Third Time’s the Charm: How the New Stimulus Plan May Impact You and Your Taxes

Another blog about a stimulus plan?  Yes.  While it may seem like a Congressional production of Groundhog Day to those have not suffered financially during the pandemic, we know that several of provisions of the “American Rescue Plan,” which Congress passed earlier this month, offer much needed relief to those who have.  And in either case, this stimulus package, like the two others in the past year, contains a number of changes to the tax law—for 2020 and 2021—so it’s important to note how the stimulus package may impact your taxes or provide other financial benefits. 

Economic Impact Payments.  The IRS has already started sending payments of $1,400 to each qualifying individual and their dependents. Are you expecting a stimulus payment based on having received payments in 2020?  Congress has good news and bad news for you.  The good news:  all dependents claimed on a tax return now qualify for a $1,400 payment, not just children under 17.  The bad news:  income limits are lower for this third round of payments.  Eligibility phases out between $75,000 and $80,000 of adjusted gross income for single taxpayers and between $150,000 and $160,000 for married filing jointly taxpayers, regardless of whether one has dependents.

Similar to last year, the IRS will determine your level of income based on your 2020 tax return.  If you have not filed your 2020 taxes yet, the IRS will use your 2019 return.  If you are eligible for the payment with your 2019 income but not with your 2020 income; it is best to wait for your stimulus payment before filing your 2020 return.

Unemployment Benefits.  The American Rescue Plan prolongs the availability of pandemic unemployment benefits and provides a tax break on 2020 unemployment benefits. 

• Pandemic Unemployment Assistance (PUA).  PUA benefits will continue to be available to self-employed workers and independent contractors until September 6, and federal unemployment benefits will include an extra $300 per week (on top of one’s regular benefit) until that date as well.  
• Unemployment Tax Break.  If you received unemployment in 2020 and your household’s adjusted gross income was less than $150,000, you will not owe federal income tax on the first $10,200 of unemployment benefits.  If this applies to you and you have already filed your 2020 taxes, wait for the IRS to issue additional guidance before filing an amended return.  If you have not filed your 2020 taxes yet, talk with your tax preparer to make sure this change is accurately captured on your return.  (Or, if you self-prepare, wait to file until your tax software has incorporated this change.  The IRS is currently working with tax software vendors to update their software.)

Child Tax Credit. For families with children up to 17 years old, another bright spot in the American Rescue Plan is the changes to the Child Tax Credit.  In 2020, the Child Tax Credit was $2,000 for each dependent child up to age 16.  For 2021, the credit amount has been increased to $3,600 for children under age 6, and $3,000 for children ages 6 to 17. 

In addition, families may not have to wait until they file their 2021 taxes to receive the benefit.  According to the new law, the IRS will send periodic payments of $250 or $300 (per child) on a monthly basis from July 1 to December 31, 2021, with the remainder being claimed on the parents’ 2021 tax returns.  (However, the IRS has expressed concerns that they may not be able to implement such a wide-reaching program within that timeframe.  Also, if families would rather receive the Child Tax Credit as a lump sum with their 2021 tax return, they can opt out of the monthly payments.)

The increase in the amount and coverage of the Child Tax Credit is only set to apply to the 2021 tax year, but some lawmakers have vowed to try to extend it through subsequent legislation.  Also, note that the additional credit (above the current $2,000 level) will be subject to a more stringent income requirement than the original credit.  If your adjusted gross income exceeds $75,000 for single taxpayers or $150,000 for married filing jointly taxpayers, the additional credit will begin to phase out.  The original $2,000 Child Tax Credit will still be available for families with higher income though.  That portion of the credit will not begin to phase out until income reaches $200,000 for single filers or $400,000 for married filing jointly.

Tax Breaks for Childcare Expenses.  The American Rescue Plan aimed to help families with childcare expenses by sweetening the two main tax breaks on childcare costs—Dependent Care Flexible Spending Accounts (FSAs) and the Child and Dependent Care tax credit.  For Dependent Care FSAs, it raised the limit for pre-tax contributions up to $10,500 in 2021 for most taxpayers (previously $5,000).  For the Child and Dependent Care credit, it increased the maximum level of expenses that can be claimed in 2021 from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals.  In addition, the maximum amount of the Child and Dependent Care credit increased to 50% of eligible expenses (previously 35%), though it gradually reduces to 20% for taxpayers with incomes between $125,000 and $400,000.  

Keep in mind, however, that “double dipping” is not allowed.  The Child and Dependent Care credit cannot be claimed for expenses that were paid using a Dependent Care FSA.

Tax Deadline Pushed Back.  Due in large part to the changes contained in the American Rescue Plan, the IRS pushed back the filing deadline for 2020 federal tax returns to May 17^th.  Note, however, that state tax deadlines may not change, despite the federal tax extension.

If you have any questions about how these new tax provisions or other aspects of the American Rescue Plan may impact you, please feel free to call or email us, and we will be happy to discuss in more detail.