The American Rescue Plan Act of 2021 – A Summary

There is some confusion about The American Rescue Plan Act of 2021. So I asked Eric Dow an Eagle Mountain resident and business owner to wade through the act and give us some insight. Eric Dow is a CPA and lives in Eagle Mountain with his wife and two children. A graduate of BYU’s accounting program, he opened Dow Tax & Accounting (www.DowCPA.com) in Eagle Mountain in 2014. Dow Tax focuses on tax services for self-employment, real estate, and individuals and families, serving hundreds of tax clients locally and many more throughout the U.S. You probably know about the $1,400 stimulus payments and something about unemployment and higher child tax credits. What you may not know is that it could take some careful planning to maximize your total benefits of The American Rescue Plan Act of 2021, officially signed into law on Thursday. First let’s recap the main tax provisions of the Act, then go through some examples, and finally cover a few tips and strategies.

Stimulus Payments

$1,400 per person will be sent to nearly every married couple with income under $150,000 ($112,500 head of household/$75,000 single). Unlike the previous stimulus payments, every dependent will qualify (not just those under 17), including college students or elderly parents that you claim as dependents on your taxes. For a married couple, it phases out from $150,000-$160,000 of income. The stimulus will be based on your most recent tax return filed (2019 or 2020) and then when you file your 2021 next year, if it calculates a higher amount from a change in income or family size, you will get the difference. Check the status of your payment at https://www.irs.gov/coronavirus/get-my-payment. Kiplinger has a great calculator if you’re not sure how much you’ll get https://www.kiplinger.com/kiplinger-tools/taxes/third-stimulus-check-calculator/index.php.

Child Tax Credits

These are increased for 2021 only from $2,000 per child to $3,000 per child or $3,600 per child under age 6. 17-year-olds normally only get you a $500 credit, but they will qualify for $3,000 as well. The IRS is supposed to set up an online portal and start sending out monthly payments this summer as an advance of the credits you’ll claim on your taxes next year. So considering just those two provisions, a new baby in 2021 means $5,000. Twins? $10,000. Paying for child care? Keep reading.

Child Care Credit

For 2021, a one-year expansion of this tax credit for paying child care to allow you to work, means you’ll get back 50% of up to $8,000 for one child or $16,000 for two or more children. Make sure to get your provider’s SSN or EIN to get your credit.

Unemployment

For 2020 (not 2021) the first $10,200 of unemployment compensation will not be taxed for those with income under $150,000.

Health Insurance Credit Repayment

If you have insurance through healthcare.gov you sometimes have a credit repayment on your taxes if your income goes up. That repayment is eliminated on 2020 tax returns (but will apply again in 2021). There are also some 2021 changes to the Earned Income Credit and extension of the Sick Pay and Family Leave Credit for employers and self-employed.

Examples

Let’s see how these provisions work together with a few interesting examples. ● Single mom makes $50,000 and pays $900/month for childcare for her kids ages 3, 5, and 8. She will receive $5,600 in stimulus and her 2021 tax credits will increase by $8,400. Did that $10,000 bonus actually cost you money? ● A family makes $150,000 and has 8 kids ages 17, 15, 13, 11, 8, 5, 3, and 1. They will receive $14,000 in stimulus and their 2021 tax credits will increase by $11,300. ● What if the same family instead makes $160,000? They will receive no stimulus. Is there a double benefit for children with divorced parents? ● A 4-year-old child’s father and mother are divorced and alternate claiming the child on their taxes. The father claims the child on his 2020 tax return and receives the stimulus of $1,400 for the child and a $2,000 child tax credit. In 2021 the mother claims the child and she also receives $1,400 for the child and a $3,600 credit. Should you file in 2021 if you don’t have to? Maybe. ● A single 18-year-old is dependent on her parents in 2020. The parents will receive $1,400 of stimulus for her. In 2021 she is 19 and supports herself making $11,500. On her 2021 tax return she will receive $1,400 in stimulus and will get a 2021 earned income credit of $1,502. She is not required to file a tax return based on her income but will need to file to receive both credits. ● A 68-year-old who receives social security income of $25,000 and part-time wages of $5,000 is not required to file taxes. If he does file in 2021 he will receive Earned Income Credit of $1,377.

Tax Tips and Strategies

What if you already filed your 2020 tax return but have unemployment compensation or a health insurance credit repayment? ● You will likely need to file an amended return, but wait until the IRS issues guidance. Should you wait to file your 2020 tax return? ● If you have unemployment or a health insurance credit repayment, wait until systems are updated to apply the retroactive law correctly to avoid amending later. ● If your 2020 income disqualifies you from receiving a stimulus payment, but your 2019 income was low enough, wait until you receive your stimulus payment or you may not get any. If you miss it but then your income goes back down in 2021, you could still get it on your 2021 tax return. ● If you claimed your 18-year-old son in 2019 but he’s no longer a dependent in 2020, wait to file until you receive the stimulus including $1,400 for him based on your 2019 tax return. Then after he files his 2020 tax return (on which he’ll receive a credit of $1,800 to make up for the first two rounds of stimulus) he’ll also receive $1,400 for the new round of stimulus. There is also a double benefit for a 2020 dependent who is no longer a dependent in 2021. Do you really not get any stimulus if your income is over $160,000? ● A family of 10 that makes $160,000 doesn’t qualify for any stimulus payments. However, if they don’t have a retirement plan at work they can contribute $10,000 to IRAs, lowering their income to $150,000, so they can receive $14,000 of stimulus plus save $2,200 in income tax. That’s a marginal tax rate of 162%! ● A family of 6 filed their 2020 tax return showing $175,000 of income and expect to make $182,000 in 2021, so they don’t qualify for any stimulus payments. They decide to contribute the maximum $19,500 to a 401(k), $6,000 to the spouse’s IRA, and the $7,200 max to their HSA. That brings their 2021 income down to $149,300, saving them $7,194 in income tax and qualifying them for an $8,400 stimulus credit on their 2021 tax return. ● A self-employed married father of 5 did not qualify for a stimulus payment is on track to make $200,000 in 2021 in his construction business. In December he finances $50,000 of new equipment, reducing his income to $150,000. He saves $8,800 in income tax and gets a stimulus tax credit of $9,800 on his 2021 tax return. These are just a few of many scenarios in which small changes can make big differences on your taxes for 2020 and 2021. Not all income limits and other restrictions could be covered in this article. If you don’t have a full understanding of how the various portions of the tax code fit together, it may be worth hiring a CPA to make sure you’re not giving up thousands of dollars just to save a few hundred. There are a variety of opinions as to the necessity of this law as a whole and regarding many of the individual provisions. In this article I make no judgment as to what may be fair or what the law should be, I only seek to educate and inform on what the current law is, and look out for the financial welfare of my clients based on what congress decides the tax law should be this week.