In March, 2021 the American Rescue Plan Act (ARPA) was signed into law. Below are brief summaries of the key provisions of the act.
Recovery rebate credits (stimulus checks). A third round of nontaxable stimulus checks directly payable to individuals. The payments are structured as refundable tax credits against 2021 taxes but will paid in 2021 (not 2022). Payments were made to taxpayers in 2021. The maximum stimulus payment is $ 1,400 per eligible individual and dependent. The payments phase out based on AGI. The payments were based on the last filed personal tax return.
Child tax credit (CTC). For 2021 (1) qualifying children include 17-year-olds, (2) the credit is increased to $3,000 per child ($3,600 for children under six years of age), but the increase is subject to modified AGI phase out rules (3) the credit is refundable, and (4) IRS will make periodic advance payments totaling 50% of its estimate of the credit in the last half of 2021. When you file your 2021 tax return you will reconcile the payments received to your actual allowable credit amount. If overpaid you will repay the difference and if underpaid will receive the difference. In January, 2022 taxpayers will receive a form from the IRS indicating advance payments received.
Child and dependent care credit. For 2021 (1) the credit is refundable; (2) the amount of qualifying expenses taken into account for the credit is increased from $3,000 to $8,000 if there's one qualifying care recipient and from $6,000 to $16,000 if there are two or more; (3) the maximum percentage of qualifying expenses for which credit is allowed is increased to 50% from 35%; and (4) phase-down rules, based on AGI, are changed.
Dependent care assistance programs. For 2021, the amount excludible under a dependent care assistance program is increased to $10,500 (or $5,250 for a married taxpayer filing a separate return). Unused benefits carried over from plan year ending in 2020 or 2021 remain excludable from income in 2021 or 2022 if amounts were within the exclusion limit in the year contributed.
Earned income tax credit (EITC). (1) For 2021 the credit is increased for taxpayers with no qualifying children and age restrictions for those taxpayers are relaxed; (2) after 2020 taxpayers that have a qualifying child but can't meet the identification requirements for the qualifying child are nevertheless allowed the credit; (3) taxpayers may use the greater of their 2019 or 2021 earned income in calculating the credit for 2021; (4) after 2020, the amount of investment income that a taxpayer can have and still earn the credit is increased; and (5) after 2020 there is broadening of the existing exception to the credit's joint filing requirement under which separated married people eligible to file jointly are allowed the credit even if they don't file jointly.
Unemployment Benefits. All benefits received in 2021 are fully taxable.
Student loan forgiveness. Beginning in 2021 and continuing through 2025, the forgiveness of many types of loans for post-high school education won't result in income inclusion for the forgiven amounts.
Charity. For 2021 non itemizers will be able to deduct $600 of charitable contributions.
Business Meals. You've probably heard that the recent stimulus legislation included a provision that removes the 50% limit on deducting business meals provided by restaurants in 2021 and 2022 and makes those meals fully deductible.
At this time Congress is negotiating a bill which may result in a tax increase for higher income taxpayers. The early drafts indicate that only high income taxpayers will be affected by the bill. If considering a Roth conversion maybe advantageous to do it in 2021. The bill includes provisions that will eliminate or reduce the use of Roth IRA’s for high income taxpayers.