How does the American Rescue Plan Act of 2021 affect me?

The 2021 tax filing season has been quite a roller coaster ride so far.  As if 2020 didn’t have enough built-in complications, the American Rescue Plan Act (ARPA) of 2021 adds even more twists for your tax return. The United States had provided about $6 trillion in total economic relief to the American people during the coronavirus pandemic, including the $1.9 trillion approved when President Biden signed the American Rescue Plan Act (ARPA) into law. Much of the American Rescue Plan’s economic relief is administered through the tax code in direct payments (stimulus checks) and expanded Child Tax Credit (CTC) in 2021.

Over many years, the IRS has been tasked with an ever-growing list of administrative duties that go well beyond simple revenue collection—everything from poverty alleviation to education, housing, and health-care benefits. In addition to other pandemic response measures, the American Rescue Plan would now require the IRS to administer additional benefits on a recurring monthly basis, much as a traditional spending agency, all while processing upwards of 160 million tax returns.

While several of the American Rescue Plan provisions are targeted toward the pandemic, as the extended unemployment insurance benefits, other aspects, like the expanded Child Tax Credit, are unrelated and not well targeted toward the pandemic.

Most of the provisions are temporary expansions for 2021 to combat the pandemic. However, some policymakers are already considering making several of the newly expanded benefits permanent, such as the Child Tax Credit.

$1,400 Stimulus Payments (Economic Impact Payments)

The American Rescue Plan Act provides a third round of stimulus payments up to $1,400 for adults and any dependent. Households with earnings of more than $80,000 for single filers, $120,000 for Head of Household filers, and $160,000 for married filing jointly will not receive any payment. The payments begin to phase out at $75,000 for single filers, $112,500 for Head of Household filers, and $150,000 for joint filers.  Be prepared for your tax preparer to ask about the amounts received in the first and second-round stimulus payments.  If you did not receive your stimulus payments, the IRS has established a Recovery Rebate Credit as a way for taxpayers to recover those funds.

Unemployment Benefits

The American Rescue Plan also extends the three federal unemployment insurance expansions first created by the CARES Act through September 6, 2021. The American Rescue Plan increases the total number of weeks of benefits available to individuals who cannot return to work safely from 50 to 79, matching the expiration of the broader UI benefits.

The law maintains the federal supplement at its current $300 a week for weeks beginning after March 14 and before September 6, 2021. The American Rescue Plan provides 53 weeks of federal UI benefits after the state benefits end.

The American Rescue Plan contains a new provision to exempt $10,200 of unemployment benefits received in 2020 from income taxes. The exclusion is retroactive, applying to unemployment insurance benefits received last year, essentially to reduce the issue of surprise tax bills. It only applies to individuals with incomes below $150,000. The Joint Committee on Taxation (JCT) estimates the exemption will reduce federal revenue by $24.9 billion. 

More than 45 million tax returns have already been filed with the IRS in the ongoing tax season, which is has been extended to May 17. The last-minute exemption is bound to create confusion for taxpayers. It puts additional pressure on the IRS to quickly provide instructions and guidance for those who have already filed their returns. Ideally, the exemption would have been made prior to the tax season’s commencement in mid-February to ensure a smoother tax season for the agency and taxpayers. The IRS has stated that they will begin reviewing those returns this month and issuing any additional refunds due beginning May. 

Expanded Child Tax Credit

Finally, the American Rescue Plan greatly expands the Child Tax Credit by allowing households with children to claim up to $3,600 for younger children or $3,000 for children age six or older regardless of earned income. While the CTC currently phases in with income, and only $1,400 can be refunded to low-income households, the American Rescue Plan allows the full credit for low-income households, raising marginal tax rates filers as they are no longer provided the credit as income rises.

The expanded CTC would also be paid out monthly, which will be a significant administrative challenge for the IRS. The agency must obtain projected incomes, filing statuses, and the number of qualifying dependents for each eligible household to accurately advance the payments. While the Biden administration hopes to have this process ready by July, that may be an unrealistic timeline; it took the IRS two years to establish advance payments of the Affordable Care Act’s premium tax credits.

Advance Premium Tax Credits

Stressed about having to pay back some or all of the premium subsidy that was paid on your behalf last year? You’re in luck: Under the American Rescue Plan Act, excess premium subsidies for 2020 do not have to be repaid to the Internal Revenue Service.

This is a one-time provision that’s being granted as part of the federal government’s massive COVID relief measure—which is also significantly increasing premiums subsidies for 2021 and 2022—and it will come as a great relief to many of the Americans who enrolled in individual and family health plans through the health insurance marketplace/exchange last year.

But thanks to the American Rescue Plan Act, no marketplace plan buyer will have to worry about repaying excess premium subsidies for 2020. If your subsidy amount was too small, you could still claim the additional amount that you’re owed when you file your taxes. But if your subsidy ended up being too large—even if your income ended up exceeding 400% of the poverty level—you won’t owe any of it back to the IRS.

This is a one-time provision for the 2020 tax year only. So it’s still important to project your income for this year as accurately as possible and keep the exchange updated if your income changes later this year.

It’s not yet clear exactly how the IRS will handle excess premium tax credits for people who filed their 2020 tax returns earlier this year and already repaid some or all of their premium tax credit for 2020. Amended tax returns can always be used to make a change, although the IRS has advised that tax filers hold off on this for the time being and await further instructions from the IRS.

As the public health situation and the economy hopefully improve this spring and summer, policymakers will have an opportunity to evaluate the effectiveness and the costs of the expanded benefits in the American Rescue Plan and determine whether they should be allowed to expire or otherwise be reformed.