In mid-March, President Joe Biden signed the American Rescue Plan into law. The $1.9 trillion bill is the third stimulus package in 12 months, and includes some of the same kinds of relief, including stimulus checks, unemployment assistance, and money for state and local governments.
It also includes new changes, however, including a large expansion of the Child Tax Credit and a significant amount of help with COBRA coverage for laid-off workers.
Unemployment: Extensions and Tax Changes
Last year’s CARES Act extended a significant amount of federal unemployment aid. The American Rescue Plan now waives taxes on some of that assistance.
Taxes have been waived on up to $10,200 per person in unemployment assistance. Individuals or married couples earning up to $150,000 can qualify, and if you and your spouse both received unemployment, the first $24,400 will not be taxed.
This rule is retroactive, so if you have already filed your 2020 taxes, don’t forget to amend your return.
Additionally, federal unemployment aid has been extended until early September. Unemployed workers are eligible for $300 per week in federal aid on top of whatever their states provide.
Expansion of the Child Tax Credit and Other Credits
For the next year, parents can claim a tax credit of up to $3,600 per child under 6 and $3,000 for each child between the ages of 6 and 17, including 17-year-olds.
Single parents earning up to $75,000, heads of households earning up to $112,500, and married couples earning up to $150,000 qualify for the full benefit.
Single parents earning up to $200,000 or couples earning up to $400,000 can still claim the existing $2,000 credit per child.
Rather than requiring tax filers to wait a year to see the benefit of this credit, approximately half of it will be paid in installments throughout the year rather than in a lump sum at tax filing time. If your AGI changes from 2019 to 2020 and you turn out to qualify for a smaller credit than the IRS thought, however, you may be asked to pay part of this back when you file your 2021 taxes.
Additionally, the full Child Tax Credit amount is refundable. The 2017 tax reform law made up to $1,400 of the $2,000 credit refundable; now, the full amount of up to $3,600 per child is refundable.
The way the Child and Dependent Care Tax Credit is calculated is also changing. The maximum amount of expenses that you can use to calculate your credit is now $8,000 in expenses when you have one qualifying child and $16,000 when you have two or more children. Taxpayers can claim a credit of up to 50% of those qualifying expenses. Your financial advisor can help you navigate these new rules.
If you’ve already read about the stimulus package, you most likely already know about the $1,400 stimulus checks it approved for qualifying individuals.
Eligibility is slightly modified from the first two rounds of stimulus checks. Adults can now receive stimulus checks on behalf of all dependents in their household, not just children under 17, whether those dependents are older children That means a family of two adults, one child in college, and one dependent parent could receive up to $5,600 in support.
On the other hand, income limits are stricter than they were for 2020’s stimulus checks. Individuals earning less than $75,000 and couples earning less than $150,000 qualify for the full benefit. The phaseout ranges are as follows:
- Single filers and married filing separately: $75,000-$80,000
- Heads of household: $112,500-$120,000
- Married filing jointly: $150,000-$160,000
In general, income will be determined based on each household’s most recent tax return — you 2020 return if you have already filed it, or your 2019 return if you haven’t.
However, if you do not qualify based on your 2019 return but do turn out to qualify in 2020, the IRS plans to send additional stimulus checks after 2020 fillings are complete. File within 90 days of the tax filing deadline, which is now May 17, 2021, to qualify.
And, if you do not qualify in 2019 or 2020 but your income drops in 2021, you will have the opportunity to claim the Recovery Rebate on your 2021 tax return.
Expanded Support for Health Insurance
The American Rescue Plan expands COBRA subsidies for people who have been laid off. Normally, maintaining health coverage through COBRA is remarkably expensive, with laid-off employees assuming the full cost of their premiums and sometimes spending even more.
The stimulus bill allows laid-off workers to maintain their health coverage through COBRA for free from April until the end of September. Premiums will be paid by employers, who will in turn receive a refundable payroll tax credit.
If you purchase health insurance through the healthcare.gov Marketplace, note that the Premium Assistance Tax Credit has also been expanded. The stimulus package lowers the threshold for qualifying for the tax credit, meaning more people will qualify based on the percentage of their income they spend on health insurance.
Is Student Debt Forgiveness on the Horizon?
The new stimulus package does not forgive any student debt. But it does include one change that may make debt forgiveness easier for lawmakers in the future.
Currently, forgiven debt must be reported as taxable income. The American Rescue Plan modifies that rule so that any student debt that is forgiven between 2021 and 2025 does not have to be reported as income. The change applies to federal as well as private debt.
Filing Your 2020 Taxes
The filing deadline for 2020 tax returns has been extended to May 17. If you plan to file an extension, make sure to do so by that date as well. Note that the deadline to make estimated tax payments for the first quarter of 2021 has not been extended, so that due date is still April 15.
The above changes are likely to affect a large number of households, but there may be other provisions in the stimulus package that impact you depending on your situation. Your financial advisor can help you understand what applies to you and claim the benefits you’re able to.