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American Rescue Plan Act

March 19, 2021
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Recently, Congress passed another bill to provide additional stimulus to the economy in an attempt to combat some of the economic hardships experienced due to the Covid-19 pandemic. Most are aware of the legislation because of the direct payments provided to individuals (stimulus payments), but there are also some other lesser-known components of the bill that we thought you should be made aware of. In addition, there have been some questions about criteria for and timing of stimulus payments and we’ll do our best to make that clearer. If you come across a piece of this short summary that you think may apply to you, but are unsure, please reach out to your advisor – we’re happy to help.

 

First, we’ll go through stimulus payments. Many have likely already received their stimulus payments, but if you haven’t, we’ll discuss the who and the when.

The who is based on income, when depends on the timing of tax filing. Individuals/Families can qualify in one of three windows. If you’ve already filed your 2020 return (prior to the bill being passed) you’ll only be eligible in two windows. The eligibility by tax filing status is as follows and is based on AGI (that would be line 8b of your 1040 in 2019):

Single (S): $75,000-80,000

Head of Household (HOH): $112,500-120,000

Married Filing Jointly (MFJ): $150,000-160,000

For those below those income levels, you will receive $1400 per member of your household – this includes all dependents and doesn’t have the same age restrictions of previous payments. In other words, adult children and even parents will be included assuming they’re categorized as dependents on your tax return. For example, a family of four (Mom, Dad, 2 kids) would receive $1400x4=$5600.

If you haven’t already received the check, there is still a chance you will. Most that previously qualified and were paid via direct deposit have already received the most recent payment (although they could potentially receive more if their circumstances have changed). Those that received previous payments via prepaid debit cards or checks are likely to receive them in the coming weeks.

The three time periods you can qualify in:

  1. If you have yet to file your 2020 taxes, you can qualify based on your 2019 income – if your 2020 income is higher and you do not qualify based on that, it makes sense to wait to file until you’ve received payment.
  2. You can qualify based on your 2020 income. If your 2019 income were too high, but your 2020 fell below the AGI range to qualify, you will receive the payment based on 2020 filing assuming you file within 90 days of the 2020 tax filing deadline (now May 17) or September 1, 2021, whichever is sooner (this would obviously require the deadline to get pushed back again).
  3. Because this is technically a 2021 credit, if you didn’t receive it based on 2019 or 2020, you can also receive it based on 2021 income if you qualify. You’d then be paid after filing your 2021 return.

Despite this being a 2021 credit, technically speaking, you can qualify in one of three tax filing years. Depending on your income in 2019 or 2020, from a planning perspective, you should be careful to consult your advisor or tax professional if your income is close to the cutoff in any of those years. For example, if your income barely exceeds the limits, but you’re eligible to contribute to something like an HSA or retirement account prior to the tax filing deadline, you may then qualify to receive the stimulus. Also, for some unique situations, married couples may even find that filing separately could be advantageous based on their unique situation (it’s very rare that this is advantageous in any other circumstance).

To clear up one more misconception from the past – if you received the check, you would NOT have to pay it back. Many were confused that past credits were just an advance on a refund they would have received. This is not accurate – if you received the check based on initially qualifying, it won’t impact your future filing numbers and you can keep it. It doesn’t matter if you received it based on 2019 income, but no longer qualify in 2020 or 2021.

There are other provisions in the bill that are of interest to some people, but we’ll be briefer in our description.

An enhanced Child Tax Credit will apply for 2021 - $3,600 per child under 6 and $3,000 per child 6-17. The income levels to qualify are the same as for the stimulus payment and are phased out above those levels, stopping completely at $200k (S) and $400k (MFJ). This credit differs from previous years in that some of it MAY be paid in advance beginning in July (based on your most recently filed tax return). You may receive up to half the credit in monthly (or regular) installments. What’s vastly different from the stimulus payment is that THIS EXCESS AMOUNT CAN BE TAKEN BACK BY THE IRS if you no longer qualify on your 2021 tax return. There are some safe harbor ranges which are lower than the qualifying ranges that won’t require you to pay it back. The income limits for the $2,000 credit are the same as before.[1]

There is also a Child and Dependent Care Credit that is dramatically increased for kids under 13 and for income under $125,000 AGI (for all filing statuses). Previously, the credit was worth UP TO $1050 for one child and $2100 for two or more, but now can be worth up to $4000 for one and $8000 for two or more. If you have children that you pay for childcare for and your income is near $125,000 AGI, please pay attention to and plan around this. [2]

There are some modifications to taxation of SOME unemployment compensation. If you filed 2020 taxes prior to the bill being passed and were taxed on ALL unemployment, you may be able to file an amended return. [3]

There are several other provisions that we won’t go into detail on, but include enhanced unemployment benefits, enhanced COBRA coverage, expansion of the Affordable Care Act Premium Assistance Credit, provisions for Excess Business Losses, enhanced Earned Income Tax Credit, paid sick leave changes, and more.[4]

Although many associate this bill with stimulus payments, please be aware of the other planning opportunities that this presented and ask questions if you think this could impact you. Some simple planning changes could potentially be worth thousands of dollars to you over the coming 12-13 months. We’re here to help.

 

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  

LPL Financial does not provide tax advice.

[1] Kitces.com

[2] Kitces.com

[3] Kitces.com

[4] Kitces.com