The ARP Act: A Breakdown of the Key Provisions — Wealthrise Financial Planning

It’s been more than a year since the pandemic hit, and the country is still struggling to regain an economic foothold. Despite past efforts to stimulate the economy, 9.7 million people remain out of work and 200,000 businesses have closed permanently.

To help trigger a recovery in 2021, the government passed the American Rescue Plan (ARP) Act on March 11. The $1.9 trillion legislation intends to deliver a wide range of pandemic-related financial relief for citizens by providing a cash stimulus and reducing the tax burden for individuals and families. Here’s a list of the key aspects of the Act and how they can help you.

2021 Recovery Rebates (aka Stimulus Payments)

One of the most popular provisions of the ARP is a third round of cash stimulus payments. If eligible, you’ll receive $1,400 for yourself and an additional $1,400 for each adult or minor dependent. The new act expands the eligibility to all dependents in a household, including aging parents living with you and college-age dependents. Previously, only dependents under age 17 were eligible.

The ARP has made it more difficult to quality this time around, though. To see if you qualify, check out the income ranges below. If your income falls below the minimum range number, you’ll receive the full payout of $1,400 per qualifying person. If your income falls within the range, you’ll get a partial payment. If your income is equal to or greater than the maximum amount, you won’t receive anything. The phaseout income ranges are:

· Single or married taxpayers filing separately: $75,000 to $80,000

· Heads of household: $112,500 to $120,000

· Married taxpayers filing jointly: $150,000 to $160,000

Child Tax Credit Enhancements

Families with children under age 18 at the end of this year will benefit from temporary changes to the Child Tax Credit in 2021. The ARP boosts the maximum credit from $2,000 to $3,000 for each qualifying child. For children under age six, the amount increases to $3,600 per child.

The ARP also makes the Child Tax Credit fully refundable. This means you can receive the full amount even if you don’t earn enough to pay taxes.

Another welcome benefit of the revised Child Tax Credit is that the IRS has been charged with paying 50% of your estimated Child Tax Credit between July 31 and December 31. In a sense, it’s like getting additional stimulus checks.

However, you may be required to pay back the credit if your actual income for 2021 ends up exceeding the phaseout restrictions, which are markedly lower than in the past. The phaseout ranges are listed below. If you make more than the amount listed, you’ll have to pay back your credit come tax time next year.

· Taxpayers filing jointly: $150,000

· Heads of household: $112,500

· All other filers: $75,000

Child and Dependent Care Tax Credit Enhancements

Another positive for parents with young children is an upgraded Child and Dependent Care Tax Credit, which can mean money back for parents using a licensed care provider that enables the parents to work, including kids attending day camps. The ARP significantly increases the expense amount that is used to calculate this tax credit. The amount for taxpayers with one qualifying child has skyrocketed to $8,000 from the previous limit of $3,000. For two or more qualifying children, the amount goes up to $16,000!

To qualify, a child must be age 13 or younger for the entire year. The credit also applies to a spouse or other dependents who are unable to care for themselves and reside more than six months out of the year with you.

Another important change is the increase of the Applicable Percentage. To determine if you’re entitled to the Child and Dependent Care Tax Credit, your eligible expenses are multiplied by your Applicable Percentage.

Previously, the Applicable Percentage ranged from a low of 20% to a high of 35%. Under the ARP, the maximum percentage has been increased to 50%. Due to these changes, more people will receive the Child and Dependent Care Tax Credit on their 2021 taxes. And the amount they may receive is drastically higher. In fact, it’s nearly quadrupled compared to the regular parameters!

While these changes are great for many taxpayers, high wage earners with an average gross income (AGI) over $125,000 will see the amount of their tax credit decrease. Those who earn more than $440,000 won’t get any tax credit — even if they were able to claim it in past years. Those who fall below the $440,000 threshold but earn more than $125,000 may qualify, but they will see reductions in their Applicable Percentage of 1% for every $2,000.

If you happen to fall into the eligible range, you could be the recipient of fairly high credits. What makes this even better is that the ARP makes the credit fully refundable whereas before it was not.

Unemployment Compensation Enhancements

At this point, many workers who were laid off or furloughed last year have been reinstated or have started jobs with new employers. While this is good news, there are more than 4 million who fall into the “long-term unemployed” category. This means they have been jobless for 27 weeks or more. The ARP helps job seekers by providing the following benefits through Sep. 6, 2021:

· Expands the unemployment benefit period from 50 to 79 weeks

· Extends unemployment compensation to self-employed workers

· Continues the increased benefit amount of $300 per week

If you received unemployment compensation in 2020, up to $10,200 of it may be tax-free. To qualify, your AGI must fall below $150,000. If your spouse also received unemployment benefits in 2020 and your AGI was below the $150,000 threshold, you both may be able to claim the tax-free benefit for a total of $20,400.

Insurance Enhancements

Having medical insurance is always important, but it’s especially crucial now when dealing with the physical, mental and financial challenges spawned by the COVID-19 pandemic. If you’re laid off and don’t have Medicare or Medicaid, the ARP allows you to keep your current health insurance through COBRA between April and October 2021 at no cost. Considering that COBRA premiums can cost four times more than an employer-subsidized plan, this is a welcome benefit for many.

For those who purchase health insurance through a state-run health insurance Exchange, the ARP increases Premium Assistance Tax Credits to help them pay the fees. These changes make it possible for taxpayers whose incomes are up to 150% of the poverty line to receive free coverage. Under previous legislation, they’d have to pay up to 4% of their income for coverage.

Even those who make higher wages can receive partial credit, thanks to newly established premium percentage caps. For example, wage earners who are at 400% or above the poverty line(example = less than $106,000 annual income for family of four) will be capped at 8.5%. This means they won’t be required to pay more than 8.5% of their income for insurance premiums. Under these new provisions, which are in effect through 2022, nearly 15 million Americans are now eligible for subsidized health care coverage. Visit healthcare.gov for more details.

The ARP also expands Medicaid coverage for home- and community-based services as well as coverage for COVID-19 testing, treatment and vaccination.

Emergency Education Grants and Future Tax-Free Student Debt

If you have college-age students, the ARP offers a couple of provisions that may apply to you.

It adds an additional $40 billion in grant money to the Higher Education Emergency Relief Fund that was established as part of last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act. Colleges and universities are required to distribute at least 50% of that money in financial grants that do not need to be paid back. They may award grants to any student, though they must give priority to students in financial need.

The ARP also makes an attempt to help those with education-related loans. Though the act doesn’t offer debt forgiveness of student loans, as some had hoped, it does set the stage for making the forgiveness of this debt tax-free in the future. Under normal circumstances, forgiven loan debt would be considered taxable income. ARP provisions make it possible to discharge student debt, such as federally backed or private student loans. Since the canceled debt wouldn’t count as income, it reduces taxpayer burden. However, this applies only if the debt is forgiven between 2021 and 2025.

Additional Noteworthy ARP Provisions

Along with the key features noted above, the ARP also includes a few additional provisions that may apply to you.

· Provides emergency rental and homeowners assistance for renters struggling to pay rent and utilities or homeowners who need help paying mortgages, utilities, homeowners insurance, and other homeowner expenses as a result of the pandemic. To learn more, visit the National Council of State Housing Agencies website to learn how individual states are distributing funds.

· Extends the Employee Retention Credit through December 2021 and allows certain startup businesses to qualify for the credit. It also makes it possible for “severely financially distressed employers” to consider most of their wages as “qualified wages” when calculating the ERC.

· Extends Limits on Excess Business Losses for Noncorporate Taxpayers through 2026. This provision allows taxpayers to offset non-business income (up to $500,000 for joint filers and $250,000 for single filers) with business losses. Normally, offsetting is not allowed.

Striking a Path Toward a Stronger Economy

The ARP offers many helpful financial advantages. From stimulus checks to tax credits to free health insurance coverage, this wide sweeping legislation offers much-needed financial aid to many Americans.

Due to the intricate details woven into this piece of legislation, it can be difficult to determine if you qualify for certain aspects of the ARP. A smart move is to consult with your CPA or tax advisor to find out if you’re eligible for various credits, rebates, and payments provided under the new act.

Hopefully the provisions laid out in the ARP will bring you some financial relief and peace of mind as we move toward a stronger economy in the coming months. As always, I’m here to help if you have questions or need assistance with your financial planning. Feel free to email or call to get the conversation started!

Sources:

Levine, Jeffrey. (March 10, 2021). “The American Rescue Plan Act of 2021: Tax Credits, Stimulus Checks, and More That Advisors Need to Know!” Kitces.com. Retrieved from https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/?utm_source=rss&utm_medium=rss&utm_campaign=the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know&utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_campaign=fc0995e3ad-NEV+MW&utm_medium=email&utm_term=0_4c81298299-fc0995e3ad-57130829.

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Simon, Ruth. (April 16, 2021). “Covid-19’s Toll on U.S. Business? 200,000 Extra Closures in Pandemic’s First Year.” Dow Jones. Retrieved from https://www.morningstar.com/news/dow-jones/202104166182/covid-19s-toll-on-us-business-200000-extra-closures-in-pandemics-first-year.

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