After months of debate regarding the federal government’s third round of COVID-19-related economic stimulus, President Biden signed the American Rescue Plan Act (ARP) into law on March 11.
As we summarize below, the ARP will provide federal dollars through a wide range of channels, including individual stimulus checks, funds for state and local governments, COVID-19 testing and vaccines, education, small businesses, and anti-poverty programs, including three expanded tax credits.
Given the magnitude and scope of the ARP, Varnum will provide further detailed advisories as our teams analyze the most pertinent implications of this $1.9 trillion package. We stand ready to answer your questions and provide further information upon request.
American Rescue Plan Act: Key Provisions
$1,400 Individual Stimulus Checks
Among the funds distributed by the ARP, the largest portion, more than $400 billion, is allocated directly to individual taxpayers. The ARP grants a direct payment of $1,400 for a single taxpayer, or $2,800 for a married couple who file jointly, plus $1,400 per dependent. Individuals earning up to $75,000 would receive the full amount, as would married couples with income up to $150,000. The legislation includes a phase out starting above these thresholds, with a hard cut-off at $80,000 for individuals and $160,000 for married couples.
State, Local Government Aid
The second largest portion of the funds goes to state and local governments. The ARP allocates $360 billion for the purpose of tracing and administering COVID-19 vaccines at the state and local level. This aid is intended to prevent further governmental layoffs and service cuts. Echoing one of the President’s major initiatives, recipients of these funds are instructed to “make necessary investment in water, sewer, or broadband infrastructure,” according to Title IX, Subtitle M of the ARP.
For Unemployed Individuals and Low-Income Families
With the federal supplement of unemployment benefits set to expire on March 14, the signing of the ARP extended the current $300 weekly jobless aid through September 6, 2021. In addition, for the 2020 tax year, the first $10,200 of unemployment income received by a taxpayer will be tax-free. For this to apply, adjusted gross income for individuals and married couples cannot exceed $150,000. Also, for married taxpayers, the tax-free amount per person cannot be stacked. This means that if Spouse A had unemployment income of $15,000 and Spouse B had $5,000, then Spouse A will still be taxed on $4,800 of unemployment income. Varnum will be updating information if and when the Internal Revenue Service issues additional guidelines.
Tax Code Changes
The ARP creates significant changes to the child tax credit, the earned-income tax credit, and the child and dependent care tax credit.
- Child Tax Credit
- The ARP increases the child tax credit to $3,000 for every child age 6 to 17, and $3,600 for every child under the age of 6. Moreover, families will no longer have to wait for a lump sum payment after they file their annual tax returns. The ARP provides that the Internal Revenue Service will make “periodic payments.”
- Earned-Income Tax Credit (EIC)
- The ARP expands eligibility for the EIC by lowering the minimum eligible age as low as 18 as opposed to 25 previously, strengthening aid for low-income workers with no children.
- Child and Dependent Care Tax Credit
- The child and dependent care tax credit is different from the child tax credit in that while the child tax credit can be used by parents for any expense, even those not related to the costs of raising children, child and dependent care tax credit must be used by working parents to offset expenses of work-related childcare. The ARP made this credit fully refundable for the year of 2021.
The ARP also increases both the dollar limit and applicable percentage for the child and dependent care credit. For tax year of 2021, the dollar limit is lifted from $3,000 to $8,000 for one qualifying child/dependent and from $6,000 to $16,000 for two qualifying children/dependents. Working parents will be able to offset as much as 50 percent of the work-related childcare expenses, up from 35 percent previously.
Paycheck Protection Program (PPP) Expansion; EIDL Advances and Restaurant Revitalization Fund
The ARP expands eligibility for the PPP loans for small businesses to include additional non-profit organizations and internet publishing organizations. The ARP also allocates an additional $15 billion in funds to EIDL advances. In addition, the ARP establishes the Restaurant Revitalization Fund to provide grants to cover certain expenses of restaurants that lost revenue due to the pandemic.
School Re-Opening and Higher Education
The ARP supports the safe reopening of schools, through investments in ventilation system upgrades, reduced class size, and personal protective equipment to help make public schools safer. It also directs $40 billion in grants to higher education and requires institutions that receive funding to dedicate at least half of it to emergency financial aid grants for students. Additionally, the ARP provides that, through 2025, any student loan that is forgiven by the lender would not carry an income tax liability.
To stay updated on the American Rescue Plan and other changes in the first 50 days of Biden’s Administration, register for Varnum’s webinar “The Biden Administration’s First 50 Days”.