Individual provisions of the American Rescue Plan Act
Unemployment Received in 2020 Partially Excluded from Income for Some Taxpayers
An individual’s gross income includes unemployment compensation. Unemployment compensation includes any amount received under a law of the U.S. or of a state, which is “in the nature of unemployment compensation.” Unemployment compensation programs are those designed to provide cash benefits on a regular basis to normally employed workers during limited periods of unemployment.
New law. Under ARPA, in the case of any tax year beginning in 2020, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer does not include so much of the unemployment compensation received by the taxpayer (or, in the case of a joint return, received by each spouse) as does not exceed $10,200.
If a taxpayer makes $150,000 or more, the exclusion does not apply, and all the individual’s unemployment compensation would be included in gross income.
The same $150,000 limit applies to returns filed jointly, as head of household, or with single status. However, in the case of a joint return, the $10,200 exclusion applies separately to each spouse
The deduction for qualified tuition and related expenses was repealed by the 2021 Consolidated Appropriations Act for tax years beginning after December 31, 2020. However, the deduction still applied for tax years beginning in 2020.
Some taxpayers already filed their returns before the passage of ARPA. If these taxpayers included unemployment compensation in their gross income, they should file amended returns if they qualify for the exclusion.
Effective date. The provision applies to tax years beginning after December 31, 2019 for tax years beginning in 2020.
2021 Individual Recovery Rebate/credit
New law. Under ARPA, an eligible individual is allowed an income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus (2) $1,400 for each dependent of the taxpayer for purposes of the dependency exemption)).
A dependent of the taxpayer, as defined for purposes of the dependency exemption, includes a qualifying child and a qualifying relative.
Eligibility for credit. For purposes of the credit, an “eligible individual” is any individual other than a nonresident alien or an individual who is a dependent of another taxpayer for the tax year.
Estates and trusts aren’t eligible for the credit.
Children who are (or can be) claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.
An individual who wasn’t an eligible individual for 2019 may become one for 2021, e.g., where the individual was a dependent for 2019 but not for 2021. IRS won’t send an advance rebate to such an individual because advance rebates are generally based on information on the 2019 return (see below). However, the individual will be able to claim the credit when filing their 2021 return.
Phaseout of credit. The amount of the credit is ratably reduced (but not below zero) for taxpayers with adjusted gross income (AGI) of over:
$150,000 for a joint return;
$112,500 for a head of household; and
$75,000 for all other taxpayers.
The credit is completely phased out (reduced to zero) for taxpayers with AGI of over:
$160,000 for a joint return;
$120,000 for a head of household; and
$80,000 for all other taxpayers.
Advance rebate of credit during 2021. Each individual who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the advance refund amount for 2019.
The “advance refund amount” is the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019.
However, if a taxpayer has filed his or her 2020 tax return when IRS determines the amount of the rebate, information on that 2020 return is used to determine the amount of the rebate.
Thus, although the credit is technically for 2021, the law treats the rebate as an overpayment for 2019 (or 2020, if the return for that year has been filed) that IRS will rebate as soon as possible during 2021.
IRS will refund or credit any resulting overpayment as rapidly as possible.
No interest will be paid on the overpayment.
If an individual hasn’t yet filed a 2019 or 2020 income tax return, IRS will determine the amount of the rebate using information available to IRS and determine the rebate amount without regard to the phaseout rules discussed above (unless IRS has reason to know those rules would apply).
A return isn’t treated as filed for these purposes until it has been processed by IRS.
Most eligible individuals won’t have to take any action to receive an advance rebate from IRS. This includes many low-income individuals who file a tax return to claim the refundable earned income credit and child tax credit.
IRS will try to make the payments electronically if appropriate.
No advance rebate will be made or allowed after December 31, 2021.
Advance rebate reduces credit allowed for 2021. The amount of credit that is allowable for 2021 must be reduced (but not below zero) by the aggregate advance rebates made or allowed to the taxpayer during 2021. If an advance rebate was made or allowed for a joint return, half of the rebate is treated as having been made or allowed to each spouse who filed the joint return.
Credit not subject to offset. No credit allowed under this provision will be subject to reduction or offset under past-due support payments, debts owed to federal agencies, past-due, legally enforceable State income tax obligations, or unemployment compensation debts, or under any similar authority permitting offset, or reduced or offset by other assessed federal taxes that would otherwise be subject to levy or collection.
Identification number requirement. No credit will be allowed to an eligible individual who doesn’t include the individual’s valid identification number (VIN) on the tax return for the tax year.
On a joint return, the credit will be $2,800 if both spouses’ VINs are included, but only $1,400 if only one spouse’s VINs is included—and zero if neither spouse’s VIN is included.
But this reduction doesn’t apply if at least one spouse was a member of the U.S. Armed Forces at any time during the tax year and at least one spouse’s VIN is included on the joint return.
If a dependent is taken into account in figuring the credit, the dependent’s VIN must also be included on the return.
A “valid identification number” means a social security number, as defined in. For a qualifying child who is adopted or placed for adoption, the child’s adoption taxpayer identification number is a VIN.
An omission of a correct VIN is treated as a mathematical or clerical error that can be summarily assessed without using the deficiency procedures.
Regulations. IRS is to prescribe regs and other guidance as necessary to carry out the purposes of the credit provision, including appropriate measures to avoid allowing a taxpayer to receive multiple credits or rebates.
Effective date. Date of enactment of ARPA, March 11, 2021.
Child Tax Credit Expanded for 2021
Before ARPA, the child tax credit (CTC) was $2,000 per “qualifying child.” A qualifying child was defined as an under-age-17 child, whom the taxpayer could claim as a dependent (i.e., a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year), and who was a U.S. citizen or national, or a U.S. resident.
The $2,000 CTC is phased out for taxpayers with modified adjusted gross income (AGI) of over: $400,000 for joint filers, and $200,000 for all other filers.
The CTC was partially refundable to the extent of 15% of the taxpayer’s earned income exceeding $2,500 (the “earned income formula”). For taxpayers with three or more qualifying children, an “alternative formula” applied, if it produced a larger refundable credit. But, the maximum refundable CTC for 2021 was $1,400 per qualifying child.
New law. Under ARPA, for tax year 2021, as amended by ARPA Sec. 9611(a)), the CTC is temporarily expanded as to eligibility, and amount, as follows:
1. The definition of a qualifying child is broadened to include a child who hasn’t turned 18 by the end of 2021.
So, for 2021 only, 17-year-olds are qualifying children for the CTC.
The $500 partial CTC for dependents who aren’t qualifying children, can’t be claimed for 2021 for children who qualify under the expanded definition.
2. The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year). But, the increased credit amounts are phased out at modified AGI of over $75,000 for singles, $112,500 for heads-of-households, and $150,000 for joint filers and surviving spouses, at a rate of $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold.
This phaseout is limited—so that it only applies to the temporarily increased amounts for 2021 (i.e., to $1,600 per child under age six, and $1,000 per child age six or older), and doesn’t apply to the $2,000 of CTC permitted under existing law. After applying this phaseout, the taxpayer’s $2,000 of CTC is subject to the phaseout rules under existing law.
So, for 2021, the CTC is subject to two sets of phaseout rules. A taxpayer eligible for an increased CTC amount(s) ($1,600 per child under age six, and/or $1,000 per child age six or older), first applies the phaseout rules above to the increased amount(s), and then applies the phaseout rules under existing law, to the remaining $2,000 of the CTC(s).
Taxpayers who aren’t eligible to claim an increased CTC in 2021, can claim a regular CTC of up to $2,000, subject to the existing phaseout rules.
Illustration. X, a head-of-household with one child and modified AGI of $140,000 in 2021, qualifies for an increased CTC of $3,000. But, the increased portion of X’s CTC ($1,000) is phased out under a rate of $50 for each $1,000 of modified AGI over $112,500 (140,000 minus 112,500 [27,500] divided by 1,000 [27.5; rounded up to 28] times 50—equals $1,400 reduction of credit, which is then limited to a reduction equal to the $1,000 increase amount).
Under the existing phaseout rules, X’s remaining $2,000 of CTC won’t be reduced because X’s modified AGI is less than the $200,000 phaseout threshold; so, X can claim a $2,000 CTC for 2021.
3. The CTC is fully refundable for 2021 for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. (determined under for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. That is, refundability will be determined without regard to either the earned income, or alternative, formula.
The modified AGI limitations (phaseout rules) apply regardless of refundability, and the $500 partial CTC for dependents other than qualifying children remains nonrefundable.
A member of the U.S. Armed Forces stationed outside the U.S. while serving on extended active duty is treated as having a principal place of abode in the U.S.
Temporary advance payments of the CTC. IRS must establish a program to make monthly (periodic) advance payments (generally by direct deposits) equal to 50% of eligible taxpayers’ 2021 CTCs, in July 2021 through December 2021. Each advance payment is 1/12 of an “annual advance amount” for the calendar year. But, if IRS determines it’s not feasible to make monthly advance payments, IRS may make advance payments based on a longer interval and adjust the amount of the advance payment accordingly.
Illustration. Assume X is entitled to $6,000 of CTCs for 2021 for two qualifying children. IRS would make a total of $3,000 in advance payments to X from July-December 2021 ($250 a month, per child), and X would claim the additional $3,000 in credit with X’s 2021 return.
The “annual advance amount” is the taxpayer’s CTC for the tax year beginning in that calendar year, but calculated based on a “reference year” (defined as, the taxpayer’s previous calendar year, or if the taxpayer didn’t file a tax return for that year, the tax year before that year).
So, to determine eligibility for advance 2021 CTC payments, IRS will look at taxpayers’ 2020 returns, or if they are not yet filed, their 2019 returns.
IRS must also create an online portal to allow taxpayers to:
(i) update information—change the number of qualifying children, the taxpayer’s marital status, reflect a significant change in the taxpayer’s income, and any other factors IRS determines; or
(ii) elect out of the advance payments.
Taxpayers who receive advance CTC payments from IRS in excess of the CTC allowable to the taxpayer for 2021 must, generally, repay the excess amounts (by increasing the taxpayers’ tax liability reported on their 2021 returns). But, for taxpayers’ with modified AGI below certain thresholds, the excess may be reduced by a safe harbor amount, limiting the amount by which the taxpayer has to increase tax liability, and allowing the taxpayer to keep a portion of the excess amount.
Application of the CTC in possessions. For tax years after 2020, IRS will make payments to Mirror Code territories (Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands) equal to the loss in revenue by reason of the application of the CTC to the territory’s Mirror Code for the tax year.
No CTC under the IRC is permitted for any Mirror Code territory resident with respect to whom a CTC is allowed against income taxes of the territory.
For 2021, the CTC is made fully refundable for taxpayers who are Puerto Rico bona fide residents for the tax year, claimed by filing a tax return with the IRS. But, IRS won’t make advance CTC payments to residents of Puerto Rico.
For years after 2021, special rules apply for Puerto Rico bona fide residents’ claims of the additional CTC (i.e., the refundable CTC).
Subject to certain requirements, for tax years after 2020, IRS will make payments to American Samoa in an amount estimated by IRS to equal the aggregate benefits that would have been allowed to American Samoa residents under the CTC if a Mirror Code system had been in effect in American Samoa in that tax year. If the specified requirements aren’t met, American Samoa bona fide residents may claim CTCs by filing a return with IRS, under rules similar to those for Puerto Rico.
Effective date. These amendments apply to tax years beginning after December 31, 2020.
Child and Dependent Care Credit Enhanced and Made Refundable
An individual taxpayer who has one or more qualifying individuals (certain dependents) may qualify to receive a credit for expenses the taxpayer paid (“employment-related expenses”) for the care of the qualifying individual(s) so that the taxpayer can be gainfully employed.
Before ARPA, the expenses taken into account in determining the credit couldn’t exceed $3,000 for one qualifying individual or $6,000 for more than one.
Before ARPA, the credit was 35% of employment-related expenses for taxpayers whose adjusted gross income (AGI) for the tax year was $15,000 or less. So, the maximum credit was $1,050 ($3,000 x 35%) if there was one qualifying individual and $2,100 ($6,000 x 35%) if there were two or more qualifying individuals. The percentage referred to here is called “the applicable percentage.”
The percentage was decreased by one percentage point for each $2,000 (or fraction thereof) of additional AGI until it was reduced to 20%. The 20% credit applied when AGI was over $43,000.
The credit was nonrefundable and was subject to the limit on nonrefundable personal credits based on the taxpayer’s tax liability.
New law. ARPA makes several child and dependent care credit changes that apply for tax years that begin in 2021.
Refundable. The child and dependent care credit is refundable for taxpayers who have a principal place of abode in the U.S. for more than one-half of the tax year.
In the case of a joint return, either spouse must have a principal place of abode in the U.S. for more than one-half of the tax year.
Increase in limits. For tax years beginning in 2021, the dollar limit on the amount taken into account is increased to $8,000 (from $3,000) if there is one qualifying individual with respect to the taxpayer, or $16,000 (from $6,000) if there are two or more qualifying individuals with respect to the taxpayer.
The applicable percentage is increased to 50%, reduced by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s AGI for the tax year exceeds $125,000.
For taxpayers with AGI of $125,000 or less, the maximum amount of the credit is $4,000 ($8,000 x 50%) for taxpayers with one qualifying individual and $8,000 ($16,000 x 50%) for taxpayers with two or more qualifying individuals.
Example 1. George pays $8,400 in qualified employment-related expenses in 2021 to care for his two children while he is working. The children are both qualifying individuals. George can take the entire $8,400 into account in calculating the child and dependent care credit. For tax years other than 2021, the maximum amount of qualified employment-related expenses that George could take into account for purposes of determining the credit would be $6,000.
Example 2. Assume the same facts as in Example 1. George has an AGI of $132,000. His applicable percentage is 46%. His credit amount is $3,864 ($8,400 x 46%).
Application of phaseout to high income individuals. The applicable percentage is not reduced below the “phaseout percentage;” the phaseout percentage is 20% reduced (but not below zero) by 1 percentage for each $2,000 (or fraction thereof) by which the taxpayer’s AGI for the tax year exceeds $400,000.
Therefore, the applicable percentage is 50% for taxpayers with AGI of $125,000 or below. The applicable percentage decreases one percentage point for every $2,000 by which the taxpayer’s AGI exceeds $125,000 until AGI reaches $185,000. The applicable percentage is 20% for taxpayers with AGI greater than $185,000 but not greater than $400,000. For taxpayers with AGI above $400,000, the applicable percentage again decreases one percentage point for every $2,000. Thus, for taxpayers with AGI greater than $440,000, the credit is phased out completely.
Example 3. Assume the same facts as in Example 1. George’s AGI is $190,000. His applicable percentage is 20%, and he is allowed a credit of $1,680 (20% x $8,400).
Example 4. Assume the same facts as in Example 1. George’s AGI is $420,000. His applicable percentage is 10%, and his allowable credit is $840 (10% x $8,400).
Taxpayers Don’t Have to Repay Excess Advance Premium Tax Credit Payments for 2020
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.
New 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.
Premium Tax Credit Increased for Taxpayers Receiving Unemployment Compensation in 2021
Applicable taxpayers enrolling in a qualified health plan through an Exchange may be able to claim the premium tax credit (PTC). A taxpayer is an “applicable taxpayer” for a tax year if:
the taxpayer’s household income for the tax year equals or exceeds 100%, but doesn’t exceed 400%, of an amount equal to the federal poverty line (FPL) for a family of its size;
the taxpayer can’t be claimed as a dependent by another taxpayer; and
the taxpayer files a joint return if married. (Code Sec. 36B(c)(1))
The PTC is limited to the excess of the premiums for the applicable second lowest cost silver plan (the applicable benchmark plan) covering the taxpayer’s family offered by the Exchange, over the taxpayer’s contribution amount (required share).
The taxpayer’s required share equals the taxpayer’s household income multiplied by an “applicable percentage” for the tax year. The applicable percentage for a tax year is based on the taxpayer’s income level relative to the FPL for the year and is adjusted for inflation.
New law. ARPA provides special rules for taxpayers who have received, or been approved to receive, unemployment compensation for any week beginning during 2021.
For the tax year in which that week begins:
(A) the taxpayer is treated as an applicable taxpayer, and
(B) any household income of the taxpayer in excess of 133% of the FPL for a family of the size involved isn’t taken into account.
Taxpayers whose household income for 2021 exceeds 133% of FPL will receive a PTC calculated as if the income was 133% of FPL. This will result in an increase in the taxpayer’s PTC.
Taxpayers who received unemployment compensation for as little as one week during 2021 qualify for these rules for the entire year.
“Unemployment compensation” defined. For this purpose, the term “unemployment compensation” , i.e., it means any amount received under a law of the U.S. or of a state that is in the nature of unemployment compensation.
Proving receipt of unemployment compensation. To be treated as having received (or been approved to receive) unemployment compensation for any week, the taxpayer attest to the receipt or approval and provide the documentation that IRS requires.
Joint return requirement unaffected. The requirement that an applicable taxpayer file a joint return if married continues to apply to taxpayers who have received or been approved to receive unemployment compensation in 2021.
133%-of-FPL limit doesn’t apply for certain purposes. The limitation of household income to 133% of FPL under (B) above doesn’t apply for purposes of:
(1) The rule in that an employee isn’t treated as eligible for minimum essential coverage if the employee’s required contribution to an eligible employer-sponsored plan exceeds 9.5% of the applicable taxpayer’s household income, and
(2) The rule in for determining whether a qualified small employer health reimbursement arrangement constitutes affordable coverage.
Effective date. These amendments apply to tax years beginning after December 31, 2020.
Student Loan Discharges
Before the enactment of ARPA, provided exceptions to the general rule requiring the inclusion of cancellation of indebtedness (COD) income from the discharge of student loans for:
(a) discharges in exchange for a provision requiring certain work for a certain period by certain professionals (e.g., a doctor in a public hospital in a rural area), or
(b) discharges on account of the death or total and permanent disability of a student. IRS also provided additional relief from COD resulting from certain student loan discharges (e.g., for certain taxpayers who had loans discharged under the Department of Education’s Closed School process or the Defense to Repayment discharge process). (
New law. ARPA excludes from gross income certain discharges of student loans after December 31, 2020, and before January 1, 2026, as amended by ARPA Sec. 9675(a)) The “student loan discharge” exclusion applies to these types of loans:
(1) Loans provided expressly for post-secondary educational expenses if the loan was made, insured, or guaranteed by a federal, state, or local governmental entity or an eligible educational institution.
(2) Private education loans.
(3) Any loan made by any educational institution qualifying as a 50% charity (for purposes of the income tax charitable deduction) if the loan is made under an agreement with any governmental entity (described in item (1)) or any private education lender that provided the loan to the educational organization, or under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt charitable organization.
(4) Any loan made by an educational organization qualifying as a 50% charity or by an tax-exempt organization to refinance a loan to an individual to assist the individual in attending any educational organization but only if the refinancing loan is under a program of the refinancing organization which is designed as described in item (3)).
But, the discharge of a loan made by either an educational institution or a private education lender is not excluded under the above rules if the discharge is on account of services performed for either the organization or for the private education lender.
The exclusion applies to a partial or a full discharge of a student loan.
Effective date. These provisions apply to discharges of loans after December 31, 2020.