Update on the American Recovery Plan Act

Update on the American Recovery Plan Act

With the passage of the American Recovery Plan Act (ARPA) of 2021 on March 11, 2021 came several significant changes to federal tax law. While it is not yet clear exactly how the IRS will implement these changes, some highlights are below.

$1,400 Stimulus Payment
Congress passed an additional stimulus payment for individuals. Most people who received past stimulus payments will receive this one as well as well as some who did not.

Question: What’s difference this time?
Answer: There are a number of changes.

1. There is a much steeper phase out of stimulus payments for individuals above the threshold ($75,000 for individuals and $150,000 for married couples). Individuals making over $80,000 and married couples making over $160,000 will not receive a payment.
2. The full $1,400 is available for dependents, unlike the first round of stimulus payments where $500 was available.
3. It is available for all dependents, not just children under 17.
4. If you had not filed 2020 taxes before the stimulus payment your payment will be based on 2019 tax filings. If based on 2020 filings you would be entitled to a larger payment, the IRS will issue an additional payment within 90 days after the tax filing date (now moved to May 17).
5. Young adults and students will get this stimulus. They were excluded in previous rounds.
6. The first two rounds of stimulus payments excluded young adults who could be claimed as dependents by their parents, regardless of whether or not they were claimed as dependents. This precluded 18-year-old non student and students under 24 who filed their own taxes from receiving stimulus payments. Because the past bills also prevented their parents from receiving any stimulus payments for them either, this age group was left out of Covid stimulus payments altogether. This round is different and they qualify for the $1,400 so long as they meet other eligibility criteria.

2020 Stimulus Payments of $1,200 and $600
Some people did not receive stimulus payments that came out in 2020. They may still be able to get these payments.

Question: I did not file taxes in 2018 or 2019 and I did not receive a stimulus payment in 2020. Is it too late for me?
Answer: No! you can still receive your stimulus payment when you file your 2020 taxes. Form 1040 line 30 allows you to claim the recovery rebate (stimulus) on your 2020 taxes if you did not receive them as advance payments in 2020.

Question: I was not eligible for the stimulus payment in 2020 based on 2019 taxes, but my situation changed in 2020. Can I get the stimulus payments now?
Answer: Maybe. If you meet eligibility criteria based on 2020 tax filings, you should be able to get the stimulus payments as a “recovery rebate credit.” A number of different people could be impacted by this.

1. Those who had a newborn child in 2020 are entitled to claim the portion of the recovery rebate for their child for which they did not receive advance payment.
2. Those excluded from the stimulus because they were students under 24 or nonstudents under 19 can claim the recovery rebate if they met eligibility criteria in 2020.
3. 2020 resident aliens who were not resident aliens in 2019 or 2018 can claim the credit on 2020 taxes. (“Resident alien” is a term used in the U.S. tax code. Its use here is not an endorsement of the term.)

Question: I owe back taxes and had not filed in 2018 or 2019. If I file in 2020 can I get the stimulus or will it be offset against my outstanding taxes?
Answer: If you filed before March 18, 2021, the IRS offset the rebate against outstanding taxes. It issued guidance on March 19, that it will no longer do so. However, the IRS will continue to offset the recovery rebate against other federal agency debts as well as certain state debts.

Question: I filed taxes before Mach 18, I owed back taxes and the IRS offset the recovery rebate against those taxes. Can I get this money back?
Answer: It is unclear. The IRS has not yet issued any guidance on this specific question.

Unemployment Tax Exemption
The first $10,200 in unemployment income from 2020 is tax exempt if a taxpayer’s Adjusted Gross Income is less than $150,000.

Question: How do I claim the exemption?
Answer: The IRS has created instructions on how to claim the exemption. It requires filing a 1040-type form, 1040 schedule 1, and the Unemployment Compensation Exclusion Worksheet. If you are using filing software, this has probably been updated to reflect the change in the statute.

Question: What do I do if I had already filed taxes before ARPA’s passage?
Answer: Nothing yet. The IRS has stated that “you should not file an amended return at this time. The IRS will issue additional guidance as soon as possible.”

Question: I am receiving unemployment now, in 2021. Will I have to pay taxes on it next year?
Answer: It is unclear. ARPA Amended the section of the Internal Revenue Code that requires the payment of income taxes on unemployment by adding a “special rule for 2020”.  The way the statute is currently drafted, it is applicable to all “taxable years beginning after December 31, 2019”. If the statute is not amended, you will likely not have to pay taxes on unemployment compensation received in 2021 so long it is less than $10,200 and your adjusted gross income is under $150,000.

Question: I had the government withhold taxes from my unemployment, will I get this money back?
Answer: Yes. The amount withheld in unemployment will be in field 4 on your 1099-G form. This will be included on line 25b of form 1040 (or analogous) when you report your federal income tax withheld. When you calculate the amount of tax you either owe or overpaid, this amount will be included to either a. reduce the amount of taxes you have to pay in, or b. increase your tax refund.

Question: What do I do if I had already filed taxes before ARPA’s passage?
Answer: Nothing. The IRS stated that it will automatically recalculate taxes and issue refunds for those who filed taxes before ARPA was signed into law. The IRS will begin issuing these refunds in May.

Changes to the Child Tax Credit for 2021
The child tax credit was increased for 2021 from $2,000 to $3,000 ($3,600 for children under 6) and eligibility was expanded to children under 18 years old on Dec 31, 2021. It is fully refundable, and up to 50% of the credit may be issued as “advance payments” throughout the year.

Question: What does it mean that it is now “fully refundable?”
Answer: this means that to the extent the credit exceeds the amount you owe in taxes you can get a tax refund for the remainder. Before 2021, although the Child Tax Credit was $2,000 only $1,400 was refundable. Now, the full $3,000 ($3,600 for children under 6) is refundable.

Question: I earned too little in the past and I did not see any benefit from the Child Tax Credit. How do the changes impact me?
Answer: The earned income requirement to receive the credit has been eliminated and the credit is now fully refundable. You will now receive a benefit of $3,000 for children 6 and over and $3,600 for children under 6 years old.

Question: In the past I was not required to file taxes because I did not have enough income. Should I file now?
Answer: Yes. While you may not be required to file taxes, in order to take advantage of refundable tax credits, such as the child tax credit, you must file taxes.

Question: Up to 50% of the Child Tax Credit is available as an advance payment? What does that mean?
Answer: The IRS will use your 2020 tax filings to determine which account to deposit the advance payment into and how much it should be. The law requires the IRS to begin issuing payments during the year. If you have a child 7 years old and are entitled to the full $3,000 credit, $1,500 will be available as monthly payments in advance for a total of $250 per month. The IRS has expressed some doubts as to the feasibility of the rollout.

This advisory is not legal advice, and does not substitute for the advice of a tax expert.

The GLS Low Income Taxpayer Clinic (LITC) program provides legal representation to eligible taxpayers who are involved in tax controversies with the Internal Revenue Service (IRS). Our LITC program is partially funded by the IRS but GLS is not associated with the Federal government and serves low income taxpayers living in Pinellas, Manatee, Sarasota, Charlotte, DeSoto, and Lee Counties.