Individual Aspects of the American Rescue Plan

March 26, 2021 - The American Rescue Plan Act of 2021 included many provisions affecting businesses, pensions, payroll, and individuals. Below are some of the provisions affecting individuals.

2020 Unemployment Exclusion

Individuals can exclude from gross income up to $10,200 unemployment compensation paid in 2020. This exclusion is available to both taxpayer and spouse if filing a joint return. The exclusion is not available if Modified Adjusted Gross Income (MAGI) exceeds $150,000 and there is no phase-out. When determining the $150,000 MAGI threshold, unemployment compensation is not included. The exclusion is not available on the Minnesota individual return.

2021 Recovery Rebate/Credit

Eligible individuals are allowed an income tax rebate of $1,400 for individuals, $2,800 for couples, and an additional $1,400 per dependent. Estates and trusts are not eligible for the rebate. The initial rebate amount is determined based on the 2019 return unless a 2020 tax return has already been filed. Taxpayers who may not have received this rebate, but are eligible will receive it as a credit when their 2021 tax return is filed

Individuals claimed (or allowed to be claimed) as a dependent by their parents are not eligible. However, if the individual is no longer a dependent in 2021, they will be allowed to claim the credit when filing their 2021 tax return.

The phaseouts are as follows:

Ratably reduced for filers with Adjusted Gross Income over:

• $150,000 for joint return
• $112,500 for head of household
• $75,000 for all other taxpayers

Reduced to zero for filers with Adjusted Gross Income over:

• $160,000 for joint return
• $120,000 for head of household
• $80,000 for all other taxpayers

2021 Child Tax Credit

Child tax credit (CTC) eligibility has been expanded from under-age-17 children claimable as a dependent to a child who hasn’t turned 18 by the end of 2021. The amount of the credit increased from $2,000 per child to $3,000 (or $3,600 for children under age 6).

The credits are subject to the following Adjusted Gross Income phaseouts:

• $150,000 for joint return
• $112,500 for head of household
• $75,000 for singles

Taxpayers who aren’t eligible to claim the increased CTC in 2021 can still claim the regular CTC up to $2,000 per child, subject to the existing phase out rules.

Child and Dependent Care Credit

Taxpayers with one or more qualifying individuals may qualify for the child and dependent care credit for expenses paid for the care of qualifying individuals if the expenses were necessary for the taxpayer to be gainfully employed.

Credit limits are now increased to up to 50% of:

• $8,000 toward the care of one qualified individual
• $16,000 toward the care of two or more qualifying individuals

This credit was previously a nonrefundable credit but is now refundable, meaning it is available even if there is no tax liability. Phaseouts decrease the refundable limit by a percentage as Adjusted Gross Income exceeds $125,000 up to $400,000.

Student Loans

Certain discharges of student loans after Dec 31, 2020, and before Jan 1, 2026, are now excluded from gross income. The exclusion applies to the following types of loans:

• Post-secondary educational loans insured and guaranteed by federal, state, local government, or eligible educational institution
• Private education loans
• Certain loans from educational institutions qualifying as 50% charity
• Certain refinancing loans made to individual students by educational organizations qualifying as 50% charitable or by a tax-exempt organization

Dependent Care Assistance

The amount of taxable wage exclusion for dependent care benefits is increased from $5,000 to $10,500 for married couples filing jointly ($5,250 if married filing separately). This increase only applies to tax year 2021.

The American Rescue Plan Act contains a number of provisions that can benefit individuals and businesses, as well as non-profits. Please reach out to your tax planning advisor with any questions.