As expected with the new administration, the third round of coronavirus stimulus, the “American Rescue Plan” was passed this month. Many of the provisions are simply extensions of previous stimulus measures. There were some notable changes. One is the lowering income thresholds for most individual relief measures. Some of the temporary provisions for 2021 (and in cases through 2022) also hint to permanent legislation that is predicted during the Biden administration.  Below are some highlights of items included (and not included) that impact individual taxpayers. 

What was not included

Relief from Required Minimum Distributions (RMDs) was not included in this round of stimulus, so taxpayers 72 and older should still plan to take RMDs this year. While there was no student loan forgiveness included, the bill did include a provision to make student loan debt forgiven between 2021 and 2025 tax-free  This seems to indicate legislation to forgive some student loan debt will continue to be pursued. There was also talk of eliminating cost-of-living adjustments for retirement plan contributions. Thankfully, this was not included in the bill as it would have hurt savers by lowering real-dollar retirement savings over time.

Child and Dependent Care Credit

While the amount of this credit will generally increase for 2021, higher income taxpayers could see their Child Care credit decrease or be eliminated for the year. The amount of expenses that qualify will be more than doubled to $8,000 (for one qualifying child), but the percentage of expenses applied to the credit will phase out more aggressively than in the past. While the lowest percentage used to be 20%, joint filers over $400,000 AGI will continue to phase out “below 20%”. Joint filers with AGI over $440. 

Stimulus payments

While few, if any of our clients will receive these payments, based on income limitations, you may have children or other family members that will be eligible. Single taxpayers earning $75,000 or less, or Couples earning $150,000 or less, will receive the full $1,400 payment. The full phase-out happens over the next $5,000 (or $10,000 for a couple).

There are three important checkpoints (dates) to determine eligibility for this round of payments. If your income has varied significantly during 2019, 2020 and 2021 (expected), you will want to pay attention to these dates and plan accordingly when to file your 2020 tax return. The first round of payments (predicted to be paid by end of March) will be based on the last tax return filed (2019 for many taxpayers at this point). There will be a second checkpoint the earlier of September 1st or 90 days after tax filing deadline – additional payments will be made based on these income numbers. The third checkpoint will be during filing of 2021 tax return – any Recovery Rebate not yet paid will be applied as a 2021 tax credit. The important thing to note is there is no recapture of payments that are made – it is a one-way opportunity to increase the amount received. If your income was unusually low during 2020, it will be important to file 2020 taxes before the second checkpoint and not wait until latest extension. 

Child Tax Credit

The Child Tax Credit is being increased from $2,000 per child to up to $3,600 for certain taxpayers (phase-out starts at $150,000 for joint filers). The phase-out remains $400,000 for joint filers for the base $2,000 tax credit and children aged 17 are eligible during 2021. Additionally, the IRS is being instructed to pay 50% of the 2021 credit monthly from July through December 2021. These payments may feel like small stimulus checks when received, but not so small if you had to pay them back. They will be subject to recapture when 2021 taxes are filed. The problem arises if payments are made and it turns out that you didn’t qualify when you file your return later. In that situation, you will be required to pay back these payments due to a higher tax liability when you file. 

We will be digging into more details over the following weeks, so expect a more thorough summary with your 2nd quarter report. As always, we are here for you. Please email or call if you want to set up a Zoom videoconference meeting or talk by phone.

Mary McCraw, CFP^®

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