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March 23, 2021

TAS Tax Tips: American Rescue Plan Act of 2021 individual tax changes summary by year

American Rescue Plan Act of 2021 Individual tax changes summary by year

The IRS is reviewing implementation plans for the newly enacted American Rescue Plan Act of 2021. The IRS will provide official guidance, processes and procedures, and forms and instructions, as applicable, as soon as possible. We encourage you to continuously check IRS.gov for the latest guidance and updates as they are released.

The following information is a simplified summary of some of the tax provisions that affect the majority of individual taxpayers, by tax year. This list is not all inclusive and is not intended to be used as official guidance. Instead it is intended as a preliminary reference to determine which of these specific individual tax-related provisions are effective for specific tax years. Unless otherwise specified, section references are to the applicable sections of the American Rescue Plan Act of 2021.

Tax Year 2020 – These provisions apply to taxable years beginning after December 31, 2019.

  • Unemployment compensation – Sec. 9042 allows an exclusion from gross income of up to $10,200 in unemployment compensation, if the adjusted gross income of the taxpayer is less than $150,000. See IRS Statement – American Rescue Plan Act of 2021 and watch for further guidance.
    • For those who received unemployment compensation last year and have already filed their 2020 tax return, IRS anticipates that they will be able to assist unemployment recipient taxpayers to take advantage of the exclusion without additional action on the part of taxpayers, with some exceptions. See IRS to recalculate taxes on unemployment benefits; refunds to start in May. So there is no need for taxpayers to file an amended return unless the calculations make the you newly eligible for additional federal credits and deductions not already included on the original tax return. See the example in the News Release.
    • For those who received unemployment compensation last year, follow the IRS instructions on the New Exclusion of up to $10,200 of Unemployment Compensation page. Those who have already filed do not need to file an amended return; as the IRS instructions provide, the IRS will refigure the taxes to make the adjustment. For additional information, go to About Form 1040 to get the latest information about Form 1040, Instructions for Form 1040,and Schedule.
  • Premium Tax Credit – Sec. 9662 removes the requirement that excess advance payments are treated as an additional tax liability on the individual’s income tax return for the taxable year. The provision applies to taxpayers who file a 2020 income tax return and reconcile any advance payment of the credit.

Tax Year 2021 – Except where provided, these provisions apply to taxable years beginning after December 31, 2020.

  • 2021 Recovery Rebate Credit – Sec. 9601 provides a recovery rebate of $1,400 ($2,800 in the case of a joint return) for the 2021 taxable year, plus an additional $1,400 per each dependent of the taxpayer, for all U.S. residents with adjusted gross income up to a phase-out threshold of $75,000 ($150,000 in the case of a joint return or a surviving spouse, and $112,500 in the case of a head of household), who are not a dependent of another taxpayer and have a work eligible Social Security number (SSN).Married taxpayers filing jointly where one spouse has a work eligible SSN and one spouse does not are eligible for a payment of $1,400, in addition to $1,400 per child with an SSN. The rebate amount is phased out above certain income levels.
  • Child Tax Credit – Sec. 9611 increases the child tax credit from $2,000 to $3,000 for the 2021 taxable year only. In the case of a qualifying child who has not attained the age of 6 as of the close of the calendar year, the credit is increased to $3,600. In addition, the term “qualifying child” is broadened to include a qualifying child who has not attained the age of 18.For the 2021 taxable year only, the child tax credit is made fully refundable for taxpayers with a principal place of abode in the United States for more than one half of the taxable year. The Secretary of the Treasury or her delegate is directed to establish a program to make periodic advance payments (of equal amounts) of the child tax credit to eligible taxpayers. Periodic advance payments are only to be made for months between July 1, 2021 and December 31, 2021.Note: Watch for IRS guidance and Taxpayer Advocate Service information sharing how taxpayers will be able to claim these advanced payments over the upcoming months.
    • Sec. 9612 provides that the Secretary of the Treasury or her delegate must make payments to each territory that relate to the cost or approximate cost of that territory’s child tax credit or make payments of the credit directly to territory residents. Sec. 9612 applies to taxable years beginning after December 31, 2020.
  • Earned Income Tax Credit (EITC) – Sec. 9621 temporarily expands EITC eligibility and increases the amount of the credit for taxpayers with no qualifying children.For the 2021 taxable year only, in the case of the credit for a taxpayer with no qualifying children, the minimum age is reduced from 25 to 19. However, if the individual is a specified student, the minimum age is reduced from 25 to 24.The provision further reduces the minimum age to 18 for any qualified former foster youth or qualified homeless youth. The upper age limit on the credit for taxpayers with no qualifying children is temporarily removed for the 2021 taxable year only.

    The provision increases for 2021 the amount of the credit for taxpayers with no qualifying children. The credit percentage and phaseout percentage are increased from 7.65% to 15.3%. In addition, the earned income amount is increased to $9,820, and the beginning of the phaseout range for non-joint filers is increased to $11,610 ($17,550 if married filing jointly).

    Other provisions of Sec. 9621 apply to taxable years beginning after December 31, 2020.

    • Sec. 9622 repeals the rule that an eligible taxpayer with at least one qualifying child who does not claim the EITC with respect to one or more qualifying children due to failure to meet the identification requirements—including the valid SSN requirement—with respect to such children may not claim the EITC for taxpayers with no qualifying children.
    • Sec. 9623 provides that an otherwise married individual separated from the individual’s spouse is treated as not married for purposes of the EITC if a joint return is not filed. The provision applies only if the taxpayer lives with a qualifying child of the taxpayer for more than one-half of the taxable year and either:(1) Does not have the same principal place of abode as the individual’s spouse during the last six months of the taxable year, or
      (2) Both

      • Has a decree, instrument, or agreement (other than a decree of divorce) described in Code section 121(d)(3)(C)145 with respect to the individual’s spouse, and
      • Is not a member of the same household with the individual’s spouse by the end of the taxable year.
    • Sec. 9624 raises the disqualified income maximum amount to $10,000 for taxable years beginning in 2021.
    • Sec. 9625 provides that the Secretary of the Treasury or her delegate shall make payments to the territories that relate to the cost to each territory of its EITC.
    • Sec. 9626 permits a taxpayer to elect to calculate the taxpayer’s EITC for taxable years beginning in 2021 using 2019 rather than 2020 earned income, if the taxpayer’s earned income in 2021 is less than in 2019.
  • Dependent Care Assistance – Sec. 9631 expands the child and dependent care tax credit for the 2021 taxable year only. The credit is refundable for a taxpayer who has a principal place of abode in the United States for more than one half of the taxable year.The maximum credit rate is increased to 50% and the amount at which the maximum credit rate begins to phase down is increased to $125,000. The limitation on employment-related child and dependent care expenses is increased to $8,000 in the case of one qualifying individual and to $16,000 if there are two or more qualifying individuals. A two-part phaseout is applied to the 50% credit rate.The Secretary of the Treasury or her delegate is directed to make payments for the 2021 tax year only to each mirror Code territory that relate to the cost to that territory of the child and dependent care tax credit.

    Other provisions of Sec. 9631 apply to taxable years beginning after December 31, 2020.

    • Sec. 9632 temporarily increases, for the 2021 taxable year only, the amount of the exclusion for employer-provided dependent care assistance (from $5,000 to $10,500).
  • Credits for Paid Sick and Family Leave:
    • Sec. 9642 provides eligible self-employed individuals with a credit equal to the qualified sick leave equivalent amount with respect to the individual, for up to 10 days occurring during the period beginning on April 1, 2021 and ending on September 30, 2021.
    • Sec. 9643 provides eligible self-employed individuals with a credit equal to 100% of the qualified family leave equivalent amount (up to $200 per day, for up to 60 days) with respect to the individual. Only days occurring during the period beginning on April 1, 2021 and ending on September 30, 2021, may be taken into account.
  •  Premium Tax Credit Sec. 9661 reduces or eliminates an individual’s or family’s share of premiums used in determining the amount of the premium assistance credit, for the 2021 and 2022 taxable years only. The provision also makes the premium assistance credit available to taxpayers with incomes above 400% of Federal Poverty Level (FPL) for the applicable family size.
    • Sec. 9662 removes the requirement that excess advance payments are treated as an additional tax liability on the individual’s income tax return for the taxable year. The provision applies to taxpayers who file a 2020 income tax return and reconcile any advance payment of the credit.
    • Sec. 9663 provides a special rule for the premium assistance credit in the case of a taxpayer who has received, or has been approved to receive, unemployment compensation for any week during calendar year 2021. Under the rule, for the 2021 taxable year only, (i) such a taxpayer is treated as an applicable taxpayer, and (ii) the taxpayer’s household income is not taken into account to the extent it exceeds 133% of FPL for a family of the size involved.
  • Student Loans Sec. 9675 excludes from gross income in taxable years 2021 through 2025 amounts related to the discharge of certain student loan debt, applicable to discharges of loans after December 31, 2020.

Again, please continue to monitor the IRS Coronavirus Tax Relief page, IRS Guidance page and applicable tax topic pages (e.g., Child Tax Credit, Earned Income Credit, etc.) for new and updated information related to the American Rescue Plan Act of 2021.