The 2021 Stimulus: What You Need to Know
On Thursday, March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law. I previously wrote an article on how this impacts Small Business owners, but this article will specifically address how this latest stimulus impacts YOU as an individual.
Keep in mind, this won't cover every detail of every provision in the new stimulus, but the following highlights should give you a broad overview of what happened and how it may impact you.
Note: If you're looking a more detailed summary, Jeffrey Levine from Buckingham Wealth Partners did a fantastic write-up (as always) here at Kitces.com.
1 | Bigger Stimulus Checks
Round 3 of the stimmy checks! This is the one most people care about, as it will impact the majority of the population. Since most of the checks have already been sent out, you probably already know how much you received, but here is a rundown anyway.
This round of checks (a.k.a. "Recovery Rebates") will be the most generous, starting at $1,400 per person (including dependents, meaning, not just children under age 17). However, the income limits for who can receive these checks have been narrowed:
The Adjusted Gross Income phaseout ranges are as follows:
Single Filers and Married Filing Separate: $75,000 – $80,000
Head of Household: $112,500 – $120,000
Married Filing Joint: $150,000 – $160,000
Single Filers and Married Filing Separate: $75,000 – $80,000
Head of Household: $112,500 – $120,000
Married Filing Joint: $150,000 – $160,000
You can find your Adjusted Gross Income (AGI) on line 8b of your 2019 tax return, or line 11 of your 2020 tax return.
If you're under the lower limit, you will receive the full amount.
If you're in-between the range, you will receive a partial stimulus check.
If you're over the upper limit, you won't receive anything.
If you're under the lower limit, you will receive the full amount.
If you're in-between the range, you will receive a partial stimulus check.
If you're over the upper limit, you won't receive anything.
The IRS will be using either your 2019 or 2020 tax return (whichever they have on file most recently). Meaning, if you haven't filed your 2020 tax return yet and your 2020 income is higher than 2019 income, you may want to hold off on filing your 2020 tax return until you get the check in hand, because, there is no "clawback" with this provision. Meaning, you won't have to payback the stimulus check if your 2020 income was higher and you got a check based on your lower, 2019 tax return.
2 | Enhanced Child Tax Credit
Having kids may just pay some additional dividends this year! Historically, the maximum Child Tax Credit was $2,000 per qualifying child. The bigger and better Child Tax Credit (for 2021 ONLY) has been temporarily increased to $3,000 per qualifying child 17 and under, OR $3,600 per qualifying child under the age of 6 (as of December 31, 2021).
However, similar to the stimulus checks, there are also income limits to this big credit:
Joint Filers: $150,000
Head of Household: $112,500
All other filers: $75,000
Joint Filers: $150,000
Head of Household: $112,500
All other filers: $75,000
For each $1,000 that you exceed the AGI limit, the Child Tax Credit reduces by $50 (for the "additional" Child Tax Credit over $2,000 at least). The normal rules and income limits still apply for the first $2,000.
Another nice feature around this Child Tax Credit increase is that it is fully refundable! Meaning, the credit can come to you in the form of a refund if the credit makes your tax liability negative. Not all credits are refundable like this, in fact, many are non-refundable, meaning you can only take the credit up to the amount of tax you owe and cannot get a refund if the credit is in excess of that.
Another very interesting aspect of this Child Tax Credit is that 50% of it may be paid "in advance". The stimulus (a.k.a. the American Rescue Plan Act) directs the IRS to pay out 50% of the estimated Child Tax Credit in "equal installments" between July 1st and December 31st. However, if the advance payments end up being more than the actual entitled credit upon filing of the 2021 tax return, you may have to pay that extra amount back (referred to as a "clawback" provision).
3 | Upgrades to the Child and Dependent Care Tax Credit
Along with the Child Tax Credit, the Child and Dependent Care Tax Credit is also getting a boost (for 2021 only) to further help parents and caretakers. This is a credit available or those who paid expenses for the care of a qualifying individual. The credit is typically calculated by taking your care expenses (maximum of $3,000 for one child, or $6,000 for two children) and multiplying that amount by a percentage (between 20% and 35% as determined by your income; see more details on page 12 here). The end result is your credit, which is NOT refundable under the normal rules.
Under the American Rescue Plan Act, the eligible expenses are going up from $3,000 to $8,000 for one child, and from $6,000 to $16,000 for two children. On top of that, the maximum percentage is moving from 35% to 50%! This increases the maximum potential credit for an individual with one child from $1,050 to $4,000. For those with two children, the maximum potential credit increases from $2,100 to $8,000!
Of course, there is another phase-out limit with this one, but that is also being increased. Before 2021, those under $15,000 in Adjusted Gross Income (AGI) would get the full 35% and gradual decrease to 20% until the taxpayer's AGI hit $43,000. For 2021 only, that phase-out limit is drastically increasing, ranging from $125,000 to $185,000! Meaning, those under $125,000 in AGI would get 50% and gradual decrease to 35% as AGI approaches $185,000. There is also a new, second phaseout from $400,000 - $440,00, where those over $440,000 in AGI won't receive any credit.
Finally, unlike in prior years, this credit is fully refundable for 2021! That means you can get a refund for any amount that the credit exceeds your tax liability.
4 | Unemployment
With millions of individuals still unemployed due to the pandemic (Happy 1-Year Anniversary, by the way), the stimulus extended Federal subsidies to states for unemployment until September 6, 2021 (they kept the amount at $300 per individual per month, on top of the state unemployment). Also extended until September 6, 2021 was the Pandemic Unemployment Assistance program, to allow for self-employed individuals to receive unemployment compensation.
Also, if you received unemployment in 2020 and have AGI under $150,000, up to $10,200 of that unemployment compensation will be considered tax-free! That amount is per individual, so for joint filers, that amount is $20,400. However, a notable caveat, when calculating AGI to see if you qualify, you must include unemployment compensation in that amount. So while it may not be taxable, in order to see if your AGI is under the qualification threshold, you have to include it in AGI. A little circular, but that's the rule.
5 | COBRA Subsidies
Generally, when an employee is laid-off, they have the option to keep their health insurance plan for 90 days after termination (via COBRA); however, the entire premium cost, which is usually largely covered by the employer, must be covered by the terminated employee. This can be VERY expensive and not ideal when you're out of a job.
Fortunately, the stimulus made some changes to this. For those individuals who have been involuntary terminated, they can utilize COBRA to keep their health insurance through September 2021…for FREE! Usually, an individual bears the full cost of the insurance premiums, and can only keep it for 90 days, so having the option to keep the insurance at no cost through September is a huge benefit for those who lost their job during the pandemic.
6 | Premium Assistance Tax Credit
When it comes to purchasing health insurance through a state-run exchange, individuals are required to spend a certain amount on monthly premiums before the Premium Assistance Tax Credits kick-in (based on household income as a percentage of the poverty line). For 2021 and 2022, the stimulus reduced this amount, so that people can spend less on insurance while maintaining the same coverage. Here is a great chart compiled by Kitces.
Furthermore, any taxpayers who received an advance Premium Assistance Tax Credit in 2020 that was greater than the amount they should have actually received, there will be no "clawback". Meaning, that the additional amount received will not have to be paid back.
7 | Student Debt
While the stimulus didn't forgive any student loans, they inserted a provision that excludes discharged/forgiven student loans from taxable income between 2021 to 2025 tax years. This was a concern some people had when talks of student loan forgiveness was first presented. Usually, when debt is forgiven or "discharged", it is considered taxable income to the taxpayer who had that debt forgiven. This can pose a problem if a big chunk of debt is forgiven and the taxpayer can't foot the associated tax bill. This tax-free provision around student loans resolves that fear and teases the idea of potential loan forgiveness in the near future.
Also interesting, this tax-free provision applies to the forgiveness of Federal AND private loans!
Want to dig into more detail?
In summary, the American Rescue Plan Act will impact the majority of people in one way or another. It also sets the tone for what may be coming with Biden's tax plan. Like I mentioned at the beginning, if you're interested in digging into more details around the stimulus, Kitces.com has an incredible write-up that does a better job at explaining this than I ever could, although, it is pretty technical because it's geared towards advisors, but it's there if you want to read it.