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Tax Provisions in the American Rescue Plan Act

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Tax Advisory: U.S. Federal

The American Rescue Plan Act has been signed into law and the Act included several tax provisions.  Here are some of those tax provisions affecting many taxpayers:

Unemployment Benefits

Taxpayers that had less than $150,000 of Federal Adjusted Gross Income (AGI) in 2020 could see the first $10,200 of unemployment benefits they received become tax-free.

It will be important to consider the tax treatment in each taxpayer’s resident state.  A taxpayer’s home state may not “conform” with this new tax treatment.  Be on the look out for state legislation either conforming to or disconnecting from the Federal law.

Additional Recovery Rebates

The Act creates an additional round of economic impact payments.  The Act provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly), plus $1,400 for each dependent.

The recovery rebate does have a phase out for individual taxpayers beginning at $75,000 Federal AGI and is fully phased out at AGI over $80,000.  For joint filers, the phase out begins at AGI of $150,000 and ends at AGI of $160,000.

Child Tax Credit

The Act expands the child tax credit in several ways;

  1. The credit can be fully refundable in 2021,
  2. 17 year old dependent children now qualify, and
  3. Depending on certain factors, listed below, the credit can be received in advance of filing a return.

The Act increases the amount of the credit to $3,000 per child ($3,600 for children under age 6).  The increased credit does have a phase out at $150,000 for joint filers, $112,500 for head of household, and $75,000 for all others.

The IRS will have to provide guidance to taxpayer on how to receive the credit in advance of filing the 2021 tax return, and the credit will be reconciled on the 2021 tax return.

Dependent Care Credit

The act makes the credit 50% of eligible expenses up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.

The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Family and Sick Leave Credits

These credits were originally introduced in the Family First Coronavirus Response Act.  This Act increases the limit on paid family leave to $12,000 and has extended it to September 30, 2021.

Employee Retention Credit

The Act extends the ERC through the end of 2021.  An eligible taxpayer could receive up to $7,000 per quarter per employee if adversely affected by the pandemic.

 

You should consult your tax advisor and discuss how each of the provisions listed in the law could affect your own personal tax situation.


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