at least one spouse was a member of the armed forces at any time during the tax year and at least one spouse includes his or her SSN on the joint return for the tax year. Any individual who was deceased before January 1, 2021, is treated as if his or her SSN was not included on the return for the tax year. In the case of a joint return where only one spouse is deceased before January 1, 2021, where the deceased spouse was a member of the armed forces, and the deceased spouse’s SSN is included on the tax return for the tax year, the SSN of one (and only one) spouse is treated as included on the return for the tax year for purposes of determining the rebate amount. No payment will be made with respect to any dependent of the taxpayer if the taxpayer (both spouses in the case of a joint return) was deceased before January 1, 2021.

Returns Not Filed for Either 2019 or 2020: Individuals who do not file returns for either 2019 or 2020 (i.e., nonfilers) will receive advance payments on the basis of information available to the Treasury Department, and the payment amount may be determined with respect to such individual without regard to the AGI phaseouts. Payments may be made to a nonfiler’s representative payee or fiduciary for a federal benefit program and the entire amount of the payment will be used only for the benefit of the nonfiler. Payments to nonfilers may not be made by reloading any previously issued prepaid debit cards.

No Administrative Offset: Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors. Additionally, the provision instructs the Treasury Department to make payments to the United States territories that relate to each territory’s cost of providing the credits.

Extension of Unemployment Assistance; Exclusion of 2020 Benefits

Section 9011 and Section 9013 of the Act extends the pandemic unemployment assistance and the federal pandemic unemployment compensation, originally enacted in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), so that eligible individuals will receive, or continue to receive, $300 per week of unemployment payments. These payments were scheduled to end on March 14, 2021, but will now be available through September 6, 2021.

Section 9042 of the Act provides that up to $10,200 ($20,400 for joint return filers if both receive unemployment) of 2020 unemployment assistance may be exempt from tax if the taxpayer’s adjusted gross income is less than $150,000. Section 9042 does not provide a phaseout range, so taxpayers with income above the cut-off by any amount will lose the exclusion entirely.

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Expansion of Child Tax Credit for 2021

Section 9611 of the Act adds Code Sec. 24(i), which significantly expands the child tax credit available to qualifying individuals by:

• increasing the credit from $2,000 to $3,000 or, for children under 6, to $3,600;

• increasing from 16 years old to 17 years old the age of a child for which the credit is available; and

• increasing the refundable amount of the credit so that it equals the entire credit amount, rather than having the taxpayer calculate the refundable amount based on an earned income formula.

Eligibility for Child Tax Credit: The refundable credit applies to a taxpayer (in the case of a joint return, either spouse) that has a principal place of abode in the United States for more than one-half of the tax year or is a bona fide resident of Puerto Rico for such tax year.

Phaseout of Child Tax Credit: As under current law, the 2021 child tax credit is phased out if a taxpayer’s modified adjusted gross income exceeds certain thresholds. For 2020, the credit is phased out for a taxpayer with modified adjusted gross income in excess of $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. The $2,000 child tax credit otherwise allowable for 2020 must be reduced by $50 for each $1,000, or fraction thereof, by which the taxpayer’s modified adjusted gross income exceeds such threshold amounts. For 2021, however, special phase-out rules apply to the excess credit available for 2021 (i.e., either the $1,000 excess credit or, for children under 6, the $1,600 excess credit). Under these modified phase-out rules, the modified adjusted gross income threshold is reduced to $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in any other case. This special phase-out reduction is limited to the lesser of the applicable credit increase amount (i.e., either $1,000 or $1,600) or 5 percent of the applicable phase-out threshold range.

Monthly Payments of Child Tax Credit: Section 9611 of the Act adds Code Sec. 7527A which provides a special program under which individuals with refundable child tax credits can receive advance payments equal to one-twelfth of the annual advance amount, thus potentially receiving up to $300 per month for children under 6 and $250 per month for children 6 years and older. However, these payments would only be made from July 2021 through December 2021. In essence, the taxpayer would receive one-half of the total child tax credit in the last six months of 2021 and the other half of the credit after filing his or her tax return.

The “annual advance amount” is the amount (if any) which is estimated as being equal to the amount which would be treated as allowed as a child tax credit if (i) the taxpayer meets the requirement of living in the United States for more than one-half of the tax year or being a bona fide resident of Puerto Rico for such tax year; (ii) the taxpayer has modified adjusted gross income for such tax year that is equal to the taxpayer’s modified adjusted gross income for 2019 or, if no return was filed for 2019, then modified adjusted gross income for 2018 (i.e., the reference tax year); (iii) the only children of the taxpayer for such tax year are qualifying children properly claimed on the taxpayer’s return of tax for the reference tax year, and (iv) the ages of such children (and the status of such children as qualifying children) are determined for such tax year by taking into account the passage of time since the reference tax year. If the annual advance amount is modified, the Secretary of Treasury may adjust the amount of any monthly payment made after the date of such modification to properly take into account the amount by which any monthly payment made before such date was greater than or less than the amount that such payment would have been on the basis of the annual advance amount as so modified.

Excess Advance Payments: If the aggregate amount of advance payments exceeds the amount of the credit allowed for 2021, the excess increases the taxpayer’s tax liability for 2021. However, a safe harbor based on the taxpayer’s modified adjusted gross income may apply to reduce this amount. Under this safe harbor, in the case of a taxpayer whose modified adjusted gross income for the tax year does not exceed 200 percent of the applicable income threshold, the amount of the increase in tax due to the excess advance payments is reduced (but not below zero) by the safe harbor amount. The applicable income threshold is $60,000 in the case of a joint return or surviving spouse, $50,000 in the case of a head of household, and $40,000 in any other case. The safe harbor amount is the product of $2,000 multiplied by the excess (if any) of the number of qualified children taken into account in determining the annual advance amount with respect to months beginning in such tax year, over the number of qualified children taken into account in determining the credit allowed for the tax year.

If information contained in the taxpayer’s tax return for the reference tax year does not establish the status of the taxpayer as being eligible for the child tax credit, the Secretary of Treasury may infer such status (or the lack thereof) from other information sources. A child will not be taken into account in determining the annual advance amount if the death of such child is known to the Secretary of Treasury as of the beginning of 2021.

On-Line Portal: The Secretary of Treasury must establish an online portal which (i) allows taxpayers to elect not to receive the payments on a monthly basis, and (ii) allows taxpayers to provide information relevant to determining the amount of an advance payment, such as a change in the number of qualifying children or a change in the taxpayer’s marital status.

Notice of Payments: Generally, by January 31, 2022, the Secretary of Treasury must provide to any taxpayer to whom child tax credits were made during 2021 written notice which includes the taxpayer’s taxpayer identity, the aggregate amount of such payments made, and such other information as may be appropriate.

Exception from Offset: The advance child tax credit payments are generally excepted from reduction or offset, including where the taxpayer owes federal taxes that would otherwise be subject to levy or collection.

Application of Child Tax Credit in Possessions: Section 9612 of the Act instructs the Treasury Department to make payments to each “mirror code” territory for the cost of such territory’s child tax credit. This amount is determined by Treasury based on information provided by the territorial governments. Puerto Rico, which does not have a mirror code, will receive the refundable credit by having its residents file for the child tax credit directly with the IRS, as they do currently for those residents of Puerto Rico with three or more children. For American Samoa, which does not have a mirror code, the Treasury Department is instructed to make payments in an amount estimated as being equal to the aggregate amount of benefits that would have been provided if American Samoa had a mirror code in place.

Increase in Earned Income Credit for 2021

Section 9621 of the Act adds Code Sec. 32(n), which expands the universe of individuals eligible for the earned income tax credit (EITC) in 2021 while also increasing the amount of the credit available. Among other changes, the Act:

• nearly triples the amount of the EITC available for workers without qualifying children;

• expands the eligible age range for individuals who qualify for the EITC, and

• increases the amount of investment income an individual can have before being ineligible for the EITC.

Special Rules for 2021 for Individuals without Qualifying Children: Code Sec. 32(n) expands the eligibility and the amount of the EITC for taxpayers with no qualifying children (i.e., “childless EITC”) for 2021. In particular, under Code Sec. 32(n)(1), the applicable minimum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students) and the upper age limit for the childless EITC is eliminated. The applicable minimum age in the case of a specified student (other than a qualified former foster youth or a qualified homeless youth) is 24, while the applicable minimum age in the case of a qualified former foster youth or a qualified homeless youth is 18. A “specified student” is, with respect to any tax year, an individual who is an eligible student (as defined in Code Sec. 25A(b)(3)) during at least five calendar months during the tax year. The term “qualified homeless youth” means, with respect to any tax year, an individual who (i) is certified by a local educational agency or a financial aid administrator during such tax year as being either an unaccompanied youth who is a homeless child or youth, or as unaccompanied, at risk of homelessness, and self-supporting, and (ii) provides consent for local educational agencies and financial aid administrators to disclose to the Treasury Secretary information related to the status of such individual as a qualified homeless youth. Code Sec. 32(n)(2) eliminates, for 2021, the age 65 cut-off for being eligible for the credit.

Code Sec. 32(n)(3) increases the childless EITC amount by (i) increasing the credit percentage and phase-out percentage from 7.65 to 15.3 percent, (ii) increasing the income at which the maximum credit amount is reached from $4,220 to $9,820, and (iii) increasing the income at which the phase out begins from $5,280 to $11,610 for non-joint filers. Under these parameters, the maximum EITC for 2021 for a childless individual is increased from $543 to $1,502.

Eligibility for Childless EITC Where Children Do Not Meet Identification Requirements: Section 9622 of the Act repeals Code Sec. 32(c)(1)(F), which prohibited an otherwise EITC-eligible taxpayer with qualifying children from claiming the childless EITC if he or she could not claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid SSN for qualifying children). Accordingly, for tax years beginning after December 31, 2020, individuals who do not claim the EITC with respect to qualifying children due to a failure to meet the identification requirements can now claim the childless EITC.

Credit Allowed in Case of Certain Separated Spouses: Section 9623 of the Act amends Code Sec. 32(d) to allow, for tax years beginning after December 31, 2020, a married but separated individual to be treated as not married for purposes of the EITC if a joint return is not filed. Thus, the EITC may be claimed by the individual on a separate return. This rule only applies if the taxpayer lives with a qualifying child for more than one-half of the tax year and either does not have the same principal place of abode as his or her spouse for the last six months of the year, or has a separation decree, instrument, or agreement and doesn’t live with his or her spouse by the end of the tax year. This change aligns the EITC eligibility requirements with present-day family law practice.

Modification of Disqualified Investment Income Test: Section 9624 of the Act amends Code Sec. 32(i) and increases the limitation on disqualified investment income for purposes of claiming the EITC from $3,650 (2020) to $10,000. This change is applicable for tax years beginning after December 31, 2020.

Application of EITC in Possessions of the United States: Section 9625 of the Act adds new Code Sec. 7530, which instructs the Treasury Department to make payments to the territories that relate to the cost of each territory’s EITC. In the case of Puerto Rico, which has an EITC, the payment is structured as a matching payment, wherein the Treasury Department will provide a match of up to three times the current cost of the Puerto Rico EITC, if Puerto Rico chooses to expand its current EITC. The other territories receive cost reimbursements of 75 percent of their EITC expenditures.

Use of Prior Year Income for Determining 2021 EITC: Section 9626 of the Act allows taxpayers in 2021, for purposes of computing the EITC, to substitute their 2019 earned income for their 2021 earned income, if 2021 earned income is less than 2019 earned income.

Increase in Dependent Care Assistance Tax Benefits for 2021

Section 9631 of the Act adds Code Sec. 21(g), which provides a number of favorable changes to tax benefits relating to dependent care assistance, including the following:

• making the child and dependent care tax credit (CDCTC) refundable;

• increasing the amount of expenses eligible for the CDCTC;

• increasing the maximum rate of the CDCTC;

• increasing the applicable percentage of expenses eligible for the CDCTC; and

• increasing the exclusion from income for employer-provided dependent care assistance.

Refundable Credit: Generally, a taxpayer is allowed a nonrefundable CDCTC for up to 35 percent of the expenses paid to someone to care for a child or dependent so that the taxpayer can work or look for work. Under Code Sec. 21(g)(1), the dependent care credit is refundable for 2021 if the taxpayer has a principal place of abode in the United States for more than one-half of the tax year.

Increased Dollar Limit on Creditable Expenses: Code Sec. 21(g)(2) increases the amount of child and dependent care expenses that are eligible for the credit to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals.

Increase in Maximum Credit Rate, Applicable Percentage, and Phase-out Thresholds: For 2020, the CDCTC is an amount equal to the applicable percentage of the employment-related expenses paid by an individual during the tax year, with the applicable percentage being 35 percent reduced (but not below 20 percent) by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the tax year exceeds $15,000. For 2021, Code Sec. 21(g)(3) increases the maximum credit rate from 35 to 50 percent and amends the phase-out thresholds so they begin at $125,000 instead of $15,000. At $125,000, the credit percentage begins to phase out, and plateaus at 20 percent. This 20-percent credit rate phases out for taxpayers whose adjusted gross income is in excess of $400,000, such that taxpayers with income in excess of $500,000 are not eligible for the credit.

Increase in Exclusion for Employer-Provided Dependent Care Assistance: Section 9632 of the Act increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

Tax Treatment of Targeted Economic Injury Disaster Loans (EIDL) Advances: Section 9672 of the Act provides that amounts received from the Administrator of the Small Business Administration in the form of a 14 targeted EIDL advance under Section 331 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act in Pub. L. 116-260 is not included in the gross income of the person that receives such amounts. Further, no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied, by reason of the exclusion of such amounts from gross income. In the case of a partnership or S corporation that receives such amounts, any amount excluded from income under this provision will be treated as tax-exempt income for purposes of Code Sec. 705 and Code Sec. 1366. The IRS is directed to issue rules for determining a partner’s distributive share of any amounts excluded from income for purposes of Code Sec. 705.

Tax Treatment of Restaurant Revitalization Grants: Section 5003 of the Act establishes a Restaurant Revitalization Fund in order to provide restaurants and similar businesses with grants to cover expenses incurred as a direct result of, or during, the COVID-19 pandemic. Under Section 9673 of the Act, restaurant revitalization grants are not includable in gross income, and no deduction will be denied, no tax attribute reduced, and no basis increase denied, by reason of the exclusion from gross income for a restaurant revitalization grant. In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount excluded from income by will be treated as tax-exempt income for purposes of Code Sec. 705 and Code Sec. 1366. The IRS is directed to provide rules for determining a partner’s distributive share of any amount of restaurant revitalization grant excluded from income under Section 9673 for purposes of Code Sec. 705.

Modification of Exceptions for Reporting of Third Party Network Transactions: Section 9674 amends Code Sec. 6050W, which currently provides that a payment settlement entity must provide a Form 1099-K for transactions of sellers who exceed $20,000 in gross receipts when collected in over 200 transactions. The provision would amend Code Sec. 6050W to provide that sales in excess of $600 would trigger the Form 1099-K filing requirement.

Modification of Treatment of Student Loan Forgiveness in 2021 – 2025:

Section 9675 of the Act excludes certain discharges of student loan debt occurring in years 2021 through 2025 from gross income.

Exclusion of Debt Forgiveness from Income: Under new Code Sec. 108(f)(5), gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge (in whole or in part) after December 31, 2020, and before January 1, 2026, of:

• any loan provided expressly for post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if the loan was made, insured, or guaranteed by the United States or agency thereof, a state, territory, or possession of the United States, or the District of Columbia, or an eligible educational institution as defined in Code Sec. 25A;

• any private education loan as defined in Section 140(a)(7) of the Truth in Lending Act;

• any loan made by any educational organization described in Code Sec. 170(b)(1)(A)(ii) if it was made (i) under an agreement with any entity described in (1) above or any private education lender (as defined in Section 140(a) of the Truth in Lending Act) under which the funds from which loan was made were provided to the educational organization, or (ii) under a program designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in Code Sec. 501(c)(3) and exempt from tax under Code Sec. 501(a); or

• any loan made by an educational organization described in Code Sec. 170(b)(1)(A)(ii) or by an organization exempt from tax under Code Sec. 501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization, but only if the refinancing loan is made under a program of the refinancing organization which is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs, and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in Code Sec. 501(c)(3) and exempt from tax under Code Sec. 501(a).

Exception to Debt Forgiveness: The exclusion provided under Code Sec. 108(f)(5) does not apply to the discharge of a loan made by an educational organization or a private education lender (as defined in Section 140(a)(7) of the Truth in Lending Act) if the discharge is on account of services performed for either such organization or for such private education lender.

Expansion of Limitation on Deductibility of Certain Executive Compensation: Section 9708 of the Act adds a provision in Code Sec. 162(m) which increases the number of highly compensated employees for which a compensation deduction is limited, to be effective for tax years beginning after 2026.

If you have any questions or need help with your taxes, please call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC prepares tax returns and provides estate and tax planning year round.