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The American Rescue Plan Act – What it Means for your Income Taxes – Now and in the Future

By: Derek Gray, CPA, Director

On Saturday, March 6, the Senate passed a $1.9 trillion COVID-19 relief package, The American Rescue Plan Act, with the House expected to pass the bill on Tuesday, March 9.  President Biden hopes to sign this bill into law before unemployment aid programs expire on March 14.

Provisions in the American Rescue Plan Act

There are a few tax provisions in the latest stimulus bill, the majority of which will provide targeted relief to families earning less than $150,000 per year. A headliner of this package is the third round of direct stimulus payments, this time in the amount of $1,400 to many Americans. Combined with the $600 payments distributed as part of the Consolidated Appropriations Act, many Americans are set to receive a total of $2,000 in stimulus money in 2021.

In addition to the base amount of $1,400, the Senate bill calls for an additional $1,400 for each dependent.  In the American Rescue Plan Act, all dependents, regardless of age, would qualify for the extra payment. In the first two rounds of stimulus payments, dependents were limited to those under the age of 17.

While this direct payment will operate in the same manner as others, i.e., an advance payment of a credit that will be reported on an individual’s 2021 income tax return, it has been structured to phase out at lower income levels than previous payments. In the Senate-approved bill, this payment will fully phase out for individuals earning more than $80,000 or couples filing jointly at an income level of $160,000. A previous version of the bill, passed by the House, had the phaseout ceilings at $100,000 and $200,000, respectively.

The Senate’s version of the American Rescue Plan also greatly expands the Child Tax Credit for 2021.  Under current tax law, the Child Tax Credit grants a credit against income taxes for each qualifying child under the age of 17. Under the Senate bill, for 2021 only, a qualifying child will include those under the age of 18, as well as increasing the amount of the credit from $2,000 to $3,000 ($3,600 for children under 6). The credit will be fully refundable, and half will be paid in advance from July 2021 to December 2021.

The stimulus bill also contains a $300 weekly boost to unemployment benefits, a provision to make the first $10,200 of unemployment income non-taxable on 2020 income tax returns, funding for COVID-19 vaccine distribution, rental assistance for low-income households, and an extension of the Employee Retention Credit until December 31, 2021

Although this latest stimulus package doesn’t contain any sweeping tax reform, the legislative process by which the bill will ultimately pass may impact your income taxes going forward.

This bill was passed using the budget reconciliation process, meaning the Senate needed only a simple majority to pass the bill, not the usual filibuster-proof 60 vote majority. As we discussed in our webinar on the Biden administration’s tax plan, even though Vice President Harris is the tie-breaking vote in a 50-50 Senate, budget reconciliation was not an assured victory for Democrats. With the margins this thin, every Senator (especially on the Democratic side) essentially holds veto power.  We saw this come to life as this bill’s passage was delayed for some 12 hours as Democrats had to negotiate a compromise with Senator Joe Manchin (D-WV). Eventually, unemployment benefits were scaled back, and the bill was able to pass the Senate.

Future of Tax Reform in 2021 and 2022

What does that mean for the future of tax reform in 2021 or 2022?  It appears the Democrats are not united on many issues; and as such, trying to pass sweeping tax reform will likely be much harder than originally expected when the Democrats took both seats in the Georgia runoff elections earlier this year. While certain aspects of the Biden administration’s tax plan may have bipartisan support, items such as an increase to the estate tax or an increase to the capital gains tax are likely to be highly contested and face an uphill battle, even in a Democratic-controlled House and Senate.

Tax Filing Deadline

The already resource-strapped Treasury Department will now be spending the next month or two coordinating and sending out stimulus payments. Does that leave enough time to also process tax returns in another uniquely challenging filing season? Many people think not. Earlier this year, the House Ways and Means Committee asked the IRS to extend the tax deadline to June 15, 2021 citing a delayed start to the filing season and the pandemic’s continued effect on taxpayers and tax professionals.  A few days later, the AICPA followed suit, calling on Treasury and the IRS to extend the tax deadline.

Whether deadline extensions come to fruition or not remains to be unknown. IRS Commissioner Charles Rettig, in testimony on February 23, stated that the IRS is not planning to extend the deadline, despite the request from House Democrats and tax professionals.

While another extension of the tax filing deadline may not be imminent, it wouldn’t be surprising either.  More information on this topic is likely to come out in the following weeks.

If you have any questions on the American Rescue Plan, future tax legislation, or an extension of the tax filing deadline please reach out to your local Blue & Co. advisor or the author at:

Derek Gray, CPA

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