Important Changes From The American Rescue Plan of 2021

March 23, 2021

President Biden recently signed the $1.9 trillion American Rescue Plan Act of 2021 (the “American Rescue Plan”). The package expands relief provisions first introduced in the Coronavirus Aid, Relief and Economic Security (CARES) Act from March 2020 and introduces new measures to help families and businesses. What does this mean specifically for you? Below is a summary of the package’s major changes and things to consider:

Recovery Rebate Checks

  • There will be another round of stimulus checks in the amount of $1,400 per eligible individual subject to income phaseout thresholds starting at $75,000 for single filers and $150,000 for joint (see chart below).
  • Eligibility this cycle has been expanded for dependents, from children ages 17 and under, to now all dependents in the household, including older kids still in school (college-age kids).
  • Checks will be based on income from your most recent tax return. So, if you already filed your 2020 return, it will be based on your income from 2020. If you haven’t, then it will be based on 2019 income.

Child Tax Credit

  • Only for the 2021 tax year, the child tax credit is increased from $2,000 under current law to $3,600 for every child under age six and $3,000 for children between the ages of six and 17 (one year older than under current law).
  • The total child tax credit is divided into two parts, where the original $2,000 credit is subject to a phaseout of $200,000 for single filers and $400,000 for joint. However, a separate phaseout will be implemented for the increased credit amount, which starts at lower income threshold levels ($150,000 for joint filers, $75,000 for separate filers and $112,500 head of household filers).
  • Another important change to the child tax credit is that parents will receive it regardless of their employment status, and the credit is fully refundable.
  • Half of the credit can be received in advance by having the IRS send monthly payments to families from July-December 2021. This amounts to a monthly tax credit of $300 per month for every child under six and $250 for every child six and over. The payments can greatly ease childcare payments for parents who have lost their jobs or have had to leave the workforce to care for their children due to the pandemic.

Child and Dependent Care Tax Credit

  • The old law provided that a tax credit (based on how many kids you have and how much you earn) could be figured on $3,000 of eligible expenses if you have one child or $6,000 for two or more children. The new law is $8,000 of eligible expenses per child, or $16,000 for two or more children.
  • Previously, in order for taxpayers to receive a child tax credit for their children, the child must be under the age of 17 (i.e., 16 or under) as of the end of the year. The American Rescue Plan temporarily increases the maximum age so that children under the age of 18 (i.e., 17 and under) qualify for 2021.
  • Lastly, for 2021 the limit on tax-free employer-provided dependent care assistance is increased from $5,000 to $10,500 (50% for taxpayers filing married separate).
Source: IRS.GOV

Many of the changes above are temporary for 2021 at the moment, but it is expected that Democrats will push to make this permanent as part of more comprehensive tax reform later in 2021. Our experienced BDF Team is happy to help navigate what the newest relief package means for you. Email your wealth management team for more information.

Disclosure: BDF does not provide legal, tax, insurance, social security or accounting advice. Clients of BDF should obtain their own independent tax, insurance and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning.