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On March 10, 2021, Congress passed a final version of the $1.9 trillion relief bill entitled the American Rescue Plan (ARP), and President Biden signed the legislation this afternoon. The ARP has several facets to it that are going to affect most Americans. This bill provides money for COVID vaccines and testing, relief to state budgets, and various other pet projects. To help clients, prospects, and others, Selden Fox has provided a summary of the relevant portions of the ARP related to individual taxpayers.

Recovery Rebates (aka Stimulus Payments)

The most significant aspect of the ARP is the third round of stimulus payments for Americans. This time the checks are going to amount to up to $1,400 per taxpayer and dependent. There are some crucial differences between the previous stimulus checks and these new payments that will hopefully be sent out over the course of the next two weeks.

ALL dependents are now eligible for stimulus payments. Previously, if you had a child over the age of 16 or if you had an adult-dependent, that dependent did not receive a stimulus. This time, you will receive $1,400 for all dependents.

This stimulus also significantly narrowed the phase-out range. Previously, if you made more than $75,000 (single) or $150,000 (married), you saw a reduced stimulus payment until you reached the top end of the phaseouts at $99,000/$198,500 for the first stimulus payments. Now, the phase-out happens a lot quicker so once you make $80,000 (single)/$160,000 (married), you will receive no payment.

The IRS is going to base your recovery rebate on your most recently filed tax return. For those who made more money in 2020 than 2019, refraining from filing your taxes until you get your stimulus money is the best course of action.

In the alternative, if you made less money in 2020 than in 2019 and are now under the threshold for receiving a stimulus payment, you will want to file your 2020 taxes in order to get your recovery rebate payment.

To that end, the ARP states that stimulus payments will be paid out in two phases. In Phase I, the IRS will use data that it already has and pay stimulus payments out based on that information. For anyone who earned less in 2020 than in 2019 and has not filed a tax return yet, there will be a Phase 2 in which the IRS will pay additional funds to everyone who should have received a larger rebate based on their 2020 filing. That date is going to be the earlier of 90 days after tax deadline day OR September 1, 2021. The takeaway to the 2-Phase payout: We do not have to rush to get your taxes filed for 2020 just so you can get your stimulus. Whatever you do not get in the first phase, you will get in the second phase, 90 days later.

When is my Recovery Rebate Coming?

If you are eligible for this stimulus payment based on the data the IRS already has, you will likely receive it in the next few weeks. The IRS pushed its first stimulus payments out in a matter of six days from the point that President Trump signed the Consolidated Appropriations Act in late December, and we can probably expect payments to start going out as soon as next week.

Unemployment Benefits Are Now (Partially) Non-Taxable

The ARP allows for the first $10,200 in unemployment benefits as non-taxable, but only for people who made less than $150,000 in 2020.

If you or someone you know has filed their 2020 tax return already and was on unemployment in 2020, there is a good chance they are going to have to amend their tax return to recoup these taxes. However, the IRS could conceivably “automatically adjust” these returns, once the IRS systems are re-programmed. That process has not been detailed yet but likely will be addressed by the IRS given the number of people it could impact.

Expanded Child Tax Credit

If you have a child under the age of 17, you typically receive a Child Tax Credit (CTC) of $2,000. The ARP is extending that Child Tax Credit to $3,600 per child under the age of 6, and $3,000 per child between the ages of 6 to 17. Dependents who are 18+ remain worth a $500 credit. This change is for Tax Year 2021 only.

The expanded CTC also comes with another bonus. The IRS is going to be paying out half of the CTC monthly from July 2021 to December 2021. This means that if you qualify, you will receive $300 per month per child under the age of 6 or $250 per month per child between 6 to 17 years old from July 2021 to December 2021.

As with the stimulus payments, you will not receive the expanded CTC or the advance if you make more than $75,000 (single)/$150,000 (married). Taxpayers over the threshold will still receive CTC of $2,000 on their 2021 return, but they will not receive the advance or the extra money.

Unlike the Recovery Rebates, this CTC advance WILL be “trued up” on your 2021 tax return, so if you receive the advance payments in 2021, but your income for 2021 ends up being over the threshold, you will be required to pay that excess back.

Other Items

In addition to these provisions, the ARP also has some tax implications for lower income Americans, including Expansion of the Earned Income Credit, extension of the $300/week federal unemployment assistance through September 6, 2021, and expansion of the Health Insurance Premium Tax Credits that benefit those who purchase a health plan through Obamacare.

What does this mean for tax filing season?

For filing your 2020 taxes, given the ARP and all that is involved it is likely your tax return, even if filed on time, will experience delays in processing. The Treasury and the IRS must implement changes from the ARP, halt their e-filing systems, reprogram computers, and the deal with the already voluminous mail backlog that will only grow in the interim. This may increase the probability that Tax Deadline Day may once again be extended as it was last year but only time will tell if that is the case. If Tax Day does get extended, similar to last year, we will be faced with states making decisions to follow suit or non-conform.

Contact Us

Selden Fox will continue to stay abreast of the ARP and will post additional news as appropriate. If you have questions on the above information or need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Paul Rozek

Paul Rozek provides tax research, consulting and compliance services to closely held businesses, tax-exempt organizations, individuals and fiduciaries. His clients include family offices, private foundations, trade associations, charitable organizations, schools, credit unions and other nonprofit entities.