The American Rescue Plan Act of 2021 is on its way through Congress, expected to become law by March 14. The bill includes the following for employers:
- Paid sick and family leave credits
- Employee retention tax credits
- Retirement plan funding provisions
The legislation also includes the following for individuals:
- A third round of stimulus payments
- Unemployment relief
- An increase in child tax credits
- Significant enhancement for dependent care assistance
- An increase in Earned Income Tax Credits
Here is a summary of some of the highlights.
Paid Sick and Family Leave Credits
The payroll tax credit for employers providing paid sick and family leave will be extended to September 30 of this year, and the limit on wages will be increased from $10,000 to $12,000. This includes credits for employees who take time off to receive a COVID-19 vaccine, or to recover from a vaccine-related illness or injury. The bill will also reset the ten-day-per-employee limitation for employers who claim the credit. As of March 31, 2021, a new ten-day period will become available.
Employee Retention Tax Credit
The new bill extends the payroll credit for employee retention through the end of 2021.
Retirement Plan Funding Provisions
Beginning in 2030, the bill will allow for a freeze on the inflation-adjusted increases to the annual contribution limit to defined contribution plans (currently $58,000), the annual defined benefit limit (currently $230,000), and the maximum limit on compensation that that may be taken into account when determining the limit on contributions and benefits of an employee (currently $290,000).
To help multiemployer plans meet their funding obligations for pension plans, the bill will provide delays in having to apply changes to funding plans or schedules. It will also provide extended improvement and rehab periods for plans that entered critical or endangered status in either 2020 or 2021. As well, the bill will provide longer investment loss amortization periods.
And for single-employer plans, the new legislation will grant a longer period for amortizing funding shortfalls of 15 years, up from the current period of just seven years. As well, the bill will provide for an extension of funding stabilization measures.
Direct Stimulus Payments for Taxpayers
The legislation provides a $1,400 stimulus payment, subject to income limitations. The amount of the payment phases out for single filers with an adjusted gross income of $75,000 to $80,000, heads of household with an AGI of $112,500 to $120,000, and joint filers with an AGI of $150,000 to $160,000.
The legislation extends the $300 weekly unemployment relief through early September, though the first $10,200 of unemployment relief will be exempt for households with up to $150,00 of income.
An Increase in the Child Tax Credit
The legislation will increase the child tax credit to $3,000 (or $3,600 for children under six years of age) for the 2021 tax year, and it will make the credit amount fully refundable. Under current legislation, the tax credit is $2,000, but only $1,000 of that is fully refundable in the case that there are insufficient taxes to be credited against.
The bill will also extend the maximum age of qualifying children to 17-year-old children.
That said, the additional credit amount ($1,000 for children over six and $1,600 for children under six) will be subject to income thresholds and will be phased out by $50 for every $1,000 of AGI that exceeds the thresholds:
- $75,000 for single filers
- $112,500 for heads of household
- $150,000 for joint filers
The bill directs the Treasury and IRS to issue advance monthly payments of half the credit amount beginning on July 1, 2021, with the remaining half of the credit applied on 2021 tax returns.
Significant Enhancement for Dependent Care Assistance
For 2021 only, the child and dependent care credit will be significantly enhanced.
This one is a bit confusing, so let’s break it down. Under current law, the credit is equal to 35 percent of qualified expenses for care of a qualifying dependent, with a cap at $3,000 for one dependent and $6,000 for two or more. But, the credit is reduced by one percentage point for every $2,000 of AGI in excess of $15,000, until reaching 20 percent, at which point the credit is no longer reduced.
This legislation increases the credit from 35 percent of qualified expenses to 50 percent of qualified expenses, and it reduces the credit percentage by one point for each $2,000 in excess of $125,000, which is quite a jump from the current threshold of $15,000.
But there’s more …
The credit is not reduced below 20 percent until AGI reaches $400,000, at which point the reduction continues until reaching zero.
And there’s still more …
The amount of eligible expenses is increased from $3,000 for one dependent to $8,000, and from $6,000 for two or more dependents to $16,000.
And, the credit is fully refundable.
An Increase in Earned Income Tax Credits (EITC)
The EITC will increase from $543 to $1,502 for filers without children. The amount of income to maximize the credit will increase from $7,10) to $9,820, and the threshold for the phaseout will increase for non-joint filers from $8,800 to $11,610. Beyond that, the minimum age to claim the EITC for filers with no child will be lowered from 25 to 19.
The legislation is close to 600 pages, so there are a few other items packed into the bill. Namely, it:
- Provides that EIDL loans and Restaurant Revitalization Grants received from the SBA will not be subject to income tax, and the exclusion will not result in the denial of a deduction reduction of tax attributes, or denial of increase in basis, which is great news for restaurants.
- Increases funding for COVID-19 testing and vaccination programs.
- Provides aid to state and local governments.
- Provides assistance for schools so that students can return to classrooms.
- Includes premium assistance for COBRA continuation coverage.
- Makes changes to the premium tax credit, and
- Much, much more.
As always, we will do our best to keep you abreast of new developments. In the meantime, call us or your advisor should you have any questions about how this impacts your own business or tax status.