Walter & Shuffain - Certified Public Accountants & Business Advisors

Key tax provisions in the American Rescue Plan Act

The American Rescue Plan Act (ARPA) has been signed into law by President Biden and makes significant updates to several tax provisions to alleviate some of the pandemic's financial burdens for individual taxpayers and businesses. Updates include expansions and extensions of various tax credits such as the employee retention credit (ERC), COBRA continuation coverage, Affordable Care Act (ACA) subsidies, and more. The bill also includes $1.46 billion for the IRS to manage the additional responsibilities on top of the annual tax filing season. Here are the critical tax updates.

Individual tax provisions in ARPA

Significant updates were made for individual taxpayers to deal with the financial ramifications of the pandemic.

COBRA continuation coverage credit expanded – Health care premiums will be subsidized at 100% for those who are eligible for COBRA from the date of enactment to Sep. 21, 2021.

  • Employers can receive a refundable credit for COBRA continuation coverage premium assistance and is taken against Medicare tax. Advance payments are available and apply to wages paid after Apr. 1, 2021.
  • Taxpayers who receive this credit are not eligible for the health coverage tax credit (Sec. 35). This coverage premium assistance is not includable in gross income.

ACA marketplace subsidies expanded – Health insurance premium cost savings for all marketplace exchange users are included in the bill.

  • The income cap for premium subsidies in the health insurance marketplace is eliminated for 2021 and 2022 coverage for individuals at 150% of the federal poverty line (FPL) or less.
  • Premium costs for households at 400% of FPL would be capped at 8.5% of their household income for benchmark plans (second-lowest-cost Silver plans), which may mean significant health insurance premium savings for many households. Currently, households in this category can spend as much as 50% of their income on health insurance, according to healthinsurance.org.
  • Subsidies will phase out as income increases, and subsidies are not available for benchmark plans that cost less than 8.5% of household income.
  • Subsidies will increase for those who already qualify for subsidies as the plan reduces the percentage of income expected for benchmark plans.
  • Taxpayers receiving unemployment compensation in 2021 whose income is between 100% and 400% of the FPL qualify for reduced cost-sharing on silver plans.

Applicable extra subsidies can be claimed immediately or on the 2021 tax return. A special enrollment period is available until May 15, 2021, for most states.

Child tax credit increased – The child tax credit can now be claimed in advance of filing your return and increases to $3,000 per child (now including 17-year-olds) and $3,600 for children under six years of age. It phases out for married-filing-joint taxpayers with incomes over $150,000, $112,500 for heads of household, and $75,000 for all others. The credit will be paid monthly in cash up to $300 per month by the IRS from July through December.

Earned income credit expanded – The bill introduces rules for individual taxpayers with no children for 2021:

  • The maximum credit is now $1,502, up from $543.
  • The minimum age is now 19, except for students (24) and former foster youth (18). The maximum age is eliminated.
  • The phase-out amount is increased to 15.3%.
  • Certain separated spouses are now eligible.
  • The threshold for disqualifying income rises to $10,000 from $2,200.
  • Taxpayers may temporarily use 2019 income instead of 2021 for calculation.

Student loan forgiveness – Any student loan forgiveness passed between Dec. 31, 2020, and Jan. 1, 2026, would be tax-free rather than the forgiven debt treated as taxable income.

Business tax provisions in ARPA

Business tax provisions were also extended and expanded to help businesses with the financial challenges of the pandemic.

ERC extended – The ERC is extended through Dec. 31, 2021, and expands the eligibility to new startups established after Feb. 15, 2020 (capped at $50,000 per calendar quarter), and companies with a 90% revenue decline compared to the same calendar quarter of the previous year.

Child and dependent care credit expanded – The credit is refundable for 2021. It increases the employer-provided dependent care assistance exclusion to $10,500. The maximum allowable expenses increase to $8,000 (from $3,000) for one dependent and $16,000 (from $6,000) for two or more and allow the credit to cover 50% of expenses.

Family and sick leave credit extended – The Families First Coronavirus Response Act (FFCRA) credits are extended to Sept. 30, 2021, and include:

  • Limit increase to $12,000.
  • The number of days for calculation increase from 50 to 60 and resets after Mar. 31, 2021.
  • Eligibility extended for leave due to COVID-19 vaccination.
  • Eligibility extended to 501(c)(1) government organizations.

Executive compensation deduction expanded – The executive compensation deduction for publicly traded employers expands to include the 8 highest compensated employees other than the CEO and CFO by 2027. Currently, a deduction is available on the first $1 million paid to the CEO, CFO, and next three highest compensated officers.

For questions and assistance with any of the programs related to ARPA, contact us.