For the most complete analysis of the impacts of the latest stimulus package, we turn to our favorite financial analysts Michael Kitces and Jeff Levine for their take on how this impacts our financial advisory clients.
Please note that there are tax changes imbedded in this legislation that impact 2020 tax returns such as
The American Rescue Plan of 2021 is intended to drive $1.9T economic stimulus and provide fiscal relief in response to the ongoing COVID-19 pandemic.
The lead of the American Rescue Plan is another (third) round of so-called “Stimulus Checks”, in an amount of $1,400 per eligible individual. This cycle has been expanded to alldependents in the household (children in the later years of high school, or in college still claimed as dependents, as well as parents who are claimed as dependents). However, the phaseout limitations of the new stimulus checks are more restrictive (starting at $75,000 for individuals and $150,000 for married couples).
The American Rescue Plan also significantly expands the Child Tax Credit, from $2,000 to $3,000 (and up to $3,600 for children under the age of 6), a slightly higher age threshold that will allow 17-year-old children to qualify in 2021, a new system that will pay a portion of the Child Tax Credit in advance over the last 6 months of the year… and yet another set of phaseout thresholds (again at $75,000 for individuals and $150,000 for married couples) for the new Child Tax Credit amount (while the original $2,000 base amount of the Child Tax Credit still phases out at higher thresholds of $200,000 and $400,000, respectively).
Up To $10,200 Of 2020 Unemployment Compensation Per Worker May Be Tax-Free: Section 9042 of the American Rescue Plan includes another potential benefit for individuals who received unemployment compensation for some or all of 2020. More specifically, provided a taxpayer’s AGI is less than $150,000, up to $10,200 of unemployment compensation received in 2020 will be tax free.
There also is a significant increase in the Dependent and Child Care Credit (including higher eligible expense limits and Applicable Percentage amounts that be claimed); new extensions on various Unemployment Compensation benefits that were otherwise set to expire; increases in the Premium Assistance Tax Credit for households buying health insurance from the state exchanges (including coverage down to the first dollar for lower-income households below 150% of the Federal poverty level, and new eligibility for the tax credit for households with income above 400% of the Federal Poverty Level if health insurance exceeds 8.5% of their AGI); a new provision that provides a 100% tax credit to employers to offset the cost of COBRA coverage for 3 months for any employees who are involuntarily unemployed; and a provision that will make student loan debt forgiveness tax-free in the future (sadly without including any actual provisions for student loan forgiveness in this legislation). On the other hand, the popular provision of RMD relief was not included in the final legislation (nor was the widely debated increase in the Federal minimum wage to $15/hour).
Most of the new provisions under the American Rescue Plan are for 2021 only (or in limited cases, until 2022 as well), making them only “temporary” relief. However, the potential remains for additional tax legislation in the coming months as well, raising the question of whether some of the changes – particularly to the Child Tax Credit – may become a permanent feature of tax law in the future, and what else (e.g., student loan forgiveness) may still be on the horizon.
We will continue to learn more about how this program will impact our clients and will keep you posted!
For even more details, go to the Kitces.com website to read the full 28 pages of their analysis.