The Third Round of COVID-19 Relief Passed the Senate. Now What?
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On Saturday, March 6, the Senate passed the American Rescue Plan Act of 2021 based on President Joe Biden's framework unveiled after his inauguration in January.
The bill will go back to the House to approve the changes made in the Senate. If passed in its current state, here is what to expect.
Minimum Wage
The original framework included a provision to gradually increase the minimum wage to $15 per hour. This aspect was removed from the Senate bill but may be taken up in a stand-alone bill in the future.
Stimulus Payments
The bill includes payments of $1,400 per individual and qualifying dependent. The payments are essentially credits against 2021 taxes but fully refundable and payable in advance (similar to the prior payments).
The full payments will be given to anyone with adjusted gross income (AGI) of $75,000 or less for single tax filers, $112,500 or less for head of household tax filers, and $150,000 or less for those who file as married couples. The payments will be phased out for those with an AGI of $80,000 for single tax filers, $120,000 or less for head of household tax filers, and $160,000 or less for those who file as married couples.
Undocumented immigrants who don't have Social Security numbers remain ineligible for the payments. But their spouses and children are eligible as long as they have Social Security numbers.
Child Tax Credit
The bill includes a significant overhaul of the child tax credit, but only for the 2021 tax year.
The bill increases the amount to $3,000 per child (or $3,600 for a child under six) and makes the credit amount fully refundable. The bill also increases the maximum age of qualifying children to include 17-year old children.
The excess credit over the present-law $2,000 amount is phased out by $50 for every $1,000 of modified adjusted gross income more than the threshold amount. The threshold amount is $75,000 for single tax filers, $112,500 or less for head of household tax filers, and $150,000 or less for those who file as married couples. Once the excess amount is eliminated, the credit amount remains at $2,000 until the present law phaseout thresholds are reached ($400,000 for those who file as married couples, $200,000 for all others).
The bill directs the Treasury and IRS to issue advance payments of half of the credit amount beginning on July 1, 2021.
The IRS and Treasury are directed to create a website for taxpayers to opt-out of the advance payments or provide information on status changes that would impact the credit amount.
Earned Income Tax Credit
For 2021 only, the earned income tax credit is significantly increased for filers without children.
The amount increases from $543 to $1,502. Also, the amount of income at which the credit is maximized increases to $9,820 (currently set at $7,100). The thresholds for the phaseout of the credit also increase to $11,610 for non-joint filers (presently set at $8,880).
The minimum age for childless claimants of the EITC is also reduced from 25 to 19 (except full-time students).
The bill also allows taxpayers to substitute 2019 earned income for 2021 earned income in claiming the EITC on 2021 returns if 2021 earned income was less than 2019 earned income.
Unemployment Compensation
The Federal Pandemic Unemployment Compensation, included in earlier pandemic relief bills, will be extended through early September at $300 per week.
The first $10,200 in UI received in 2020 would be non-taxable for households with incomes under $150,000 per year.
Student Loan Forgiveness
Under current law, forgiven student loans are only excludable from taxable income under certain conditions (such as the death or disability of the borrower).
The bill expands the exclusions to apply to any discharge of federal student loans after 2020 and before 2026 for any reason.
The exclusion does not apply to loans discharged by private lenders.
Employee Retention Credit
A provision of the CARES Act legislation is the payroll credit for employee retention. The credit was extended through June 30, 2021, by the Consolidated Appropriations Act, 2021, and has now been extended through the end of 2021.
Paycheck Protection Program
$7.25 billion in additional funding was included for the Paycheck Protection Program (PPP). Also, provisions have been added, allowing more non-profits to be eligible for PPP loans.
To see how these proposed changes could affect your unique tax situation, contact us. For more information about the original American Rescue Plan, read our article Key Points from Biden's American Rescue Plan.