President Biden has signed the $1.9 trillion American Rescue Plan Act of 2021. Many Americans welcome the long-overdue COVID-19 financial relief measures that the new law gives to individuals, families and businesses. Here are the highlights.

Key Provisions for You

The new law includes the following provisions for individuals and families:

Third round of direct relief payments. Eligible recipients will receive direct payments of $1,400 per person and $1,400 for each qualifying dependent. For this round of payments, qualifying dependents aren’t limited to children under 17.

Previously, Congress approved two other rounds of direct payments: 1) $1,200 per person and $500 for each qualifying child in March 2020, and 2) $600 per person and $600 for each qualifying child in December 2020.

Under the new law, people under the following adjusted gross income (AGI) thresholds are eligible to receive the maximum direct payments:

• $75,000 for single people and married people who file separate returns,
• $150,000 for married people who file joint returns, and
• $112,500 for people who use head-of-household filing status.

These amounts are the same as they were for the previous rounds of direct payments. However, once AGI reaches the following thresholds, direct payments are fully phased out under the new law:

• $80,000 for single people and married people who file separate returns,
• $160,000 for married people who file joint returns, and
• $120,000 for people who use head-of-household filing status.

The Senate lowered the income caps for the third round of stimulus payments. So, people who previously received direct payments under prior relief measures may not necessarily be eligible for a direct payment under the American Rescue Plan Act. It’s estimated that about 12 million fewer adults and 4.6 million fewer children will be eligible for the third round of stimulus payments compared to the previous rounds of payments.

Important: Direct relief payments are initially based on AGI reported on your 2018 or 2019 tax returns. You may be eligible for a higher amount if your AGI was lower in 2020 than in previous years. Contact us for more information.

Extended unemployment benefits. Federal unemployment benefits of $300 per week are extended through September 6, 2021. In addition, taxpayers with modified adjusted gross income below $150,000 are now exempt from paying federal income tax on up to $10,200 of 2020 unemployment compensation. For married couples, a total of $20,400 of unemployment compensation is exempt if both spouses are entitled to such benefits.

Increased child tax credit. For 2021 only, this credit has been increased from $2,000 to $3,000 per child ($3,600 for a child under age 6). The credit is also fully refundable and available to qualifying children who haven’t turned 18 by the end of 2021. The $500 partial credit for dependents other than qualifying children remains nonrefundable, however.

For phaseout purposes, the child tax credit will be broken up into two parts:

1. The original $2,000 credit. This portion is subject to a phaseout when modified adjusted gross income (MAGI) exceeds $200,000 ($400,000 for married couples who file jointly).

2. The increased amount. A separate phaseout applies to this portion of the credit. The phaseout thresholds start at the following MAGI levels:

• $75,000 for single people and married people who file separately,
• $112,500 for heads of households, and
• $150,000 for married couples who file jointly.

Starting in July, the child tax credit will be sent out in monthly payments to eligible taxpayers, rather than being added to the family’s refund at tax-time. The amount of each monthly payment will equal 1/12 of the total amount for the year.

Increased tax credits for child and dependent care. For 2021 only, families will be eligible for a refundable tax credit of up to half of their spending on child and dependent care for qualifying children under age 13 and other qualifying dependents. The maximum credit is $4,000 for one qualifying individual ($8,000 for two or more qualifying individuals). The start of the phaseout threshold also has been increased to $125,000.

Expanded earned income tax credit (EITC). For 2021, the new law increases the maximum EITC for childless adults, eliminates the age cap for older workers and raises the income threshold, allowing more households to qualify for the credit.

Student loan discharges. The new law provides an exemption from federal income tax for certain student loan forgiveness for December 30, 2020, through January 1, 2026. The exclusion applies to partial or full discharge of qualifying student loans.

Key Provisions for Your Business

The new law includes the following provisions for businesses:

Extended paid sick and family leave benefits. These benefits are reinstated through September 2021. The benefits are not mandated, rather an employer can voluntarily comply for the tax credits for both or just for the EPSL.

Employers are also eligible for a refundable tax credit for the cost of this leave. The new law increases the cap on family medical leave pay from $10,000 to $12,000.

Employee retention credit (ERC). The ERC has been liberalized and extended through the end of 2021, structured as a refundable payroll tax credit against hospital insurance tax. The new law also expands it to so-called “recovery startup businesses” that launched after February 15, 2020, with average annual gross receipts under $1 million.

Employer-provided dependent care assistance. For 2021 only, the new law increases the exclusion for employers who provide such benefits under a qualified dependent care assistance program to $10,500 ($5,250 for married couples who filed separate returns).

Economic injury disaster loan (EIDL) program. Another $15 billion has been provided for EIDLs for eligible small businesses in low-income communities. These advances aren’t included in the gross income of the person who receives the amounts. For partnerships and S corporations, the advances will be allocated to partners or shareholders and increase their bases in their ownership interests.

In addition, the American Rescue Plan Act provides an additional $7.25 billion for paycheck protection program (PPP) loans, though this program is scheduled to expire at the end of March. The new law also includes $28.6 billion of revitalization grants, capped at $5 million each, for restaurants, food trucks, bars, breweries, tasting rooms and similar businesses that were adversely affected by the pandemic. These grants are generally exempt from federal income tax. Targeted relief funds are provided for shuttered venue operators and aviation companies, too.

Compromises Made

The Senate passed the bill 50-49 on party lines, using the budget reconciliation process. Several compromises were made from the House’s original version of the bill, including:

• Removal of the $15 per hour minimum wage increase,
• Reduction of the income caps for direct payments and federal unemployment benefits,
• Exemption of up to $10,200 of 2020 unemployment compensation,
• Expansion of the ERC to recovery startup businesses, and
• Extension of the limitation on excess business losses through 2026, rather than 2025.

As the economy slowly starts to reopen, many people in Congress are hopeful that this massive package will be the final round of financial relief needed for the economy to rebound. But it’s certainly not an end to federal spending under the Biden Administration.

Stay tuned for details on Biden’s Build Back Better plan. This proposal is expected to revisit the minimum wage increase. It may also include provisions for infrastructure improvements, worker training programs and green energy initiatives over the coming years. It’s currently unclear if, and to what extent, the plan will include federal tax increases for individuals and businesses. Contact our tax specialists for more information.