President Biden signed the American Rescue Plan Act into law Thursday, triggering the release of $1,400 Economic Impact Payments along with tax breaks for stimulating the economy.
The $1.9 trillion legislation includes a one-year expansion of the child tax credit to up to $3,600 per child, which promises to cut in half the child poverty rate in the U.S. Another provision exempts the first $10,200 in unemployment benefits for households earning up to $150,000, which could prompt many taxpayers to submit revised tax returns. The bill also extends the employee retention credit and adds more money to the Paycheck Protection Program.
The legislation promises to boost the economy substantially at a time when it is still slowly recovering from the ongoing COVID-19 pandemic that has left millions of people unemployed. The bill required Democrats, who hold a razor-thin margin in the Senate, to resort to a budget reconciliation maneuver to get it passed, without any Republican support in either chamber. Biden signed the bill one day ahead of the previously announced Friday date, as he plans to give the first prime-time speech of his presidency on Thursday night. The legislation needed to be passed ahead of a May 14 cutoff date in expanded unemployment benefits, which have now been extended through Sept. 6.
“This historic legislation is about rebuilding the backbone of our country, and giving the people of this nation — working people and middle class folks who have built the country — a fighting chance,” Biden said during the bill signing. “That’s what the essence of it is.”
Employee retention credit
One of the most significant provisions for businesses involves the Employee Retention Credit, which was introduced in the $2.2 trillion CARES Act that Congress passed last March during the Trump administration with the goal of keeping workers on the payroll by providing tax credits to employers in the early days of the pandemic. Congress extended the tax credit in December in the $900 billion Consolidated Appropriations Act, which allowed employers to use the ERC along with the Paycheck Protection Program that provides forgivable loans backed by the Small Business Administration to companies that retain workers.
“The granddaddy is the extension of the employee retention credit and all of the changes that were made to that, piled on top of the Consolidated Appropriations Act,” said Bill Smith, managing director of CBIZ MHM’s National Tax Office. “It extended it through the end of the year. The CAA extended it through the first two quarters of 2021. They changed the amount of qualified wages, and the eligible percentage, to 70 percent. That stays there through the entire year. They changed eligible wages to $10,000 per year to $10,000 per quarter. In 2020, if you have the eligible wages, you can get a maximum for the year of a $5,000 credit per employee. For 2021, that goes up to $28,000 per employee, a 560 percent increase over 2020. That’s obviously very big.”
The intersection between the ERC and the Paycheck Protection Program bears watching, though. “You can’t include wages that are used to justify PPP loan forgiveness, but employers should generally have lots of qualifying wages in addition to that,” said Smith. “That creates an interesting interplay there also because when they dropped the eligible expenses on PPP loan forgiveness that have to be attributable to wages from 75 percent to 60 percent, that now is an incentive to get as many nonwage eligible expenses in for your forgiveness as possible because the lower you drop toward 60 percent with your PPP loan forgiveness, the more potential employee retention tax credits you can get because you’ll have more wages that weren’t used to justify the PPP loan forgiveness.”
The incentives may prompt some companies to go back and amend their previous tax filings. “The amended return filings would be if they were claiming the employee retention credit for 20202,” said Alisha Jernack, a partner at Mazars USA. “The reason being is because this all didn’t come out until after the filings for 2020 would have been done. So companies are now going to be exercising their advisors to see if they qualified for the employee retention credit for 2020. You have to claim the credits for your payroll tax filings, which are due quarterly. For instance, if they’re looking to claim it for the second quarter of 2020, that payroll tax filing would have been filed in July of 2020. Or if they’re going to claim it for December of 2020, that payroll tax filing would have been filed in January 2021. We’re working with our clients. If we know that they are eligible, we can help them to prepare those amended forms and filings, which are just payroll tax filings, and then they can go back and claim the credit and receive the employee retention credit for 2020.”
The extension of the employee retention credit could provide an extra potential $14,000 per employee. “There was a really interesting question we were concerned about on the income tax side because typically you would have a credit against income taxes,” said Smith. “When you pay income taxes, you don’t deduct them. But this is a credit against payroll taxes, and when you pay payroll taxes you do deduct them. So that raised the question: We know we have to reduce the wage deduction by the amount of the employee retention tax credit, but do we also have to reduce the payroll deduction? That makes the overall benefit much less. But the IRS came out and said you only have to reduce your wage deduction. You don’t reduce your payroll deduction at all and you don’t have to include any of the credit in income regardless of whether it’s the nonrefundable portion of the credit or the refundable portion of the credit. The combination of all of those things has made the extension of this for the second two quarters very beneficial.”
Wolters Kluwer Tax & Accounting has posted an updated
Child tax credit
The expansion of the child tax credit also could bring huge benefits to taxpayers, especially large families, and could substantially reduce child poverty, at least for a year. Democrats hope to extend the program beyond just a year.
“It seems like a great new program in terms of getting the money to the lower-income families,” said Smith. “There are two different aspects of it. There's the child credit, which was $2,000 for eligible children maximum for 2020. For 2021, one year only, it’s going to go up to $3,600 for each child [ages] zero to five, and $3,000 for children six to 17. That’s up $1,600 and $1,000, respectively, over the year before. That's just for having the child as long as you're not in a phaseout. So if you have [up to] $75,000 if you're single or head of household, or $150,000 if you’re married filing joint, you get that full benefit. That's similar to what we had in 2020, except the numbers have gone up dramatically. It’s almost double the amount for children zero to five from $2,000 to $2,600, and 50 percent for six to 17. The second benefit is that the IRS is supposed to start issuing half of that amount of the expected amount in periodic payments starting in July, so you're going to start to see that money soon.”
That benefit will be on top of the stimulus payments, and could help millions of families. “Let’s say if you're a single mom who is head of household with a four-year-old kid, you’re going to see $2,800 of stimulus payments hit pretty soon, assuming you filed your 2020 return and elected the direct deposit,” said Smith. “That should go into your bank account. Then they're going to look at that 2020 return and say, are you eligible for the 2021 child credit? And they're going to start paying that in July in some manner of periodic payments. And then you’d pick up the rest of it when you file your 2021 tax return.”
Many families will also benefit from the child and dependent care expenses. “Again, it’s a one-year deal for 2021 only,” said Smith. “It went up from qualifying expenses of $3,000 for one child, or $6,000 for more than one child, all the way up to $8,000 and $16,000, respectively, for 2021. So if you've got one child, you can get a credit for daycare expenses up to $4,000. You're not going to see that, as I understand it, until you file your 2021 return, but that's another huge bump up in that lower-income bracket, where they obviously need the money.”
Popular tax credits
It’s hard to predict if the Biden administration will be able to extend the expanded child tax credit beyond one year, given the narrow margin in Congress between Republicans and Democrats. However, tax benefits like the child tax credit enjoy wide support.
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No Republicans in Congress voted in favor of the American Rescue Plan Act, but criticism was muted in terms of the tax credits. “There wasn’t serious Republican opposition to the American Rescue Plan,” said Faricy. “A popular strategy is to take one part of a bill and attack that.”
The unemployment benefit tax break is useful, but some taxpayers may need to file amended returns if they filed early this year. “The unemployment benefits are a big deal, primarily because on the tax side, it's going to be tax free up to the first $10,200 of benefits as long as you don't have more than $150,000 of income,” said Smith. “We've had situations where people are confused about the stimulus and unemployment benefits, what's taxable and what's not. I can't believe I have to pay tax on this, or am I supposed to pay tax on my stimulus? This might produce confusion, but the tax-free nature of it will be well received for those who are getting the amounts now.”
