Additional guidance on the American Rescue Plan Act of 2021.

This mid-month newsletter covers only part of the changes under the New Law.  Part 2 will arrive around April 1, 2021. 

Key Things to Act on at this Time:

As we get down to the current April 1, 2021 tax deadline we may or may not have guidance on the issues presented here.

New webinars coming in June! In the meantime, check out our webinar schedule

Issue 1: IRS Guidance on the American Rescue Plan Act of 2021 (ARPA)

The IRS is reviewing implementation plans for the newly enacted American Rescue Plan Act of 2021. Additional information about a new round of Economic Impact Payments, the expanded Child Tax Credit, including advance payments of the Child Tax Credit, and other tax provisions will be made available as soon as possible on The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time.

The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable.

For those who haven’t filed yet, the IRS will provide a worksheet for paper filers and work with software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return. For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.

Issue 2: The American Rescue Plan Act of 2021 (ARPA)

As we have been struggling this tax season with the Stimulus Payments and other tax changes we needed to implement – Congress handed us the American Rescue Plan of 2021.  For many of us, our laps are full, and our phones are out of control with questions and concerns from our clients on how the bill will impact their tax returns.  It is like the COVID virus has hit the practitioner community head on and created a 2021 Tax Year Crisis.

IRS is still processing 2019 returns, the timing of the 2nd stimulus occurred just prior to tax season, tax season started about 2 weeks later than usual and Congress gives a retroactive, in some cases, tax bill that will potentially cripple the IRS in its ability to implement.

Meanwhile we await guidance from IRS and updates to our software which can only happen when IRS provides guidance – the chicken and the egg issue.  Meanwhile we plug along, some of us hoping for an extended filing season and others hoping that IRS does not extend the season – mixed concerns to say the least.

Last month we summarized what some of the key tax provisions were, but then the Senate took another approach and tagged the “unemployment issue” of $10,200 in unemployment would remain not taxable if below a certain income level. So many of us have filed tax returns and may need to amended once we get the promised guidance form IRS.

For now, we will expand on what was published last month based on what little guidance we currently have and, in some cases, provide corrections based on the final bill.  The Senate made several changes to the version of the bill the House of Representatives passed on Feb. 27, including the details of how the third round of stimulus benefits will be paid. 

§9601 – 2021 Recovery Rebates to Individuals (Round Three)

New §6428B provides a $1,400 refundable tax credit for each family member that shall be paid out in advance payments. The credit is $1,400 for a single taxpayer ($2,800 for joint filers), in addition to $1,400 per dependent.

The credit phases out between $75,000 and $80,000 (single) of adjusted gross income ($112,500 and $120,000 for head of household filers and $150,000 and $160,000 for joint filers). This is a significant change in the phaseout ranges reported in the March issue.

For purposes of this credit, a dependent includes both children and non-child dependents. A taxpayer is eligible for a credit with respect to any individual in the household for whom a Social Security number is associated with such individual on the tax return.

Note the IRS will use 2019 income unless the client has filed the 2020 return.

Advance payments are generally not subject to administrative offset for past due federal or state debts, including offset for past-due child support.

In addition, Treasury is given broad authority to make payments to non-filer populations based on return information available to the Secretary. Taxpayers receiving an advance payment that exceeds their maximum eligible credit based on 2021 tax return information will not be required to repay any amount of the payment to the Treasury. If a taxpayer’s 2021 tax credit exceeds the amount of the advance payment, taxpayers can claim the difference on their 2021 tax returns.

Some key points to remember:

Treatment of Deceased Individuals

Any individual who was deceased before January 1, 2021, shall be treated in the same manner as if the valid identification number of such person was not included on the return of tax for such taxable year.

In the case of a joint return with respect to which only 1 spouse is deceased before January 1, 2021, and the deceased spouse is included on the return of tax for the taxable year, the valid identification number of 1 (and only 1) spouse shall be treated as included on the return of tax for the taxable year.

No amount shall be determined with respect to any dependent of the taxpayer if the taxpayer (both spouses in the case of a joint return) was deceased before January 1, 2021.

§9042 of the Act – Unemployment Compensation – Non-Taxability of Unemployment for 2020 Only up to $10,200 as well as Extended Unemployment Benefits.

The American Rescue Plan Act extends the three major unemployment insurance programs created by the Coronavirus Aid, Relief and Economic Security Act (CARES) and continued with the Consolidated Appropriations Act (CAA.

On that note guidance is needed in the following areas:

We do not mean to confuse you, but information online is mixed. And these are just some of the concerns/questions we are asking ourselves and getting from our client base.  It is best to wait for IRS guidance on the issue as a whole and not file amended returns or file original returns until we have guidance.

COBRA Coverage Premium Assistance

New § 6432 allows beginning April 1, 2021, through September 30, 2021, eligible individuals who have been laid off, furloughed, or had their hours reduced can choose to continue group health benefits without having to pay COBRA premiums.

The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The act creates §Sec. 6432, which allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against the §3111(b) Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.

The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30, 2021.

Affordable Care Act Subsidies

The American Rescue Plan Act provides premium subsidies for individuals purchasing health insurance on the Affordable Care Act exchanges through 2022. The subsidies are scaled as income increases, but, under the law, individuals will not be required to pay more than 8.5% of his or her income for a health insurance plan purchased on an exchange.

Under pre-ARPA law, the applicable percentage table for tax years beginning in 2021 was to have been as follows:

Household Income Relative to FPL: Initial Percentage Final Percentage
Less than 133% 2.07% 2.07%
At least 133% but less than 150% 3.10% 4.14%
At least 150% but less than 200% 4.14% 6.52%
At least 200% but less than 250% 6.52% 8.33%
At least 250% but less than 300% 8.33% 9.83%
At least 300% but not more than 400% 9.83% 9.83%

Under pre-ARPA law, individuals with household income above 400% of the FPL were not eligible for the PTC.

New law. Under ARPA, the following applicable percentages apply for tax years beginning in 2021 and 2022 (§36B(b)(3)(A), as amended by ARPA §9661(a)):

Household Income Relative to FPL: Initial Percentage Final Percentage
Up to 150% 0.0% 0.0%
150% up to 200% 0.0% 2.0%
200% up to 250% 2.0% 4.0%
250% up to 300% 4.0% 6.0%
300% up to 400% 6.0% 8.5%
400% and higher 8.5% 8.5%

Our clients required share of payment for insurance will be less under the new payment for 2021 and 202. This will result in a greater Premium Tax Credit.  The bottom line will allow clients whose income exceeds 400% of the federal poverty level potentially eligible for the Premium Tax Credit.

In addition, the Premium Tax Credit is Increased for Clients Receiving Unemployment Compensation in 2021. ARPA also benefits the 12 million people who have health insurance through the marketplaces established by the Affordable Care Act. It substantially boosts premium assistance for those families and covers the entire cost of COBRA premiums for workers who lose their jobs.

Finally, Taxpayers Do not Have to Repay Excess Advance Premium Tax Credit Payments for 2020 §36B(f)(2)(B)

Overview of How Premium Tax Credit Works

The premium tax credit (PTC) allowed to taxpayers enrolled in an Exchange-purchased qualified health plan is payable in advance directly to the insurer. The advance payments are based on income estimated from tax returns for prior years. The advance payments reduce the amount of the taxpayer’s PTC.

Taxpayers must reconcile the amount of the PTC, based on the taxpayer’s actual household income, family size, and premiums, with the amount of the advance payments. The reconciliation is made on the taxpayer’s income tax return for the tax year (on Form 8962).

A taxpayer whose PTC for the tax year exceeds the taxpayer’s advance payments may receive the excess as an income tax refund. A taxpayer whose advance payments for the tax year exceed the taxpayer’s PTC owes the excess as additional income tax, subject to a repayment cap based on household income.

Change in Law

Under ARPA, no additional income tax is imposed for tax years beginning in 2020 where the advance credit payments exceed the taxpayer’s PTC. This currently applies for the tax year 2020 only.

§9611 – Child Tax Credit

Child Tax Credit improvements for 2021 makes the child tax credit (“CTC”) fully refundable for 2021 and increases the amount to $3,000 per child ($3,600 for a child under age 6). The provision also increases the age of qualifying children by one year for 2021, such that 17-year-olds qualify for the credit.

For 2021, the excess of the child tax credit (i.e., the additional $1,000, or $1,600 per-child in excess of the present-law $2,000 per-child credit) is reduced by $50 for every $1000 in modified adjusted gross income in excess of $150,000 for joint filers ($112,500 for head of household filers and $75,000 for other filers).

Once the excess credit amount is reduced, the credit plateaus at $2,000, and then phases out at the present law levels established in the TCJA ($400,000 for joint filers, $200,00 for other filers).

Directs the Secretary of the Treasury to issue advance payments of the child tax credit, based on 2019 or 2020 tax return information. The payments are intended to be delivered on a monthly basis, but if the Secretary determines that this frequency is infeasible, the Secretary is directed to issue the payments as frequently as is feasible.

The advance payments under this section do not begin until July 1, 2021 and will comprise in total half of the child tax credit for which the taxpayer is otherwise entitled to for 2021 (with the remaining half claimed on the 2021 tax return).

Thus, under the advance payment provision, if the Secretary determined that a monthly payment was feasible, a taxpayer with two children above age 5 would receive $500 per month (2 x $3,000/12) for each of the six months remaining in calendar year 2021, for a total of $3,000.

The remaining $3,000 would be claimed in 2021 on the taxpayer’s tax return. If, however, the Secretary determined that it was feasible to make a payment every two months, each advance payment would total $1,000. The taxpayer’s child tax credit claimed on the 2021 tax return is reduced by the aggregate of advance payments paid by the Secretary.

However, in the case of taxpayers who received an overpayment of the advance credit due to a child for whom the advance was paid in 2021, when in fact the child was no longer that taxpayer’s dependent, the provision provides a hold-harmless amount on the repayment obligation. Under this hold-harmless amount, a taxpayer below the income threshold ($40,000 for a single taxpayer, $50,000 for a head of household, and $60,000 for a joint filer) will be protected from repaying up to $2,000 in overpayments per child that was incorrectly taken into account. The hold-harmless threshold is decreased to $0 as the taxpayer’s income rises to double the threshold amount.

The Secretary is directed to establish an on-line portal to allow taxpayers to opt-out of receiving advanced payments and provide information regarding changes in income, marital status, and number of qualifying children for purposes of determining each taxpayer’s maximum eligible credit.

§9612 – Application of Child Tax Credit in Territories

Instructs the Treasury Department to make payments to each “mirror code” territory for the cost of such territory’s CTC. This amount is determined by Treasury based on information provided by the territorial governments.

Puerto Rico, which does not have a mirror code, will receive the refundable credit by having its residents file for the CTC directly with the IRS, as they do currently for those residents of Puerto Rico with three or more children.

For American Samoa, which does not have a mirror code, Treasury is instructed to make payments in an amount estimated by Treasury as being equal to the aggregate amount of benefits that would have been provided if American Samoa had a mirror code in place.

Key Points for the Expanded Child Tax Credit:

§9621 – Earned Income Tax Credit

Strengthen the Earned Income Tax Credit for individuals with no qualifying children.

Expands the eligibility and the amount of the earned income tax credit for taxpayers with no qualifying children (the “childless EITC”) for 2021.

In particular, the minimum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students, more on that in a moment) and the upper age limit for the childless EITC is eliminated.  So, the reference to age 65 is removed from §32(n)(2) of the Code, but only temporarily.

Full Time Students

Full-time students have a difference rule:  In the case of a “specified student” (other than a “qualified former foster youth” or a “qualified homeless youth”), the applicable minimum age is 24.

This section also increases childless EITC amount by increasing the credit percentage and phaseout percentage from 7.65 to 15.3%, increasing the income at which the maximum credit amount is reached to $9,820, and increasing the income at which phaseout begins to $11,610 for non-joint filers.

Under these parameters, the maximum credit amount in 2021 increases from $543 to $1,502. The provision contains special rules regarding the application of the credit for former foster youth and homeless youth.

Former Foster Youth and Homeless Youth

For former foster children and youth who are homeless, the minimum age would temporarily be reduced from 25 to 18.

The term “qualified former foster youth” means an individual who:

The term “qualified homeless youth” means, with respect to any tax year, an individual who certifies, in a manner as provided by the IRS, that such individual is either an unaccompanied youth who is a homeless child or youth, or is unaccompanied, at risk of homelessness, and self-supporting.

§9622 – Taxpayer Eligible for Earned Income Tax Credit in Case of Qualifying Children Who Fail to Meet Certain Identification Requirements

Repeals the provision prohibiting an otherwise EITC-eligible taxpayer with qualifying children from claiming the childless EITC if he or she cannot claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid SSN for qualifying children).

Accordingly, individuals who do not claim the EITC with respect to qualifying children due to failure to meet identification requirements would now be able claim the childless EITC.

§9623 – Credit Allowed in Case of Certain Separated Spouses

Allows a married but separated individual to be treated as not married for purposes of the EITC if a joint return is not filed.

Thus, the EITC may be claimed by the individual on a separate return. This rule only applies if the taxpayer lives with a qualifying child for more than one-half of the taxable year and either does not have the same principal place of abode as his or her spouse for the last six months of the year, or has a separation decree, instrument, or agreement and does not live with his or her spouse by the end of the taxable year.

This change aligns the EITC eligibility requirements with present-day family law practice.

§9624 – Modification of Disqualified Investments Income Test

Increases the limitation on disqualified investment income for purposes of claiming the EITC from $3,650 (2020) to $10,000. The $10,000 amount is indexed for inflation.

§9626 – Temporary Special Rule for Determining Earned Income for Purposes of the Earned Income Tax Credit

Allows taxpayers in 2021, for purposes of computing the EITC, to substitute their 2019 earned income for their 2021 earned income, if 2021 earned income was less than 2019 earned income.

§9631 – Dependent Care Assistance

Refundability and enhancement of Child and Dependent Care Tax Credit Temporary Provision

Makes a number of modifications to the child and dependent care tax credit (“CDCTC”) for 2021 only.

At $125,000 the credit percentage begins to phase out, and plateaus at 20% This 20% credit rate phases out for taxpayers whose AGI is in excess of $400,000, such that taxpayers with income in excess of $500,000 are not eligible for the credit.

Provides for a reimbursement of mirror code territories for the costs of this refundable credit in 2021. Additionally, for non-mirror code territories (Puerto Rico and American Samoa), provides a reimbursement for the aggregate value of such a credit, provided the territory develops a plan, approved by the Secretary, to distribute these amounts to its residents.

§9632 – Increase in Exclusion for Employer Provided Dependent Care Assistance – Temporary Provision

Increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

§9041 Extension of Limitation on Excess Business Losses of Noncorporate Clients

 This provision of the limitation of excess business losses was set to expire on January 2, 2025. ARPA has extended this provision thru December 31, 2026.

§9671 of the Act -Repeal of Election to Allocation Interest, Etc. on Worldwide Basis

U.S. firms are eligible for foreign tax credits up to the amount of U.S. tax paid on foreign-source income. To impose this limit, U.S. and foreign source income must be determined. Certain deductions are allocated between U.S. and foreign sources, including interest.

Until 2021, firms allocated interest excluding that paid by foreign firms (called “waters edge” allocation).

Under current law, beginning in 2021, firms could elect to include interest paid by related foreign firms. This treatment is called worldwide allocation. It is beneficial for some firms because some of the interest paid for foreign firms is allocated to U.S. sources, increasing foreign source income, increasing the limit on the foreign tax credit and, thus, increasing foreign tax credits that reduce tax liability.

A provision was adopted in 2004 to move to worldwide allocation, but it has been delayed by other legislation and is scheduled to begin in 2021. This provision would repeal the election to move to worldwide allocation

§9672 of the Act: Tax Treatment of Targeted Economic Injury Disaster Loans (EIDL) Advances

The law provides that amounts received from the Administrator of the Small Business Administration in the form of a 14 targeted EIDL advance under §331 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act in Pub. L. 116-260 is not included in the gross income of the person that receives such amounts.

Further, no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied, by reason of the exclusion of such amounts from gross income.

In the case of a partnership or S corporation that receives such amounts, any amount excluded from income under this provision will be treated as tax-exempt income for purposes of §705 and §1366. The IRS is directed to issue rules for determining a partner’s distributive share of any amounts excluded from income for purposes of §705.

§5003 of the Act: Tax Treatment of Restaurant Revitalization Grants

The Act establishes a Restaurant Revitalization Fund in order to provide restaurants and similar businesses with grants to cover expenses incurred as a direct result of, or during, the COVID-19 pandemic.

Under §9673 of the Act, restaurant revitalization grants are not includable in gross income, and no deduction will be denied, no tax attribute reduced, and no basis increase denied, by reason of the exclusion from gross income for a restaurant revitalization grant.

In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount excluded from income by will be treated as tax-exempt income for purposes of §705 and §1366.

The IRS is directed to provide rules for determining a partner’s distributive share of any amount of restaurant revitalization grant excluded from income under §9673 for purposes of §705.

§9674 of the Act: Modification of Exceptions for Reporting of Third-Party Network Transactions

§9674 amends §6050W, which currently provides that a payment settlement entity must provide a Form 1099-K for transactions of sellers who exceed $20,000 in gross receipts when collected in over 200 transactions. The provision would amend §6050W to provide that sales in excess of $600 would trigger the Form 1099-K filing requirement.

This provision lowers and modifies the threshold below which a third-party settlement organization is not required to report payments to participants in its network. Under the provision, for any calendar year, a third-party settlement organization is required to report third party network transactions with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the aggregate number of such transactions.

Third party network transactions include any commercial transactions settled through a third-party payment network. The provision also clarifies that third party network transactions only include transactions for the provision of goods or services (e.g., personal gifts, charitable contributions, and reimbursements are not included).

For example, an individual who has registered for a mobile payment service and uses such a service to reimburse friends or relatives for expenses, or on occasion sells a used item to another person, would not be engaging in transactions that are subject to reporting requirements. However, if that individual were to register with such mobile payment service for the purposes of engaging in commercial transactions, such as regularly carrying on a trade or business through use of that service, the mobile payment service would be required to report under the provision.

Effective Date The part of the provision that lowers and modifies the reporting threshold is effective for returns for calendar years beginning after December 31, 2021.

The part of the provision that clarifies that reporting is not required on transactions which are not for goods or services is effective for transactions after the date of enactment.

§9675 of the Act: Modification of Treatment of Student Loan Forgiveness in 2021 – 2025

§9675 of the Act excludes certain discharges of student loan debt occurring in years 2021 through 2025 from gross income.

Exclusion of Debt Forgiveness from Income: Under new Code § 108(f)(5), gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge (in whole or in part) after December 31, 2020, and before January 1, 2026, of:

Any loan provided expressly for post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if the loan was made, insured, or guaranteed by the United States (or an instrumentality or agency thereof), a state, territory, or possession of the United States, or the District of Columbia (or any political subdivision thereof), or an eligible educational institution (as defined in §25A).

Any private education loan (as defined in §140(a)(7) of the Truth in Lending Act).

Exception to Debt Forgiveness:

The exclusion provided under §108(f)(5) does not apply to the discharge of a loan made by an educational organization or a private education lender (as defined in §140(a)(7) of the Truth in Lending Act) if the discharge is on account of services performed for either such organization or for such private education lender.