American Rescue Plan Act of 2021

American Rescue Plan Act of 2021

On March 11, the American Rescue Plan Act of 2021 was signed by president Biden. It is a $1.9 trillion coronavirus relief package to boost the economy and tackle coronavirus. Due to this new law, a wide variety of taxes changed. It ranges from the third round of economic impact payments to the expansion of the employee retention credit.

Here to break down what’s in the act and what it means for the tax community.

  1. It is more focused on the lower-income group. The tax law is an economic stimulus. It is called a demand-side stimulus. The government is trying to increase spending in the economy and get the unemployment rate down. This law is a relief in the form of a macroeconomics stimulant. This bill is tightly targeted to low-income folks. This law is quite the opposite of the Tax Cuts and Jobs Act, in which generally upper income get benefits. In terms of the number, this bill was $1.9 trillion, which is about 8.5 percent of GDP. It would be $5,500 for every American. Now not every American is getting that. A lot of that’s going to the lower end of the income spectrum. We can see how large an effect this is having on lower-income families.
  2. This bill is great for business. Suppose we don’t include fraud. A lot of people applied for the Paycheck Protection Program loans and the Economic Injury Disaster Loans. There were a lot of people that started a business to get this, exaggerated the business they had or didn’t have one at all, and received some of these benefits. The problem is that people who need this may not be getting it. But overall, the intent is great for businesses. 
  3. For individuals, unemployment was probably the only major thing that it did. It looks like the government will make some adjustments to something like the premium tax credit, which is also for lower-income. Even the business provisions are targeted toward the workers, so everything is for workers and people in need. The employee retention credit is to help the workers. Family leave and sick leave are to help workers. Those are business provisions, but they’re targeted not to help the businesses. They’re just transmitting benefits to their employees.
  4. The initial two payments were provided to the people who married and jointly made under $200,000. It started a gradual reduction of a tax credit that a taxpayer is eligible for as their income approaches the upper limit to qualify for that credit from $150,000 to $200,000. Hence, those people did not get the whole amount. And then for singles, it was $75,000 to $100,000. If they were under $75,000, they got the whole amount, and between $75,000 and $100,000, that would phase out. It means they would get a smaller amount as they went over that amount.
  5. The new bill or the recent one that just passed limited that to where now only people under $75,000 will get the full amount, and it phased it out at $80,000 for singles. For married filing jointly, it’s $150,000 and phases out completely at $160,000. Anybody who made between $160,000 and $200,000 and filed married jointly is cut out, and anyone who made between $80,000 and $100,000 as a single filer is cut out of this. 
  6.  The more benefits are targeted to low-income folks results in more stimulus effects. All other things equal, this law would rather have $200 of benefits to a low-income family instead of $100 and $100 to a low- and middle-income family. That is pure macroeconomic stimulus. The bill is $1.9 trillion, but only about $600 billion in tax. The other $1.3 billion in spending and most of that is the economic impact payments at $410 million.
  7. Child tax credit is $3,600 for ages 0 to 5. Ages 6 to 17 is $3,000. There is actually a gradual reduction of a tax credit that a taxpayer is eligible for as their income approaches the upper limit to qualify for that credit too. There’s a base of $1,000 that everyone gets, but it phases out at $75,000 for singles and $150,000 for joint filers. People over those amounts will not get that additional amount. They will get the original $2,000. It’s a little bit more complicated than it’s projected out to be. We’ve got that income limitation still set in place even for this credit.
  8. Then the portal was supposed to be set up this summer with the IRS. In my opinion, that is going to be a logistical nightmare. The IRS is going to administer this portal that they have not yet created. People actually will have to opt-out of it, meaning they’re somehow calculating how much child tax credit people should get. I guess they’re looking at the birth date because if the child goes between 5 and 6, that credit is different. They’re giving them 50 percent of that over the six months.
  9. People who alternate claiming children on opposite years like divorced parents and people who, “I claim one year, the dad claims the next year.” Who claims the advanced credit? Do they both opt-out? Does one opt-in? The practical logistics of it are a nightmare upfront for the actual taxpayer and a nightmare for the tax preparer because we can barely get people to remember how much their stimulus check was for the first two stimuli. Now we have to say, “Well, how much-advanced child tax credit did you get?” If their income is below that this year and they calculate for it next year, it’s higher; now we have an issue where they may have received too much credit. The ERC, the PPP, which is not taxed but it’s all involved with tax, and the expanded child credit are all sort of the same, but they’re a little different, which makes it nightmarish for practitioners. When you look at it from 10,000 feet, you go, “Oh, they’re just continuing the programs.” But for practitioners, there are so many details, and they’re so similar. It’s so easy to get confused.
  10. The dependent care credit is also going to be expanded, which I think is well overdue. That one maxed out at $3,000, and most people only got a tax credit of $600, whereas now it can go up to $4,000 per child, up to $8,000. It does stop at $2,000, but now that credit expenses up to $8,000 per child. It does change with an adjusted gross income over $125,000 again, so here again, we have some AGI limitations. But it’s still a much better credit, and it is fully refundable, which is awesome because it was limited to tax liability before. Refundable means you can get credit more than your tax liability. The dependent care credit is allowing that as well as the child tax credit.
  11.  Some states tax unemployment, some do not. We have a couple of states that already don’t tax it. When you subtract it off the federal, if any of those states use the federal AGI to calculate the state, you’re going to have to add it back. Tax professionals have to wait on software, and we know that if the IRS adjusts it, it doesn’t mean the states will. That’s kind of a hold.
  12. The other hold is those that haven’t filed yet. We know the IRS has it. We have basically, in terms of old school people who didn’t do virtual taxes, a drawer full of returns that are being held with unemployment on them because we’re waiting for the software to update to make sure that tax professionals make the adjustments.
  13. Announcement of the income as general because some states still tax that unemployment. It’s just the federal that has exempted the $10,200. Then we take an adjustment on Form 1040 for the $10,200, so they’re only going to report the amount over that essentially. But, with the states, some tax it, some don’t, and we have to consider this adjustment. Some software has already updated theirs. Some people are working on this adjustment. Hence, clients are getting more money back.
  14.  The other thing is it’s only for people under $150,000. We have to look at that cliff again, where if they made $150,000 per taxpayer, single and married filing with the unemployment included, they can’t take the subtraction. It’s only for those who are way under.
  15. The bill says all payments received in 2020 get this exemption. So this individual, who had to wait 11 months, will now receive the benefit.
  16. The IRS formally announced that the tax filing deadline would be pushed back to May 17. If you move the date, they move when they give you their paperwork. I believe any client who has issues should go on an extension just like any other tax season. That would mean we could have extended the payment due date to June 15 or something just to kind of ease it to let the stimulus come in, so people have money to pay the tax bill.
  17. We cannot get through the phone lines. We cannot talk to a person. Our Centralized Authorization File unit, which is the unit that processes the power of attorneys, has been backed up at least six weeks. You can’t even get your power of attorney on file to talk to a person. When you finally do get to speak to a person, if you fax it in, then there are all these other complications with it.
  18. For the last 20 years, we’ve been saying, “Why are we raising taxes on people who are paying taxes while we’re allowing this enormous tax gap just to sit out there?” Hundreds of billions of dollars are not being collected, and study after study proves that if you increase IRS funding, it will more than pay for itself. With the incredible increase in the deficit this last year, people are saying it’s moving onto the front burner again that we should increase IRS funding because it will help reduce the deficit.
  19. It’s what economists call taxpayer morale. People have been dumping on the IRS. It’s the agency that’s so easy to hate because they’re taking your money and making you do the math on top of it all. It’s been politically simple to just beat on the IRS. I think they do an incredible job. 
  20. We need to boost taxpayer morale. We need to boost employee morale at the IRS. That’s our national infrastructure. I don’t know how they do it. Ty, you talk about they do such a great job with so little. But how do they? I am amazed. Look how much they get right. It’s just incredible.
  21.  In that time frame, they put together the ERC, which is a complicated piece of legislation, and the PPP program, which was $600 billion. If you spend $600 billion, you better be popular. But the hoops they made people jump through, the frustrations and the complexity for the practitioners, for the business people, for the employees were just unforgivable.