President Biden released his “American Rescue Plan” on January 14. It is a wish list of proposals he wants Congress to enact to address the COVID-19 pandemic and associated economic crisis. While some of the proposals are intended to be in effect for just one year, they could be extended or made permanent later on. Many of these items have been on the Democrats’ agenda for some time. If all of the proposals are agreed to by Congress, the anticipated cost of the American Rescue Plan could be $1.9 trillion. None of Biden’s proposals are revenue raisers, and according to a January 15, 2021 Wall Street Journal report, he intends to use government borrowing to pay for his plan.
Tax-related proposals of the American Rescue Plan
Stimulus (Economic Impact) Payments
Biden’s plan requests that Congress provide an additional stimulus payment of $1,400 to qualified lower income households. Combined with the $600 that Congress authorized in December legislation, this will bring the latest total direct assistance to $2,000 per person. The prior stimulus distributions included stipends for dependent children under the age of 17, whereas the proposed payments will be provided for all dependents regardless of age.
So far, the payments have counted as advances toward a 2020 Recovery Rebate Credit. This is so even for the second round of payments that didn’t reach recipients until early January 2021. Individuals will need to reconcile the payments they received and the credits they are entitled to on their 2020 returns.
It is unknown if additional payments will be part of the 2020 credit, or an advance toward a new 2021 credit. But if it’s a part of the 2020 credit, it could delay some return filings.
Unemployment Compensation
This part of the plan requests that Congress provide a $400-per-week unemployment insurance supplement through September 2021, and extend the unemployment benefits to self-employed workers such as ride-share drivers and many grocery delivery workers, who do not typically qualify for regular unemployment compensation. Presumably, the $400-per-week enhancement would replace the $300-per-week benefit passed in the Consolidated Appropriations Act in December 2020. In any event, the unemployment benefits are taxable income for federal purposes; most states also tax this income, but a few do not.
Raise the minimum wage to $15 per hour.
Education Assistance
The CARES Act, passed in late March 2020, included a Higher Education Emergency Relief Fund. This fund that provides money to institutions to provide emergency financial aid grants to students whose lives have been disrupted by the COVID-19 pandemic. Student Emergency financial aid grants are nontaxable. This grant can be used for expenses related to the disruption of campus operations due to coronavirus. This includes eligible expenses under a student’s cost of attendance, such as food, housing, course materials, technology, health care, and child care. Biden’s proposal would increase funding for the Higher Education Emergency Relief Fund, including providing college and university students with up to an additional $1,700 in financial assistance from their institutions.
Families First Coronavirus Response Act
This part of the American Rescue Plan requests that Congress fund an extension of sick leave through September 30, 2021, which would provide over 14 weeks (up from 12) of paid sick and family and medical leave to help parents with additional caregiving responsibilities when a child or loved one’s school or care center is closed; for people who have or are caring for people with COVID-19 symptoms, or who are quarantining due to exposure; and for people needing to take time to get the vaccine. The maximum payment would increase from $1,000 per week to $1,400 per week.
Under Biden’s plan, the exemptions for businesses with over 500 employees and those with fewer than 50 employees would be eliminated, making the program mandatory for all sizes of businesses. The government will reimburse employers with fewer than 500 employees for 100% of the cost.
Increase the Child Care Tax Credit
Currently, a nonrefundable tax credit is available to some taxpayers for the expenses they incur for “Human care”; the care of a child, spouse, or other dependent while the taxpayer is gainfully employed (or is seeking a job). The maximum expenses that can be used to determine the credit are $3,000 for one child; while $6,000 is the maximum expense and for two or more children. The credit rate ranges from 20% to 35% depending on income (the higher the income, the lower the credit rate).
Biden’s plan requests Congress to authorize an increase in the child care credit and make it refundable for one year. The credit would be a full 50% of the expenses. The maximum expense for one child under age 13 would then be $4,000 and for two or more children, $8,000. When income ranges from $125,000 to $400,000 the credit would be phased out.
Child Tax Credit
For years 2018-2025, the child tax credit is a maximum of $2,000 per dependent child under the age of 17. In some cases, up to $1,400 of the credit is refundable. The credit phases out when the taxpayer’s modified adjusted gross income exceeds $200,000 ($400,000 for married joint filers). Biden is asking Congress, for a period of one year, to include children through age 17 in the credit. Also to increase the Child Tax Credit to $3,000 ($3,600 for children under the age of 6).
Earned Income Tax Credit (EITC)
Childless adults are eligible for a lesser earned income tax credit amount than if they had a qualifying child. Biden’s plan requests that Congress make a one-year increase in the EITC for childless adults. This would roughly add $530 to $1,500, increasing the income limit for the credit from approximately $16,000 to $21,000. Biden also would also like Congress to eliminate the age cap. This would allow older workers without a qualifying child can claim the credit. Currently, a childless individual cannot claim the credit after reaching age 65.
Healthcare Coverage
Individuals who purchase their health insurance through the government marketplace may be eligible for a premium tax credit. This would include an advance premium tax credit (APTC) used to reduce monthly premiums. Both the advance and actual credits would be reconciled on their income tax return each year. The request to increase this premium tax credit is so workers will not pay more than 8.5% of their income for coverage.
Although not tax-related, other issues in the American Rescue Plan affecting individuals include:
Evictions and Foreclosures
President-Elect Biden is calling on Congress to extend the eviction and foreclosure moratoriums until September 30, 2021. In addition, he asks to continue applications for forbearance on federally guaranteed mortgages until September 30, 2021. And to provide funds for legal assistance for households facing eviction or foreclosure.
Homelessness
The plan requests that Congress provide $5 billion to help secure housing for the approximately 200,000 individuals and families.
Remember, these are only Biden’s proposed changes. Quite often, what Congress ends up passing is not the same as the originally proposed legislation. If you need assistance or have questions related to other tax issues, please give this office a call at 360-778-2901.
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