Enhanced Tax Benefits – New Legislation Summarized

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In the last 12 months congress has passed several pieces of legislation intended to provide relief to individuals and businesses. One such law, the American Rescue Plan (ARP) of 2021, was enacted last month. It contained some important changes that we highlight here.

Child Tax Credit

Under prior law, individuals received a $2,000 tax credit per child under the age of 17, and a $500 credit for ages 17, 18 and full-time students ages 19-24. This credit was phased out with adjusted gross income (AGI) in excess of $200,000 for individuals ($400,000 for married couples).

With the ARP of 2021, the credit was expanded to $3,000 per child under age 18, and $3,600 per child under age 6. This expanded tax credit phases out with AGI in excess of $75,000 ($150,000 for couples).

Interestingly, 50% of these credits will be paid in advance starting in July. Historically, the credit was applied when you filed your tax return. The IRS will use your 2020 tax return to determine eligibility, or your 2019 return if 2020 has not yet been filed.

The credit was expanded for 2021 only and will revert to prior levels in 2022.

Dependent Care Expense Credit

Prior to the ARP of 2021, you could receive a non-refundable tax credit of up to 35% of allowable expenses due to child and dependent care costs. “Allowable expenses” were previously defined as $3,000 for one qualifying person and $6,000 for two or more qualifying persons.

The ARP of 2021 makes the credit refundable, and the allowable expenses are increased to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals. Additionally, the percentage of allowable expenses that can be refunded is raised from 35% to 50%. However, once your income exceeds $125,000, the credit begins to phase out until your AGI reaches $438,000.  

Unemployment Benefits Extended

The enhanced unemployment benefits of $300/week were extended through September 6, 2021.

Taxation of Unemployment Benefits

Historically, unemployment benefits were included in taxable income. However, benefits received in 2020 are excluded from taxable income up to $10,200. To qualify for this exclusion your AGI must be less than $150,000 for both single and joint filers.

If you already filed your tax return prior to the passing of this legislation in March, you may be entitled to a tax refund.

Healthcare Benefits

Prior to ARP of 2021, the Affordable Care act (ACA) offered premium subsidies if your income was less than 400% of the federal poverty limit (FPL).

ARP of 2021 expanded the subsidy, allowing individuals earning more than 400% of the FPL to pay no more 8.5% of their income on healthcare insurance offered through the exchanges. This expansion is for 2021 and 2022. The bill also provides relief for COBRA premiums through September for those who are still on their former employer’s health insurance plan.

In summary, there were important tax changes with the American Rescue Plan of 2021 (not all were listed here). Many of the enhanced tax credits begin to phase out with $75k of AGI ($150k for married individuals). You might consider temporarily switching from Roth to pre-tax contributions to your retirement accounts to qualify for some of these enhanced credits before they expire. Lastly, you might consider reviewing your health insurance plan to see if the ACA exchange might be more cost effective.  Be sure to talk to your financial advisor and your tax advisor before making any changes.

Logan Jones
Partner & Wealth Manager CFP®, CIMA®, CPWA®, CEPA

Source: https://www.putnamwealthmanagement.com/four-key-tax-changes-in-the-new-pandemic-relief-bill