Understanding the Impact of Recent Tax Law Changes in the American Rescue Plan Act of 2021
Introduction to the American Rescue Plan Act and Its Tax Law Changes
The American Rescue Plan Act (ARPA), signed into law on March 11, 2021, introduced several significant changes to the U.S. tax laws. These changes are designed to provide relief to individuals and businesses at various stages of the economic recovery process. Instead of waiting for approval, many of these changes were implemented immediately, affecting tax returns for 2020 and 2021.
Key Changes in the Tax Law
1. Exemption from Taxation on Unemployment Benefits
One of the most impactful changes in the ARPA is the exemption from taxation for the first $10,500 of unemployment benefits received in 2020. This exemption impacts your 2020 tax return even if you have already filed. It applies to taxpayers with Modified Adjusted Gross Income (MAGI) under $150,000. This change helps alleviate financial stress for individuals who received unemployment benefits during the pandemic.
2. Expanded Child Tax Credit
The Child Tax Credit (CTC) has been expanded significantly with an increase from $2,000 to $3,000 per child aged 6 to 18, and $3,600 for children under 6. Additionally, the new credit is now fully refundable, meaning that even those without tax liability can receive it. Advance payments of the credit will start in July 2021 and be based on your 2020 tax filing. These payments will be reconciled with your 2021 tax return, and if you receive excess amounts, you may need to repay the difference. This new credit is similar to the advance payments under the Affordable Care Act (ACA).
3. Expanded Child and Dependent Care Credit
The Child and Dependent Care Credit has also been expanded, increasing the expense limit from $3,000 and $6,000 to $8,000 and $16,000. Additionally, the credit is now refundable, making it more accessible to lower-income families. These changes will be reflected on your 2021 tax return, providing significant financial relief for families.
4. Expanded Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) has been expanded to include individuals the age of 19 and older as childless individuals, eliminating the maximum age limit. The maximum credit has been increased, and the investment income limit has been raised to $10,000. These changes will be seen on your 2021 tax return, providing more support to working individuals and families.
5. ACA Premium Credits
Action for affordability under the Affordable Care Act (ACA) was bolstered by increased ACA premium credits, which are now available to individuals receiving unemployment benefits. This change will be effective for 2021 and 2022, providing additional financial assistance to those who need it most.
6. Forgiven Student Loans and EIDL Grants
The American Rescue Plan also impacted student loans and small business grants. For forgiven student loans issued between 2020 and 2026, the exclusion from income applies to these. Additionally, EIDL (Economic Injury Disaster Loan) advances and restaurant revitalization grants have been excluded from income, providing immediate financial relief to businesses in need.
7. Tax Credits for Paid Sick and Family Leave
To aid employers during the pandemic, tax credits for paid sick and family leave were introduced. These credits went into effect immediately, starting March 31, 2021, and ending September 30, 2021, offering support to employers who provided essential leave to their employees.
8. Employee Retention Credit and COBRA Subsidies
The Employee Retention Credit was extended to December 31, 2021, effective immediately. COBRA (Consolidated Omnibus Budget Reconciliation Act) subsidies were also provided until September 31, 2021, helping employees maintain health insurance during job transitions.
Conclusion
The American Rescue Plan Act introduced numerous changes to the tax laws that were designed to provide immediate and significant benefits to individuals and businesses. These changes aim to alleviate financial stress and support the economic recovery. For 2021 and future tax returns, these changes can result in significant income and credits, making it essential for taxpayers to understand and take advantage of them.