The American Rescue Plan Act of 2021 (ARPA) was signed into law by President Biden on March 11, 2021. Below is a summary of the provisions of ARPA that affect individuals.
Recovery Rebate Credit/Checks
Under the ARPA, an eligible individual is allowed an income tax credit for 2021 equal to the sum of $1,400 ($2,800 for individuals filing a joint return), plus $1,400 for each dependent of the taxpayer. This credit is refundable. An eligible individual is any individual other than a nonresident alien or an individual who is a dependent of another taxpayer for the tax year.
The credit begins to phase out for individuals with adjusted gross income over $75,000 ($150,000 for joint filers) and will be completely phased out for individuals with adjusted gross income over $80,000 ($160,000 for joint filers).
The IRS will start issuing advance payments of the Recovery Rebate Credit in the coming weeks based upon the individual's 2019 tax return (or 2020 if already filed). The amount of the credit allowed on the 2021 tax return must be reduced (but not below zero) by the amount of the advance payment received by the taxpayer during 2021.
Student Loan Discharges
The ARPA excludes from gross income certain discharges of student loans after December 31, 2020 and before January 1, 2026. The student loan discharge exclusion applies to (a) loans provided expressly for post-secondary educational expenses if the loan was made, insured, or guaranteed by a federal, state, or local governmental entity or an eligible educational institution, (b) private education loans, (c) any loan made by any educational institution qualifying as a 50% charity if the loan is made under an agreement with any governmental entity or any private education lender that provided the loan to the educational organization, or under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt charitable organization, or (d) any loan made by an educational organization qualifying as a 50% charity or by an tax-exempt organization to refinance a loan to an individual to assist the individual in attending any educational organization but only if the refinancing loan is under a program of the refinancing organization which is designed as described in item (c).
The discharge of a loan made by either an educational institution or a private education lender is not, however, excluded under the above rules if the discharge is on account of services performed for either the organization or for the private education lender.
Child Tax Credit
The ARPA expands the eligibility and amount of the child tax credit (CTC) for tax year 2021 to include:
- The definition of a qualifying child is broadened to include a child who hasn’t turned 18 by the end of 2021.
- The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the tax year). Increased amounts are, however, phased out at modified adjusted gross income over $75,000 for singles and $150,000 for joint filers.
- The CTC is fully refundable for 2021 for a taxpayer with a principal place of abode in the U.S. more than half of the tax year or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.
IRS to establish a program to make periodic advance payments equal to 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTC in July 2021 through December 2021.
Earned Income Tax Credit (EITC)
EITC for Taxpayers with No Qualifying Children. The ARPA expands the eligibility and amount of EITC for 2021. The 7.65% credit percentage and phaseout percentage is increased to 15.3% and the $4,220 earned income amount is increased to $9,820. The credit increases from $543 to $1,502.
Substitution of 2019 Earned Income. The ARPA allows taxpayers to elect to substitute their earned income for 2019 if that 2019 amount is greater than their 2021 earned income when calculating the EITC for 2021.
Child and Dependent Care Credit
For tax years beginning in 2021, the ARPA increases the amount of expenses eligible for the child and dependent care credit to $8,000 (from $3,000) if there is one qualifying individual and $16,000 (from $6,000) if there are two or more qualifying individuals. The applicable percentage is also increased to 50% (from 35%), reduced by 1 percentage point for each $2,000 by which the taxpayer’s adjusted gross income exceeds $125,000.
The child and dependent care credit is refundable for taxpayers who have a principal place of abode in the U.S. for more than one-half of the tax year.
The ARPA extends the federal pandemic unemployment compensation of $300 per week to September 6, 2021. Households (both single and married taxpayers) with adjusted gross income of less than $150,000 for tax year 2020 may exclude up $10,200 of unemployment benefits from taxable income. The IRS has announced that those who received unemployment benefits last year and have already filed their 2020 tax return should not file an amended return until the IRS issues additional guidance.
COBRA Premium Subsidy
The ARPA provides Assistance-Eligible Individuals (AEIs) a 100% subsidy for COBRA premiums for any period of COBRA coverage during the period beginning April 1, 2021 and ending September 30, 2021 (“Covered Period”).
Eligibility. An AEI is a COBRA qualified beneficiary (i.e., employee, former employee, covered spouse, or covered dependent) who is eligible for and elects COBRA coverage during the Covered Period due to a qualifying event of involuntary termination of employment or reduction of hours.
Extended election period. Individuals who do not have a COBRA election in effect on April 1, 2021, but would be an AEI if they did, are eligible for the subsidy. Furthermore, individuals who elected but discontinued COBRA coverage before April 1, 2021 are eligible if they would otherwise be an AEI and are still within their maximum period of coverage. Individuals meeting these criteria may make a COBRA election beginning April 1, 2021 and ending 60 days after they are provided required notification of the extended election period.
COBRA coverage elected during the extended election period will commence with the first period of coverage beginning on or after April 1, 2021 and may not extend beyond the AEI's original maximum period of coverage.
Duration. The subsidy is available for any period of coverage during the period beginning on April 1, 2021 and ending on September 30, 2021. Eligibility may end earlier, however, if the qualified beneficiary's maximum period of coverage ends before September 30, 2021 or if the qualified beneficiary becomes eligible for coverage under another group health plan or Medicare.
Plan enrollment option. Group health plan sponsors may, but are not required to, allow AEIs to elect to enroll in different coverage. Enrollment must occur within 90 days after the date of notice informing the individual of the enrollment option. Enrollment in different coverage may be permitted only if:
- the premium does not exceed the premium for the coverage in which the individual was enrolled at the time of the qualifying event,
- the different coverage is also offered to similarly situated active employees at the time of the election, and
- the different coverage is not coverage that provides only excepted benefits, or is a qualified small employer health reimbursement arrangement or health flexible spending arrangement.
Notices from individuals to group health plan. AEIs must notify the group health plan if they cease to be eligible for the subsidy because they become eligible for another group health plan or Medicare. Notices must be provided in the time and manner specified by the Department of Labor. Penalties of $250 (or more for intentional failures) may be assessed for failure to provide such notification. No penalties will be assessed for failures due to reasonable cause.
Required notices to AEIs. Group health plans must provide the following notices to AEIs:
- Notice of assistance availability. Informs AEIs of the availability of the subsidy and the option to enroll in different coverage (if permitted by the employer). Must be provided to individuals who become eligible to elect COBRA during the period beginning April 1, 2021 and ending September 30, 2021. This notice requirement may be met by amending existing notices or including a separate document along with them. Specific content requirements apply.
- Notice of extended election period. Must be provided to individuals eligible for an extended election period within 60 days after April 1, 2021.
- Notice of expiration of subsidy. Must be provided between 45 and 15 days before the date on which an individual's subsidy will expire, unless the subsidy is expiring because the individual has gained eligibility for coverage under another group health plan or Medicare.
The Department of Labor is to issue model notices within 30 days of enactment of the ARPA.
Coordination with Health Coverage Tax Credit (HCTC). Effective for tax years ending after the date of enactment, AEIs are not eligible for the HCTC under Code Sec. 35(g) for any period of coverage in which they receive a COBRA subsidy.
Exclusion from income. Effective for tax years ending after the date of enactment, subsidy amounts will not be included in the gross income of AEIs.
Premium Tax Credit
The ARPA expands the premium tax credit for 2021 and 2022 by expanding the households eligible for the credit.
Furthermore, no additional income tax is imposed for tax years beginning in 2020 where the advance credit payments exceed the taxpayer’s premium tax credit.
Special rules for calculating the premium tax credit apply to taxpayers who have received, or been approved to receive, unemployment compensation for any week beginning during 2021.