The information in this article was last updated on Jan. 13, 2022. This article relates to the tax laws enacted during the COVID-19 pandemic. These laws may have expired or reverted to their original state.
What do tax professionals need to know about the American Rescue Plan Act (ARPA)? Here’s a summary of the American Rescue Plan of 2021 and how it might impact you, your clients, and tax filing.
What Did the American Rescue Plan Do?
The American Rescue Plan was designed to provide economic relief to families and individuals and help the economy recover from the impact of the COVID-19 pandemic. Much of the funding for the $1.9 trillion bill went directly to states, counties, and other local governments or helped expand existing programs in education, food assistance, healthcare, and other benefit programs.
The aspects of the ARPA that most affect your clients are those related to direct financial assistance, including unemployment, stimulus payments, tax credits, and the PPP.
Expanded Unemployment Benefits
The ARPA extended many of the additional unemployment benefits that were included in the CARES Act. Most notably, the ARPA:
- Extends the additional $300/week payment through September 6, 2021 (though many states have now chosen not to offer this additional benefit).
- Extends Pandemic Unemployment Assistance (which allows independent contractors, part-time workers, and other workers who would not typically qualify for unemployment insurance to receive unemployment benefits) and Pandemic Emergency Unemployment Compensation (which extends eligibility for unemployment benefits to those who have already used standard unemployment benefits) until September 6, 2021. (It extends an individual’s eligibility to collect PUA benefits from 50 to 79 weeks and to collect PEUC from 24 to 53 weeks.)
- Offers a tax break on some unemployment benefits received in 2020. The first $10,200 of unemployment benefits are not considered taxable for those with an annual income less than $150,000.
The Child Tax Credit
The ARPA brought significant changes to the Child Tax Credit. However, most of these changes are temporary and are set to expire at the end of 2021. Under the expanded CTC, families receive a fully refundable $3,000 credit per child ages 6-17 and $3,600 per child ages 0-5. (The previous CTC included a $2,000 tax credit per child, only $1,400 of which was refundable).
The Earned Income Tax Credit
The maximum Earned Income Tax Credit (EITC) for your clients without dependents will increase from $540 to about $1,500. In addition, the income threshold for the EITC will increase from about $16,000 to at least $21,000, and age thresholds will be temporarily lifted.
The Child and Dependent Care Credit
The Child and Dependent Care Credit increased from 35% to 50% of qualifying care expenses. Families can claim a credit of up to $8,000 per child and $16,000 total. The credit is also refundable for tax year 2021.
For more information, see the IRS website.
The FFCRA and Paid Leave Credits
The American Rescue Plan extended the Families First Coronavirus Response Act (FFCRA) to September 30, 2021. However, the FFCRA is no longer mandatory. The FFCRA initially required employers to provide paid sick and family leave to employees with COVID-19 or taking care of a family member who had COVID-19. It allowed employers to claim these costs as refundable tax credits. Now, employers no longer have to provide this paid leave, but if they choose to do so, they can still claim the FFCRA Paid Leave Credits for any qualifying leave paid before November 2021.
Employee Retention Credits
The ARPA also extended the Employee Retention Tax Credits for small businesses to December 2021, incentivizing and making it easier for small businesses to keep employees.
The Paycheck Protection Program
The American Rescue Plan provided additional funding for the Paycheck Protection Program and created a second application period, which ended on May 31.
Economic Impact Payments
The ARPA included a third round of economic impact payments of $1,400 per person for those with an AGI less than $75,000. Unlike the previous two stimulus checks, dependents over 17 were also eligible to receive a payment.