The American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Package, is a $1.9 trillion economic stimulus bill passed by Congress and signed into law by the President on March 11, 2021. The Act builds upon many of the measures in the CARES Act and the Consolidated Appropriations Act. The team at ATBS has read through the Act and has summarized some of the key pieces of information that will have the greatest impact on owner-operator truck drivers.
As you know, legislation surrounding the economic recovery of the Coronavirus pandemic has changed significantly over the past year and will likely continue to do so. We will continue to update this article with more information as it changes or becomes available.
If you are a current client and have questions about this legislation, please contact your ATBS Business Consultant. If you are not yet a client and are interested in learning more about how ATBS can help you file your taxes and manage your trucking business, please give our enrollment team a call at 866-920-2827.
Third Round of Stimulus Payments
The third round of stimulus checks will be $1,400 per adult and qualifying dependent. These payments are set to arrive in March of 2021 at the earliest. Eligible individuals must have a valid identification number, which can be a SSN, Adoption TIN. Additionally, members of the Armed Forces must have at least one taxpayer listed on the return with a qualifying identification number to qualify. To check on the status of your stimulus payment, visit https://www.irs.gov/coronavirus/get-my-payment.
Individuals who are ineligible to receive the payment include:
Individuals without Social Security Numbers
Individuals filing as Single with AGI above $80,000
Individuals filing as Head of Household with AGI above $120,000
Married Filing Jointly Couples with AGI above $160,000
Nonresident aliens
Individuals who are claimed as a dependent of another individual
Individuals who were deceased prior to 1/1/2021
Estates and Trusts
One of the most significant changes in this round of stimulus payments is that dependents of any age qualify for the stimulus. That includes college-age dependents and disabled adult dependents. The 2020 tax return will be used to qualify for the stimulus payment. If a 2020 tax return has not yet been filed, then the 2019 return will be used.
Taxpayers that claim qualifying children or adult dependents on their tax return will receive the stimulus check for those dependent(s). If an individual files their own return and was not claimed as a dependent by anyone else, then they will receive the stimulus check.
The phase-out for single taxpayers begins at AGI levels of $75,000 - $80,000. At $80,000 the stimulus is fully phased out. Married filing jointly taxpayers phase-out begins with AGI of $150,000 - $160,000.
Child Tax Credit Changes
The American Rescue Plan Act includes an increase to the existing Child Tax Credit. For those unfamiliar with the Child Tax Credit, it provides dollar-for-dollar tax savings for taxpayers with children under the age of 17. The credit amount is $2,000 per child for 2020. During 2021, and for 2021 only at this time, the American Rescue Plan Act increases the Child Tax Credit in two ways:
For children ages 6-17, the credit increases by $1,000 for a total annual credit of $3,000 per dependent child.
For children under age 6, the credit increases by $1,600 for a total annual credit of $3,600 per dependent child.
Additionally, the Act provides that a portion of the credit be issued during the calendar year 2021. Ordinarily, taxpayers receive the Child Tax Credit benefit by filing their annual income tax returns. The Act states that the IRS would start providing periodic payments of the credit potentially as frequently as monthly during 2021. The advance credit payment could begin as early as July 2021.
For children ages 6-17, labeled as “School-aged children”, the taxpayer claiming the child as a dependent on their tax return would receive $250/mo per child ($3,000 / 12 = $250/mo). For children under age 6, labeled as “Young children”, the taxpayer claiming the child as a dependent on their tax return would receive $300/mo per child ($3,600 / 12 = $300/mo). If the taxpayer qualifies for the lower $2,000 tax credit due to high income, then the advance credit payment is $167/mo ($2,000 / 12 = $166.66).
For children born during 2021 the IRS is tasked with creating an online portal where taxpayers can update dependent information in order to qualify for the Child Tax Credit.
If the monthly advance of the Child Tax Credit begins in July 2021, that would mean that half of the credit would be advanced during 2021 and the other half would be claimed by filing a 2021 income tax return. A notable point with this enhancement of the Child Tax Credit is that the credit will be reconciled when filing the 2021 tax return. Taxpayers that file their 2021 tax return and qualify for less Child Tax Credit than they received may be required to repay the credit on their 2021 tax return. However there are safe harbor rules that protect lower income taxpayers. Taxpayers that are not required to repay any amount include those with AGI below $80,000 for single filers and $120,000 for those married filing jointly.
Additionally, there are new phase-out limitations for the enhanced amount of Child Tax Credit. Single filers earning more than $95,000 and married filing jointly filers earning more than $170,000 would be phased out of the enhanced portion of the Child Tax Credit. Taxpayers that are fully phased out of the enhanced Child Tax Credit are still eligible to claim the ordinary Child Tax Credit of $2,000 on their 2021 income tax return assuming they aren’t phased out of the ordinary Child Tax Credit. The phase-out range of the ordinary Child Tax Credit is $200,000 for single filers and $400,000 for married filing jointly filers.
Finally, another benefit to some taxpayers is the removal of any limitation on the refundable portion of the Child Tax Credit. The maximum refundable credit amount under 2020 law is $1,400 per child. The American Rescue Plan Act removes the limitation for 2021 tax returns and increases the refundable amount. If the right circumstances caused a taxpayer to be unable to use the entire $2,000, $3,000, or $3,600 credit to reduce their tax liability, the taxpayer would receive the remaining amount of the unused credit in the form of a refund.
Earned Income Tax Credit (EITC)
The Act enhances the Earned Income Tax Credit (EITC) for tax years starting 2021. For those unfamiliar with the EITC, it provides a refundable tax credit for low-income taxpayers. The changes include:
Specifically for taxpayers without a qualifying child, the minimum age to qualify for EITC is lowered from age 25 to age 19.
Additionally, for taxpayers without a qualifying child, the maximum age to qualify for EITC has been removed. Previously taxpayers age 65 or older did not qualify.
Married individuals that are separated but legally married, living with a qualifying child for more than one-half of the year, and did not live with their spouse for the last 6 months of the year would now qualify for the EITC. Previously taxpayers that filed married filing separately did not qualify for EITC. It is important to note that the qualification for EITC under the new rule is not simply filing as Married Filing Separately, but refers to taxpayers that may be in the process of legal separation and meet the above criteria.
There are also new limits for claiming EITC if you have investment income. Investment income is income such as interest, dividends, and capital gains. If investment income exceeds certain amounts the taxpayer is disqualified from claiming EITC. The previous investment income limit to disqualify the taxpayer from receiving the credit was $3,650 (2020) and has been increased to $10,000 for 2021.
Similar to the 2020 EITC rule, passed by the Consolidated Appropriations Act, taxpayers can use 2019 earned income to calculate their 2021 EITC if they would benefit from using 2019 earned income.
What this means for you:
More low-income taxpayers that do not have qualifying children will now qualify for EITC due to less strict age limitations.
More taxpayers with investment income will now qualify for EITC.
If you don’t qualify for EITC on 2020 or 2021 income tax returns, you can use your 2019 earned income to calculate the credit.
Child and Dependent Care Expenses
The Act enhances the credit for child and dependent care expenses by increasing the allowable expenses, increasing the credit percentage, and increasing the AGI phase-out limits for tax year 2021. Taxpayers that pay for child and dependent care in order to work qualify for this credit. Taxpayers who are married filing jointly qualify if both spouses work.
Previously, the maximum allowable expenses were $3,000 for one dependent and $6,000 for more than one dependent. That has been changed to $8,000 for one dependent and $16,000 for more than one dependent.
The credit calculation has several steps. In short, the amount a taxpayer pays in childcare expenses doesn’t equal what the taxpayer receives as a credit. The credit is dependent on the level of income and total expenses paid. The maximum benefit percentage was 35% and the Act has enhanced that percentage to 50%. That means a taxpayer receiving the maximum credit for one dependent under the previous rules would receive a credit of $1,050 ($3,000 expenses x 35%). Under the new rules, the same $3,000 in expenses would result in a credit of $1,500. Additionally, if a total of $8,000 or more in childcare expenses were incurred, then the new maximum credit for one dependent would be $8,000 x 50% or $4,000.
Perhaps more important than the enhancement above is that previously the dependent care credit was nonrefundable and is now fully refundable.
Unemployment Benefits and Extension
The Act creates two changes on unemployment benefits. First, it extends the $300 weekly unemployment benefit to September 6, 2021. Additionally Federal unemployment benefits were originally set to expire on March 14, 2021, through the Consolidated Appropriations Act passed in late December 2020.
Second, the Act allows an exclusion of $10,200 of unemployment benefits from taxable income per taxpayer retroactively for 2020 tax returns. The exclusion has a phase-out of AGI above $150,000. This phase-out limitation is the same for married couples filing jointly. This rule is retroactive; it only applies to 2020 tax returns, not 2021. Currently, there is no guidance from the IRS with taxpayers who have already filed a 2020 tax return. Taxpayers that have already filed for 2020 may be required to file an amended 2020 tax return to receive the tax-free status of their unemployment benefits. The IRS will be issuing more guidance for taxpayers that have already filed and had unemployment benefits that would qualify for tax-free treatment.
Extended PPP Funding
The Act adds an additional $7.25 billion in funding to the $284 billion in current PPP funding still available. The increase provides expansion for certain nonprofit entities and other organizations. However, the Act does not extend the PPP’s current application period, which is scheduled to close on March 31, 2021.
As of March 17, 2021, the House has passed a bill that will extend the PPP deadline by 60 days, making the new proposed deadline May 31, 2021. This bipartisan bill was passed with a 415-3 vote in the House; it now moves to the Senate, and then if it passes, to the President for signing.
Student Loan Debt Forgiveness
The American Rescue Plan Act lays the groundwork for the cancellation of student loan debt to be considered tax-free from 2021 through 2025. The plan has no wording specifically canceling any amount of student loan debt at this time. If Congress or a student loan lender later acts to forgive student loan debt, then under current tax law the forgiveness or cancellation of that student loan debt would not result in a tax liability.
Families First Coronavirus Response Act (FFCRA)
The American Rescue Plan extends payroll credits for COVID-19-related paid sick leave and paid family leave. This Act extends the credit for paid leave provided through September 30, 2021, but employers are not required to provide such leave. If an employee already used up their FFCRA credit, starting April 1, 2021, they will receive an additional 10 days (80 hours) of sick leave time. The FFCRA now includes time off taken to get the COVID-19 vaccine.
Subsidy to the Affordable Care Act
Under prior tax law, the premium subsidies were fully phased-out for taxpayers earning modified AGI over 400% of the federal poverty line. For example, the federal poverty line for a single taxpayer is $12,880 in 2021, so the subsidy would end at $51,520 of income. The American Rescue Plan removes the phase-out for subsidies. It also imposes a maximum health insurance rate of 8.5% of a household’s total income through 2022. That maximum rate applies to families with incomes beginning at 400% of the federal poverty line, with lower rates applying to incomes below that threshold.
COBRA Premium Subsidy
The Act creates a premium subsidy for federal and state COBRA coverage for “assistance eligible individuals,” defined generally as including any employee or dependent who loses group health plan coverage due to an involuntary termination of employment or because of a reduction of hours. Under prior law, the individuals who were terminated from employment were required to pay the premiums themselves rather than subsidizing them. The COBRA premiums would ultimately be paid by the employer and the employer then receives a refundable tax credit for premiums paid against certain payroll taxes.
Extension and Expiration of Excess Business Losses
Looking back to the Tax Cuts and Jobs Act (TCJA) this Act introduced an excess business loss limitation, meaning that for certain losses only 80% of the business’s loss could be claimed on the following year’s tax return. The rule was set to be in place from 2018 through 2025. The CARES Act suspended this rule for the tax year 2020 due to the Coronavirus pandemic, allowing full losses. The most recent American Rescue Plan Act extends the excess loss limitation rule by one year, now including 2026. Perhaps more notable is that the excess business loss limitation is back in full effect for tax years 2021 through 2026.
What’s Next
As previously mentioned, the details of this legislation is subject to change at any time. The team at ATBS will continue to update this article and alert our clients and subscribers whenever new information becomes available. If you are an owner-operator interested in receiving the latest news and information to help you successfully run your trucking business, please click here to sign up for the ATBS newsletter.