March 11, 2021: Congress Passes $1.9 Trillion Relief Package

Yesterday, Congress passed a budget reconciliation bill that includes the “American Rescue Plan Act” (“ARPA”, “Plan”), a $1.9 trillion COVID-19 relief package.  President Biden is expected to sign the bill into law this week. The ARPA includes several taxpayer economic relief and individual and business income tax provisions.

One of the provisions frequently discussed in the mainstream media is the 2021 individual stimulus payments.  Eligible individuals will receive a direct payment of $1,400 for themselves and each of their dependents.   The payment is subject to a phase out for taxpayers with adjusted gross income (“AGI”) between $75,000 and $80,000 for individual taxpayers and $150,000 and $160,000 for married taxpayers filing a joint return.   The phase-out amounts are determined based on 2020 AGI if a return has already been filed.  Otherwise, those amounts are based on 2019 AGI.

The ARPA extends federal unemployment benefits through September 2021.  The amount of this add on to state administered unemployment programs is $300 per week.  The first $10,200 of unemployment payments received in 2020 is not taxable for taxpayers with AGI less than $150,000.   If income is $150,000 or more, the entire amount received is taxable. 

In addition, student loan forgiveness that would normally have been included in gross income is not taxable for loans discharged after December 31, 2020 and before January 1, 2026.

The Plan increases the child tax credit from $2,000 to $3,000 ($3,600 for children under age 6), expands the eligibility for the qualification of certain children, and increases the phase-out limitations for the credit.   Under the ARPA, the child tax credit is phased out at AGI levels of $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.

The child and dependent care credit was also changed for the 2021 tax year only. The credit, up to a maximum amount of $4,000 for one qualifying dependent or $8,000 for two or more dependents, is equal to up to 50% of eligible expenses and has been made refundable for the 2021 tax year.  The credit is also subject to reduction and phase out for higher income taxpayers.

 The ARPA also includes various business tax provisions, including extending the excess business loss limitation for noncorporate taxpayers through the 2026 tax year (Note that the excess business loss provisions were suspended for the 2018 through 2020 tax years by the CARES Act, but remained effective for the 2021 and subsequent tax years).

Certain business credits, including the family and sick leave credit and the employee retention credit, have been clarified and expanded.  The Plan also provides that Economic Injury Disaster Loan (“EIDL”) program grants and revitalization grants received by eligible restaurants, food trucks, and similar businesses are not included in the gross income of the recipient.  Like PPP loans, taxpayers are allowed to take deductions and capitalize assets paid with forgiven EIDL funds.  

The ARPA also expands the limitation on the deduction of compensation paid to certain individuals by publicly traded corporations.  The definition of “covered employees” for which a corporation’s compensation deduction is limited has been expanded to include more highly compensated employees.

For more information regarding new developments in tax law, please click here to view our Tax Alerts on the Whitley Penn website.

Whitley Penn is continually monitoring the tax and economic developments related to the coronavirus pandemic and will send out additional alerts in the future. In the interim, please contact your Whitley Penn tax advisor if you have any questions or require any additional information.