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With all of the memes surrounding the 2021 "stimmy," it is no secret that the American Rescue Plan Act (ARPA) included another round of economic impact payments (EIPs). This round of payments paid up to $1,400 per each eligible person and qualified dependent.
Taxpayers began to receive their payments during March 2021 since eligibility and amounts were based on 2019 or 2020 tax returns. Similar to the prior two EIPs, each taxpayer's Adjusted Gross Income (AGI) had to fall below a certain threshold to qualify for the EIP.
The lower limit of the eligbile AGI threshold, also called the "beginning phaseout," was steeper than that of the prior EIPs. For instance, single taxpayers with AGI greater than $80,000 were ineligible for this third payment. Residents of San Francisco, New York and other cities with high average salaries were more likely to have AGIs that exceeded EIP qualifications.
Although having a high AGI can be a good thing, being ineligble for the EIP might make you feel some type of way if you could have used that "free money." Fortunately, the ARPA has a few other tax benefits for people of all income levels.
CHILD AND DEPENDENT CARE CREDIT
The ARPA increased the amount of child care expenses eligible for the Child and Dependent Care Credit. Since this credit does not completely phase out until AGI nears $450,000, a larger number of taxpayers will benefit from this credit. The following changes were made to this credit for 2021:
The maximum credit percentage increased from 35% to 50% of child care expenses.
The amount of eligible expenses for one qualifying individual increased from $3,000 to $8,000
The amount of eligible expenses for more than one qualifying individual increased frp, $6,000 to $16,000
The beginning of the AGI phaseout increased from $15,000 to $125,000.
In addition, the 2021 amount of employer-provided dependent care assistance that is excludable from taxable income increased. The amount increased to $10,500 for married individuals filing jointly and to $5,250 for married individuals filing a separately.
This credit may also be claimed by taxpayers who have non-children dependents incapable of caring for themselves, so long as those individuals meet certain qualifications.
STUDENT LOAN FORGIVENESS EXCLUSION
Although the ARPA did not include student loan forgiveness, it did specify that canceled student loan amounts will not be considered taxable income for any student loan discharged between 2021 and 2025.
Should Biden issue an Executive Order to cancel $10,000 of student loan debt before January 1, 2026, the canceled amount would not be subject to a taxpayer's taxable income. In prior years, this type of provision only applied to student loans that qualified for the Public Student Loan Forgiveness Program.
SELF-EMPLOYED CREDITS
Under the 2020 Family First Coronavirus Relief Act (FFCRA), certain self-employed taxpayers who paid mandatory sick or family leave benefits are eligible for a refundable credit on up to 100% of sick and family leave benefits provided. The credit is taken against the employer's payroll taxes on IRS Form 941.
Under the 2021 American Rescue plan Act, certain qualified employers have a choice, not a mandate, to pay these benefits and claim the credit until September 30, 2021. In addition, after March 31, 2021, employers who pay out benefits to employees for time to get the Covid vaccine and for qualified health plan expenses will also receive the 100% credit.
Certain self-employed taxpayers might also be eligible for the Employer Retention Credit and the second draw of Payroll Protection Program (PPP) loans.
Finally, if you have considered these other ARPA benefits but are still determined to qualify for the third round of EIPs, consider talking to your tax preparer about tax strategies that might reduce your 2020 AGI to a qualifying amount. Strategies can include making a deductible contribution to an IRA before the deadline, taking advantage of the Unemployment Income Exclusion or considering the cost and benefits of choosing a different filing status (i.e. Married Filing Separate).
Whether you qualify for the EIP or not, there is something in the ARPA for everyone. Hopefully this legislation will bring much needed aid as we endure the tail end of this pandemic.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. This information is not endorsed by a financial institution. You should consult your own tax, legal and accounting advisers before engaging in any transaction.