President Biden Signs $1.9 Trillion Relief Package



More stimulus is on the way, as President Biden signed a third massive COVID-19 relief package into law. While much has been written regarding the direct payments contained within the bill, now that the language is official, the time has come to analyze the tax credits.

1) The Child Tax Credit (CTC) and dependent care credit will receive a major bump. The Journal of Accountancy reports the key takeaways from the CTC provisions are:

  • $3600 per qualified child under age six, $3,000 for each child aged 6 up to age 17.
  • Taxpayers no longer have to make at least $2500 per year to qualify.
  • Increased credit begins phasing out at over $150,000 for families, $112,500 for heads of household and $75,000 for others; expanded credit reduces by $50 per $1000 of income beyond those thresholds.
  • Taxpayers’ CTC amounts are to be estimated by the IRS and paid out monthly in advance at one-twelfth of the annual estimation beginning in July through December. Further, the IRS will be responsible for creating a web portal to allow taxpayers to opt out of the advance payments1.

2) Expands dependent care tax credits for one year in the following ways, according to CNET:  

  • The 2021 Dependent Care Credit is refundable.
  • $4,000 for one child; $8,000 for two or more children with adjusted gross income (AGI) up to $125,000.
  • Credit reduced below 20% for those households with AGI of $400,000 or greater2.

3) Unemployment receives more than just an additional $300 in weekly benefits. The new bill will exempt unemployment benefits received in 2020 from federal income tax up to $10,200 for families with an AGI under $150,000. According to CNBC, consideration for tax preparers and their clients include:

  • Taxes only waived on first $10,200 of unemployment income per individual, or first $20,400 per couple filing jointly with an AGI up to $150,000.
  • Not all states allowed unemployment recipients the option to have 10% of benefits withheld toward tax liabilities; less than 40% of those with the option to do so actually took advantage.
  • All other tax mechanisms apply to amounts above the threshold, meaning whether a taxpayer ends up owing taxes on their benefits depends on their situation in 2020. Eligibility for other credits, such as earned income or the CTC, could change what one might owe3.

4) The earned income tax credit (EIC) decreases the applicable minimum age to 19 for 2021, except for students (24) and former foster or homeless youth (18) and the maximum age is eliminated. According to the Journal of Accountancy the following applies:

  • Certain separated spouses could still qualify.
  • Phaseout percentage increases to 15.3%, and phaseout amounts also increased.
  • Disqualifying investment income threshold raised to $10,000 from $2,200.
  • Taxpayers may temporarily use 2019 income in place of 2021 income to calculate credit amount1.

5) Student loan forgiveness received consideration in the latest bill as well. Effective between 2021 through 2025, forgiveness of any student loans insured or guaranteed by federal or state governments, as well as from private lenders and educational institutions will be tax exempt. While 2025 is the current expiration date, this could be extended or made permanent, the CPA Practice Advisor reports4.

6) The new bill also codifies the credits for sick and family leave enacted by the Families First Coronavirus Response Act, according to the Journal of Accountancy. Those credits are extended to Sept. 30, 2021. It also changes it in the follow ways:

  • 501(c)(1) governmental organizations are now eligible.
  • Self-employed individuals may calculate qualified family leave using 60 days, up from 50.
  • Paid leave credits will now include leave due to COVID-19 vaccinations.
  • Reset of the limitation on the overall number of days considered for paid sick leave resets after March 31, 20211.

7) The employee retention credit (RTC) is codified into the new bill as well and will be extended through the end of the year.

8) The applicable percentage amounts of the premium tax credit changes under the new bill. However, taxpayers will not have to repay any overpaid credits in 2020. Further, new special rule treats unemployment recipients for any week beginning during 2021 as an applicable taxpayer. The following additional tax provisions, according to the Journal of Accountancy also apply:

  • For years after 2026, a corporation’s five highest-compensated employees (besides the employees already covered by Sec. 162(m)) will be added to the list of individuals subject to the $1 million cap on deductible compensation.
  • Extends limitation on excess business losses of noncorporate taxpayers for one year, through 2027.
  • Repeals Sec. 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis.
  • States that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and such will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. This also applies to SBA restaurant revitalization grants.
  • Temporarily delays the designation of multiemployer pension plans (endangered, critical, or critical and declining status); includes other changes for multiemployer plans in critical or endangered status.
  • Creates new Sec. 6432 to allow COBRA continuation coverage premium assistance credit to taxpayers. Credit is refundable, and also qualifies for advance payment1.

Finally, on the matter of recovery rebates, direct payments of $1400 ($2800 for those filing jointly) will be credited to taxpayers and their dependents, including qualifying students and relatives claimed. Phase out begins at the AGI of $75,000 for individuals and $150,000 for those filing jointly. Income from 2019 will be used if 2020 income taxes are not yet filed. According to Kiplinger, those that do not receive a third round of stimulus via direct payment, 2021 tax returns will include a stimulus credit5.

  1. Nevius, Alistair M. “American Rescue Plant Act Passess With Many Tax Components.Journal of Accountancy. 10 Mar. 2021. Accessed on 12 Mar. 2021.
  2. Colby, Clifford. “New Stimulus Bill Provides More Than 1 Check…” CNET. 13 Mar. 2021. Accessed 12 Mar. 2021.
  3. Reinicke, Carmen. “Next Covid Bill Will Waive Taxes on $20,400 of Unemployment Income…CNBC. 8 Mar. 2021. Accessed on 12 Mar. 2021.
  4. Berry, Ken. “Biden Signs Stimulus Bill Into Law.CPA Practice Advisor. 10 Mar. 2021. Accessed on 12 Mar. 2021.
  5. Mengle, Rocky. “Your Third Stimulus Check: How Much? When? And Other FAQs.Kiplinger. 11 Mar. 2021. Accessed 12 Mar. 2021.

Source: MICPA

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