The American Rescue Act is expected to cost $1.9 trillion 

This stimulus bill follows closely behind prior relief legislation of the Consolidated Appropriations Act, 2021 ($900 billion) and the CARES Act ($2 trillion).  A vote is anticipated by the end of February. It is expected that act that includes a third round of stimulus payments will pass with little opposition since budgets have been passed for the year and streamlined reconciliation requires a simple majority for passage. Included in the bill are several provisions to extend supplemental unemployment benefits and expand child tax credit. Proposals to extend the employee retention credit are included but very few details have been released.

The most talked-about component of the proposal is the third round of stimulus payments made directly to taxpayers. There is still debate over the income level at which an individual should no longer be eligible to receive a payment and which dependents will receive a payment.

Eligible Stimulus Payments and Dependents

The proposed third round of stimulus payments will pay out up to $1,400 for each “eligible individual” ($2,800 married filing jointly); up to $1,400 per dependent. The definition of dependent has been expanded to include anyone who qualifies as a dependent which would encompass a full-time college student, a parent, or another person a taxpayer is supporting. Additionally, a valid identification number (social security number) is needed for the taxpayer, the spouse, and any dependents that are alive.

Ineligible recipients include:

• A nonresident alien individual
• An estate or trust
• Any individual who is a dependent of anyone else
• Anyone whose income exceeds limits on receiving the stimulus payment

AGI and Filing Status

Stimulus payments are based on adjusted gross income (AGI) for the tax year during which the stimulus payment calculation is based. Your AGI is on line 8b of the 2019 Form 1040 and line 11 of 2020 Form 1040.

Eligible AGI figures for the tax year on which the payment is based are as follows:
Payments are determined on a sliding scale and phase out once the AGI exceeds $100,000 if single, $200,000 if married filing jointly, and $150,000 for a head of household.

At the time of this blog, a calculator is not available yet. However, the calculation is as follows:
[Your AGI – The threshold ($75,000 if single, $150,000 if married, or $112,500 head of household)] /$25,000 if single, $50,000 if married, or $37,500 if a head of household. The answer will be a decimal. You will need to subtract that decimal from 1 to determine the percentage that will be applied to the maximum stimulus payment per recipient of $1,400.

For example, if you are married and your AGI is $170,000 with 1 child the calculation would be
($170,000-$150,000)/$50,000 =.40
1 -.40 = .60 or 60%
60% of $1,400 = $840 per recipient
3 recipients x $840 = $2,520 stimulus payment

These stimulus payments are a one-way credit system. Also, the stimulus payments are not taxable. If the stimulus payment you received is based on 2019 and your situation changed in 2020 or 2021 to reduce the amount you do not need to pay the difference back. If the stimulus payment you received is based on 2019 and your situation changed in 2020 or 2021 to increase the amount you should have received, you will CLAIM the credit on your 2021 tax return that will offset your tax liability for that tax year. There are no guidelines for a taxpayer to pay back the windfall. An example would be, the individual who was claimed as a dependent and was not eligible to receive a stimulus payment during the 3rd round of stimulus payments and will not be claimed as a dependent in 2021 will be eligible to receive a credit in the amount of the stimulus payment/credit when they file their 2021 return.

According to the bill, the payments will not be offset against previous federal or state tax liability or past-due child support. Additional guidance is forthcoming regarding how non-filers receive stimulus payments.

Unemployment Benefits

Under the Consolidated Appropriations Act, federal unemployment benefits were extended through mid-March (with a “soft phaseout” through mid-April). However, the American Rescue Plan is proposing to continue and expand benefits through September 2021 and beyond.

Child Tax Credit

The Institute on Taxation and Economic Policy has stated that the American Rescue Plan Child Tax Credit (CTC) would do the following:
• Double the size of the existing CTC
• Increase the maximum credit from $2,000 per to $3,000 with an additional $600 for a child under the age of six.
• Provide a 37.4% income boost to the poorest 20 % of families with children who make $21,300 or less annually
• Extends benefits to more children whose families are currently too poor to qualify for the credit
• Boost the average benefit to the poorest 20% of families with children from $1,000 to $5,590

We will continue to provide additional updates regarding this legislation. There is a lot of available information available to assist taxpayers experiencing COVID-19 related financial difficulties to be aware of these options and get assistance. Contact us today to review your options.

Maria D. Stromple, CPA, MST

Maria is a Partner at Wilke & Associates, servicing closely-held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.