American Rescue Plan – Legislation Highlights

Since March 2020, there have been two significant stimulus packages—the $2.2 trillion CARES Act and the $900 billion Consolidated Appropriations Act. Now, there is another package, the American Rescue Plan.

The long-awaited relief bill has finally passed through reconciliation requiring only a simple majority and passed 50/49. The historic $1.9 trillion coronavirus relief package was signed into law by President Joe Biden on Friday, March 12.

What support does this bill provide? More importantly, how does this legislation impact you? Here are the major takeaways.

Top Provisions of the American Rescue Plan

This package was designed to support individuals, families, businesses, and the economy at large, which has sustained negative impacts due to COVID-19. Let’s take a look at the legislation and talk about how it impacts you.

Direct payments

Eligible households will receive the biggest stimulus check yet, $1,400 per person plus an extra $1,400 for qualified dependents. This is huge as previously dependents did not receive the full payment rebate amount.

Phaseouts are much stricter this time around, income thresholds are below:

• Single: $75,000 (Phase out at $80,000)
• Head of Household: $112,500 (Phase out at $120,000)
• Married Filing Joint: $150,000 (Phase out at $160,000)

There’s good and bad news here.

The bad news is that these thresholds are significantly tighter than previous government stimulus so fewer individuals with higher income will qualify.

The good news here is that even if didn’t qualify for direct payments based on your 2019 or 2020 return, there is the availability for you to qualify in 2021 and receive a tax credit.

There are checkpoints here to determine whether you qualify for a direct payment based on your AGI from the most recent tax return on file.

• Checkpoint 1:
  • 2019 or 2020 tax return has been filed.
  • Income was equal to or less than the AGI phase-out range.
  • The taxpayer receives a full recovery check via direct deposit, check, or debit card.
• Checkpoint 2:
  • This is for taxpayers who have no filed their 2020 tax returns yet.
    • AGI might be significantly less in 2020 compared to 2019.
    • Can have recovery rebate amount calculated based on newly reported 2020 AGI.
      • If 2020 AGI ends up less than 2019, IRS will send an additional check to ‘true up’ the difference.
    • The key to note here is to have your 2020 tax return filed before what the American Rescue Plan introduces as the Additional Payment Determinate dates. This Additional Payment Determination Date is the earlier of:
      • 90 days after the 2020 calendar year filing deadline (90 days after April 15th)
      • September 1st, 2021
        • This acts as a hedge in case the filing deadline is moved (because 90 days after April 15th is sooner than September 1st)
• Checkpoint 3:
  • Recovery Rebate is a 2021 tax credit
    • If 2021 AGI is lower than 2019 and/or 2020 AGI (and below the phaseout), a recovery rebate credit will be applied to the 2021 tax return
    • No clawback of 2021 Recovery Rebate credit paid at any “checkpoint’

The planning opportunity that arises is to reduce your income below the income thresholds to qualify for the recovery rebate checks. This can be done through 401k, HSA, IRA, etc. contributions, pushing bonuses out until the next year, or even taking some unpaid time off work to qualify if you do not already but are close to the income thresholds.

Substantial child tax credit

Americans will see a 12-month extension on a larger child tax credit (historically at $2,000/child) but have been raised to $3,600 for children under 6 and $3,000 for kids 6 to 17.

There are several ways this credit could impact families. It allows 17-year-old children to qualify, removes the earnings stipulation, and is fully refundable. The best part? Half the credit can be paid to families in advance. While there are, of course, income thresholds to be cognizant of, $200,000 for single filers and $400,000 for married filing jointly filers – there is a caveat here. One important thing to note is that the ‘extra’ credit amount from this bill is subject to the lower-income phase-out limits that are the same as the direct payment thresholds this adds additional emphasis on those who are slightly over the income threshold to reduce their taxable income to qualify for the ‘extra’ child tax credit.

Child & Dependent Care Credit

For those with children or dependents will see a boost in the maximum amount of expenses eligible to be used in the calculation for the child and dependent care credit for 2021. For starters, the credit is (again) fully refundable for 2021 and upper limits for qualifying expenses are as follows:

• $8,000 for one child
• $16,000 for two or more children

There is a formula to calculate the credit amount based on a certain percentage of the total amount of eligible expenses. Max applicable percentage is as follows:

• 2020: 35% of qualified expenses
• 2021: 50% of qualified expenses

Boost for unemployment benefits

Until September 6, 2021, unemployment benefits can see an increase of $300 per week. The first $10,200 in benefits will also be tax-free (for all filing statuses making less than $150,000).

Unemployment programs that protect self-employed people and independent contractors (Pandemic Unemployment Assistance) have also been extended to September 6.

The plan also offers a 100% subsidy for COBRA health insurance premiums, allowing unemployed people to remain on their plans through September. Note, this is only for those who are not eligible for Medicare/other group healthcare plans and were involuntarily terminated – if you retired or left on your terms, this is not available to you.

A break for education (but not student loans)

School closures have put a significant strain on students, parents, teachers, and administrators. The plan allocates about $130 billion to K-12 schools. The funds will help schools reopen safely by reducing class sizes, purchase proper personal protective equipment, enhance ventilation, among other improvements.

Deeply connected to K-12 closures is the lack of accessible and affordable childcare. The plan infuses $40 billion to childcare providers.

$40 billion is reserved for higher education to provide emergency financial aid to students.

Biden’s much-discussed student loan forgiveness plan was not included in this package. However, should any forgiveness law be passed before January 1, 2026, the forgiven balance will be tax-free. This amount has been discussed to be up to $10,000 per borrower but is unknown at this time. Under normal circumstances, loan forgiveness is considered taxable income—a law afflicting many borrowers.

Additional funds for vaccine manufacturing and distribution

Covid-19 vaccine manufacturing gets about a $20 billion windfall and about $50 billion will be funneled into testing and contact tracing.

How will the bill impact you?

The American Rescue Plan will impact families in different ways.

Direct payments present many opportunities for individuals and families across the country. If you don’t have to use the funds to supplement daily living expenses, consider the following:

• Shore up your emergency fund (3-6 months of living expenses)
• Put more towards your retirement (Brokerage, IRA, etc.)
• Pay off debt (concentrate on high-interest first)
• Fund short-term goals

It’s important to take advantage of every financial opportunity available to you, especially in light of the trials and tribulations over the past year.

We are here to support you through all of life’s transitions. If you have any questions regarding how this legislation might impact you – please feel free to schedule a call with us below.