The much-anticipated Coronavirus Relief-Act has finally been signed into law. Titled the American Rescue Plan Act, it provides relief in the form of a $10,200 unemployment insurance income exemption for 2020, a third round of direct payments (stimulus checks), and expanded child tax credit.
A new provision to exempt $10,200 of unemployment benefits received in 2020 from income taxes. The exclusion is retroactive, applying to unemployment insurance benefits received last year. It only applies to individuals with incomes below $150,000. If you have already filed your return and you qualify, you will need to amend your return to take advantage of this provision. We advise that you wait to request your amended return until the IRS and the tax preparation companies update their systems for this change. Expect your amended return to be sometime in early summer 2021. For those of you that have not filed yet, we have a workaround to take advantage of the provision.
The American Rescue Plan also provides a third round of stimulus payments up to $1,400 for adults and any dependent. Households with earnings of more than $80,000 for single filers, $120,000 for Head of Household filers, and $160,000 for married filing jointly will not receive any payment. The payments begin to phase out at $75,000 for single filers, $112,500 for Head of Household filers, and $150,000 for joint filers—meaning about 89 percent of filers will receive a payment.
Finally, the American Rescue Plan greatly expands the Child Tax Credit, for 2021, by allowing households with children to claim up to $3,600 for younger children or $3,000 for children age 6 or older regardless of earned income. While the CTC currently phases in with income and only $1,400 can be refunded to low-income households, the American Rescue Plan allows the full credit for low-income households, which raises marginal tax rates on these filers as they are no longer provided the credit as income rises. A portion of this expanded CTC would also be paid out monthly as an advanced credit.