How Will the New Stimulus Bill Affect Your Taxes?
New Tax Provisions in the American Rescue Plan Will Impact Millions of U.S. Households
The latest stimulus package, called the American Rescue Plan (ARP) Act of 2021, recently became law and contains $1.9 trillion of federal spending programs. There are several provisions in this new bill that make changes to the current tax code and/or may affect how to file your taxes this year.
The American Rescue Plan (ARP)
President Biden signed the American Rescue Plan on March 11, 2021. This is the third major stimulus deal that the federal government has authorized in an effort to provide financial relief to households and families struggling with the COVID-19 crisis.
The ARP includes a third round of stimulus checks, extended unemployment benefits, an increase to the Child Tax Credit, and other expansions to tax-related programs.
$1,400 Stimulus Checks & the Recovery Rebate Credit
The American Rescue Plan creates another round of stimulus checks (also called Economic Impact Payments) that are being distributed to eligible individuals. This third round of stimulus payments is for up to $1,400 per person – or $2,800 for a married couple that files taxes jointly.
Stimulus payments will be delivered via Direct Deposit or by mail (as a paper check or prepaid debit card). The IRS provides an online tool called “Get My Payment” that you can use to check the status of your money.
The IRS uses your most recently filed tax return to determine whether you qualify for a stimulus check. For single filers, you are eligible for the $1,400 stimulus payment if your annual Adjusted Gross Income (AGI) is $75,000 or less – for a married couple filing jointly, your combined AGI must be $150,000 or less.
Households with dependents will receive an additional $1,400 for each dependent, regardless of the age of the dependent. That means a family of 2 parents with 2 children could get a $5,600 stimulus check this time.
The stimulus payments are considered to be advance payments of the Recovery Rebate Credit, a new tax credit that was created by the CARES Act in March 2020. Therefore, if you are eligible for a stimulus check but you don’t receive it for some reason, you can claim the Recovery Rebate Credit on your 1040 tax return to get your stimulus money. The ARP contains a new provision that provides qualified individuals with a $1,400 Recovery Rebate Credit (or a $2,800 credit for married couples filing jointly).
Child Tax Credit (CTC)
The American Rescue Plan makes significant changes to the Child Tax Credit (CTC) by temporarily opening up eligibility, increasing the amount you can claim, and making it fully refundable for some families. Before the ARP was passed, the Child Tax Credit was worth up to $2,000 per qualified child and it was not available to higher income households.
Now, this tax credit can be claimed by anyone with a qualified dependent child (below age 17) regardless of your income level. Additionally, the maximum amount you can claim for each child has increased to $3,600 per young child (below age 6) and $3,000 for every child who’s older than 6 years of age. Furthermore, the Child Tax Credit is now fully refundable for low-income households.
RELATED: The Child Tax Credit
Tax Credit for Child & Dependent Care Expenses
The new stimulus bill makes some changes to the Child and Dependent Care Tax Credit, which was originally worth up to $3,000 for taxpayers with one dependent/child or $6,000 for taxpayers with two or more dependents/children. This tax credit is available to people who have paid for someone to care for a child, spouse, or other dependent during the year. If you are eligible, you can use the Child and Dependent Care Credit to help offset your costs, which may include daycare or in-home care.
The American Rescue Plan increases the amount you can claim under the Child and Dependent Care Credit to $8,000 for eligible households with one dependent/child or $16,000 for eligible households with two or more dependents/children.
Expanded & Extended Unemployment Benefits
Since the Coronavirus and subsequent government-mandated lockdowns have put a lot of Americans out of work, legislators are attempting to ease some of the strife by sending unemployment compensation to jobless workers. President Biden said in a statement, “This legislation extends unemployment insurance by $300 a week until September. It’s going to help 11 million Americans who were days from losing that benefit. This legislation includes the biggest investment in childcare since World War Two.”
The American Rescue Plan extends the provision (originally brought about by the CARES Act) to provide $300 weekly unemployment benefits and moves the program’s expiration date to September 6, 2021. (It was scheduled to expire on March 14, 2021.) It also creates a new tax provision that gives out-of-work individuals the option to exempt $10,200 of the unemployment benefits they received in 2020. Your income must be less than $150,000 in order to claim this tax exemption, which can be applies retroactively.