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Six Tax Changes Under the American Rescue Plan Act of 2021

April 9, 2021

Congress and the Biden Administration recently provided Americans with trillions of dollars in economic relief through the American Rescue Plan Act (ARPA) of 2021. The legislation includes assistance and support in response to the ongoing COVID-19 pandemic and tax provisions to help fight child poverty.


Here are six tax provisions from the bill that you need to know:


1. Increased Child Tax Credit

In 2021, the ARPA increases the $2,000-per-child credit to $3000 ($3600 for children under the age of six). Children 17 years old and younger qualify, the credit is fully refundable and the Internal Revenue Service (IRS) is expected to begin paying half of the credit to qualifying families monthly from July to December. Credit eligibility and payment amounts will be based on 2020 or 2019 tax returns and depend upon the number of children and their ages.


The payments are advances of the 2021 child tax credit and aren’t taxable. Families with adjusted gross incomes (AGI) at or below $40,000 for single filers, $50,000 for head of households and $60,000 of joint filers will not be required to repay any credit overpayments they receive.


The IRS is currently developing an online tool for people to easily update their 2021 AGI, marital status and the number of qualifying children. Taxpayers can also elect out of the advance distributions and instead take the full credit on their 2021 tax returns.


The increased tax credit currently only applies to 2021, but Democratic lawmakers have said they’d like to make the credit permanent in an effort to reduce child poverty.


2. New Tax Benefits for American Workers

  • Workers without children now qualify for a higher Earned Income Tax Credit (EITC) for 2021. Additionally, these taxpayers can choose to use their earned income from 2019 or 2021, whichever amount will earn them a larger credit.
  • Working parents get a higher child and dependent care credit for 2021. Parents with an AGI of up to $125,000 are eligible to get up to $4,000 for one child and $8,000 for two or more children. Partial credit will be given to parents with AGIs between $125,000 and $500,000.
  • Another 2021 tax benefit for working parents is that they can contribute up to $10,500 of pretax wages to dependent care Flexible Spending Accounts. This amount is more than double the previously allowed amount of $5,000.

3. Health Premium Credit

Premium tax credits under the Affordable Care Act for 2021 and 2022 are available to more individuals and in larger amounts.


4. Up to $10,200 of unemployment benefits received in 2020 are not taxable

Individuals and couples (each spouse) with an AGI of less than $150,000 will not be taxed on up to $10,200 of unemployment benefits received in 2020. The IRS is urging individuals who have already filed their 2020 taxes to not amend their returns to claim the exclusion and says qualifying individuals and joint filers will automatically be issued refunds.


5. Third round of stimulus checks

Many Americans have already received their third stimulus check—$1,400 for single filers and heads of household, $2,800 for joint filers and $1,400 for each dependent claimed on your most recently filed tax return. The latest stimulus checks are an advance payment of a tax credit on 2021 returns.


The IRS will first look at 2020 tax returns to determine eligibility for the payments, and if a 2020 tax return is not yet filed, they’ll look at 2019. Use the ‘Get My Payment’ tool on the IRS website to check the status of your stimulus payment if you have not yet received it.


The IRS reminds individuals that it will not email, call or text you as a prerequisite to receiving your stimulus payment and that scammers often use these methods of communication to not only intercept your payment but to steal your financial information. Do not respond or open links from these types of messages.


6. Other notable tax changes under ARPA

  • Most student loan debt forgiven from 2021 to 2025 will be tax-free.
  • Two COVID-19-related employer payroll tax credits are expanded: The payroll credit for sick and family leave paid by businesses to employees affected by COVID-19 and the employee retention tax credit for businesses that experience financial hardships because of the pandemic but continue paying wages to employees.

Do you have questions about the new tax provisions of the ARPA and how they affect your personal or business taxes? Contact Anthony Hoffmaster, CPA, CES, MST by phone 919-435-4413 or email .

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