On March 11, 2021, President Biden signed the American Rescue Plan Act into law. The Act provides for several changes to both the 2020 and 2021 tax laws related to individual taxpayers.
Changes Impacting 2020 Taxable Income – Unemployment Compensation
Unemployment compensation received during the tax year beginning in 2020 may not be taxable income. To qualify for the exclusion, the adjusted gross income for the taxpayer must be less than $150,000. If the taxpayer has already filed their 2020 tax return and included the income as taxable, an amended tax return may need to be filed to obtain a refund. Taxpayers should wait for the Internal Revenue Service (IRS) to issue additional guidance.
Changes Impacting 2021
Recovery Rebate Credit: Similar to earlier stimulus payments which were advanced payments on the Recovery Rebate Credit, the American Rescue Plan Act created a Recovery Rebate Credit for 2021. A significant change from the 2020 Recovery Rebate Credit is the ability for taxpayers to receive payments for their dependents which include college students and other qualifying relatives.
Child Tax Credit: For tax year 2021 only, the child tax credit was expanded for some taxpayers. The provision also instructed the IRS to make advanced payments beginning in July 2021 through December 2021. Taxpayers will be provided with an option to opt out of the advanced payments.
Dependent Care Assistance: The allowable expenses for calculation of the credit for child and dependent care expenses increased from $3,000 per qualifying individual to $8,000 per qualifying child. For taxpayers with Adjusted Gross Income (AGI) of $125,000 or less, the credit will be 50% of the qualifying expenses with a maximum amount of $4,000. For taxpayers with an AGI in excess of $125,000, the credit will be reduced.
Earned Income Tax Credit: For 2021 only, the credit is significantly increased for filers without children.
Forgiveness of Student Loans: Applicable to student loans forgiven after 2020 and before 2026, the loan forgiveness will not be taxable income. The expanded exclusion includes loans discharged for any reason. The exclusion also applies to private loans.
A more detailed discussion of the Unemployment Compensation, Recovery Rebate Credit, and Child Tax Credit, may be found here.