The American Rescue Plan Signed Into Law
The House passed and President Biden has signed into law a $1.9 trillion stimulus plan, aimed at boosting the economy and ending the pandemic. The vast relief package is known as the American Rescue Plan and will take considerable time to fully study and assess how it will affect taxpayers. Our team has been monitoring the progress of this bill over the last two months and assembled immediately after its passage to review the Act.
Our summary of the Act is 40 pages of tax and business provisions. However, this brief Client Summary is intended to provide initial clients with some insights regarding the common tax matters which might affect you and your family.
Most of the provisions in the rescue plan are related to tax changes and credits for 2021. However, one provision may impact some taxpayers for their 2020 tax return.
2020 Unemployment Benefits
Beginning in 2020, the American Rescue Plan will not impose federal income tax on the first $10,200 in unemployment benefits a person received last year. This exemption applies for households with adjusted gross incomes below $150,000.
Taxpayers who have already filed 2020 tax returns may need to amend their returns. However, it will take a little time for the IRS and tax preparation software companies to make the necessary changes. If this affects you, be patient. We have already assembled a list of Sackett Financial clients whom we have already filed and will reach out to all clients that are eligible when amended returns can be filed.
2021 Tax Provisions
There are many components of the new relief plan, some will affect you and others will not. We have summarized two provisions that may affect many of our individual clients and one that may affect some business clients:
Individuals earning $75,000 per year and couples earning $150,000 would still receive the full $1,400-per-person benefit. However, the benefit would disappear for individuals earning more than $80,000 annually and couples earning more than $160,000.
Child tax credit
Under the legislation, most Americans would receive $3,000 a year for each child ages 6 to 17, and $3,600 for each child under 6.
The provision in the bill would last one year and be sent via direct deposit on a “periodic” basis. It is a major expansion of the existing child tax credit, which provides $2,000 a year for children from birth through age 16.
Employee Retention Tax Credit (ERTC) Under the Consolidations Appropriations Act (CAA)
ERTC has been expanded for 2021. The ERTC originally only applied to qualified wages and qualified health expenses incurred in 2020. The CAA change extends the ERTC for two more calendar quarters, through June 30, 2021.
Under the CARES Act, a company needed a more than 50 percent decline in gross receipts, compared to the same quarter in 2019, in order to use the gross receipts test to be eligible for the credit. The CAA changes the test so a company that has had a more than 20 percent decline in gross receipts in 2021, compared to the same quarter in 2019, satisfies the gross receipts test.
PPP Taxability in California Awaiting Guidance
The governor announced that the AB 80, which would partially conform to the federal provision allowing Paycheck Protection Program (PPP) loan borrowers to deduct expenses paid with the PPP loan amounts, has been put on hold awaiting guidance from the US Treasury Department to see if AB 80 can be enacted and California still be eligible for funding from the American Rescue Plan Act.