A Look at Tax Provisions for Low-Income Americans in the American Rescue Plan Act

NEW ECONOMIC IMPACT PAYMENTS

Already, the new $1.9 trillion COVID relief law has led to the distribution of $1,400 stimulus payments for millions of Americans. This round of economic impact payments total $1,400 per person, including per adult dependent (a group that was excluded from the first two rounds; undocumented parents can now obtain payments for their children who have Social Security numbers as well).

The income eligibility guidelines are similar to the last two rounds in that the full $1,400 payments go to single filers who make up to $75,000, married filing jointly filers who make up to $150,000, and head of household filers who make up to $112,500. There are smaller payments for single filers who make up to $80,000, married filers who make up to $160,000, and head of household filers who make up to $120,000. Anyone with a Social Security number authorized for work, who is not a nonresident immigrant and not a dependent, can get a payment.

Congress authorized the IRS to look to 2019 and 2020 returns to determine eligibility. This time, Congress also specifically authorized the IRS to make “additional payments,” through rolling eligibility determinations, for individuals who file 2020 returns that make them eligible for additional stimulus payment. Therefore, if a taxpayer has a 2019 return on record right now that makes them eligible for partial or no stimulus payment but then they file a 2020 return that makes them eligible for more stimulus payment, they should get the additional payment.

Beneficiary recipients (Social Security, SSI, VA, RRB recipients) will automatically get payments. The payments are again protected from offset for federal and state tax debts, debts to federal agencies, unemployment overpayments, and child support. Congress was unable to protect the payments from garnishment by private debt collectors but members of Congress are considering introducing legislation to remedy this issue.

Non-filers who don’t receive the aforementioned benefits qualify for these payments as well. If these individuals used the Expedited Filing Portal last year that created 2019 returns, they should get these payments as well – since 2019 return information is used for eligibility. We are still awaiting guidance as to whether such a portal will return this time, particularly in light of President Biden’s January 22 executive action. Already though, the IRS revived the “Get My Payment” tool on its website with an IRS EIP Information Center too (www.irs.gov/eip).

If an individual’s income dropped in 2021 such that they are eligible for more payment now than they were based on current information or if they have a child born in 2021, they can claim the additional stimulus payment as a refund on their 2021 return. Alternatively, if an individual’s 2019 return makes them eligible for payment but a 2020 return would make them ineligible, were it to be filed, they may want to wait to file the 2020 return until they receive the stimulus payment – and the law makes clear they won’t have to pay back any excess.

EXPANDED CHILD TAX CREDIT

One aspect of the American Rescue Plan Act that has gotten significant attention is the expanded Child Tax Credit (CTC). Only for tax year 2021, the law makes the CTC fully refundable and enlarges it to $3,600 for each child 0-5 years old and $3,000 for each child 6-17 years old, including children who are 17.

Notably, the expanded CTC may begin to impact families already starting around this summer. The law authorizes the IRS to make periodic, advance payments of half of the child tax credit from this summer until December 2021. If the payments are distributed monthly, it could mean that families receive $300/month or $250/month – a new monthly child allowance that, if made permanent, has the potential to reduce child poverty in half. The other half of the credit would then be claimed on a 2021 return. Significantly, the law also abolishes the minimum income earnings requirement for receipt of the expanded CTC thus bringing millions more within this safety net’s reach.

Further, the law directs the IRS to develop an “online information portal” where individuals can update their information for purposes of this credit. This portal could be vital because the distribution of the expanded CTC will be based on the most recent return, whether that be 2019 or 2020, available but since the enlarged benefit incorporates potential non-filers, the portal could be useful for them or for individuals whose children are born this year.

The full $3,600 or $3,000 will be available for single filers who make up to $75,000, married couples who make up to $150,000, and head of household filers who make up to $112,500. However, single filers who make up to $200,000 or married couples who make up to $400,000 can still access a $2,000 child tax credit. If one makes less than $40,000 as a single filer, $50,000 as a head of household filer, or $60,000 as a married filing jointly filer, they need not pay back any overpayment on a 2021 return.

UC TAX FORGIVENESS

Weeks ago, Senator Dick Durbin and Congresswoman Cindy Axne’s proposal to exempt from taxation the first $10,200 of unemployment compensation individuals received in 2020 appeared to be a longshot possibility. Negotiations over the federal weekly unemployment supplement and its duration though led to this provision’s inclusion in the final legislation. A major change in the middle of the tax filing season, this aspect of the law will avoid surprise, large tax bills for millions and will boost the finances of those who had tax withheld.

The IRS already has guidance on how to claim this $10,200 exclusion if you have not filed a return but it remains unclear what taxpayers who already filed should do. It is possible taxpayers will have to file superseding or amended 2020 returns. If so, it will be convenient that 1040-Xs can be filed electronically now but nevertheless, it could also add to the backlog of unprocessed returns. It is uncertain if the IRS will instead try to automatically refund individuals but recently, the same Democratic members of Congress who crafted the exclusion wrote to the IRS requesting as much. 

It should be noted that this tax forgiveness applies per person – so up to $20,400 of UC could be forgiven from tax for a married couple – and only applies for individuals making up to $150,000 in adjusted gross income. But there’s a potentially thorny issue of statutory interpretation at play: does the $150,000 AGI limit include your unemployment compensation in 2020? If a taxpayer received $10,200 in unemployment compensation as part of $150,001 in AGI in 2020, can they exclude the UC or not because their income is too high? If the taxpayer received more than $10,200 in UC (let’s say, $20,000) and that $20,000 put them above $150,000, how much of that is part of AGI that goes into determining eligibility for this forgiveness provision?

The statutory construction here is important as Section 9042 of the American Rescue Plan Act reads that Section 85 of the Code (the section that made unemployment compensation taxable) is amended by adding the special $10,200 tax forgiveness rule “if the adjusted gross income for such taxable year is less than $150,00.” The statute goes on to read “for purposes of [the paragraph describing the forgiveness], the adjusted gross income of the taxpayer shall be determined…without regard to this section.”

So far, in its guidance regarding this new forgiveness, the IRS seems to have taken the position that “without regard to this section” means that all of a taxpayer’s unemployment compensation is included in your AGI. If your AGI is above $150,000, even if without your unemployment compensation in 2020 you would’ve been eligible for this exclusion, you won’t be able to claim it, the Service says. Some observers agree but there appears to be disagreement among tax professionals as to this interpretation, particularly since it would seem to encourage married couples to file separate returns to lower their particular AGIs in order to each claim this benefit. It would be interesting to hear from members of Congress who crafted this language to ascertain their legislative intent.

EXPANDED EITC

For 2021 only, the law triples the maximum Earned Income Tax Credit for childless workers from $543 to $1,502 – a proposal long sought by President Biden’s economic adviser, Jared Bernstein. Childless workers who are not full-time students can now start getting the EITC at  age 19, former foster youth can start getting it age 18, and the upper age limit of 65 is gone – again, all for 2021. The “EITC lookback period” will be applicable for 2021 tax year too so individuals can use 2019 earned income if the latter is higher.

There are a few permanent changes to the EITC though. Married but separated individuals can receive the EITC for themselves (as if they are single essentially) if they meet certain criteria. The married person would have to live with a qualifying child for more than half of the year and not reside with their spouse for at least six months of the year or not live with their spouse by December 31 and have a separation agreement. Another permanent change is an increase in the limit on investment income to $10,000 that individuals can have in figuring EITC eligibility. Also, people are otherwise eligible for EITC can get a single-filer EITC if they are have children who don’t have Social Security numbers.

EXPANDED ACA ASSISTANCE

In addition to the UC tax forgiveness, another major change in the middle of the filing season has to do with Affordable Care Act Premium Tax Credits. For 2020 only, if an individual received more ACA premium tax credits than they should have based on their income and family information, they do not need to pay back the credits on their returns. If a taxpayer already filed their 2020 return, it is possible they may need to file an amended return. Again, this process could add to the processing backlog at the IRS but it will also mean relief for a lot of taxpayers.

Going forward, for 2021 and 2022, the law removes the 400 percent federal poverty line cap for ACA premium assistance. Premium assistance is also now more generous in that premiums for benchmark health plans are capped at 8.5 percent of household income and individuals who make up to 150 percent of the federal poverty line are eligible to pay zero premiums. For 2021 only, individuals who receive unemployment compensation in 2021 are eligible for zero premiums and also get lower out-of-pocket costs.

OTHER ITEMS

The law also expands the child and dependent care credit as it will now be fully refundable for 2021 and will increase to $4,000 for one individual or $8,000 for two or more individuals; the credit will also cover 50% of eligible expenses. Lastly, the law also excludes from taxation any student loan debt cancelation that occurs from December 31, 2020 to January 1, 2026. As such, if the President or Congress does cancel federal student loan debt, federal taxation of canceled debt income in such a scenario would not be of concern to individuals.

All told, these dramatic changes will be enormously impactful in the lives of clients of low-income taxpayer clinic practitioners. Practitioners like me will also surely be navigating questions and concerns about the implementation of these measures. The IRS will certainly have new hurdles to overcome in the process. Ultimately, one thing is clear: these are major changes that require our focus.