President Biden signed the American Rescue Plan into law on March 11, 2021. One of the central pieces of the American Rescue Plan is a third round of ‘stimulus checks’. Officially referred to as 2021 Recovery Rebates, the latest round of stimulus checks serves as an advance receipt of a 2021 income tax credit.
There are a number of important differences between 2021 Recovery Rebates and prior COVID Relief rebates.
The payments are worth up to $1,400 for individuals earning an adjusted gross income of up to $75,000 in 2019 or 2020, and $2,800 for married couples earning up to $150,000, plus $1,400 for dependents. For anyone making more than that, the size of the check is gradually reduced, hitting $0 at $100,000 AGI for singles and $200,000 for couples.
The ‘Base Amount’ of a taxpayer’s 2021 payment is calculated by multiplying $1,400 times the total number of eligible individuals in a single household, which includes not just taxpayers themselves but also any dependents claimed by the eligible taxpayer.
Example 1: Sue and Rich are a married couple who file a joint income tax return. They have a 19-year-old son in college, and a 13-year-old daughter in middle school, both of whom are dependents.
Accordingly, the ‘Base Amount’ of Sue and Rich’s 2021 Recovery Rebate is 4 × $1,400 = $5,600.
The criteria to determine the number of individuals eligible for the rebate is one of the key differences between the 2021 Recovery Rebate and its 2020 predecessors, as the ‘Base Amount’ for both of last year’s 2020 Recovery Rebates was calculated using only the number of taxpayers and the taxpayer’s children for whom a Child Tax Credit could be claimed (under age 17). The change is a big ‘win’ for parents with older dependent children (age 16 and older), such as those who are in their final years of high school or in college.
Additionally, taxpayers who claim older disabled children or elderly and/or infirm family members as dependents will also benefit from the revised criteria for Recovery Rebate eligibility.
Example 2: Caryn is a single taxpayer. She lives with her four-year-old son and her 81-year-old mother, both of whom she claims as dependents.
Accordingly, the ‘Base Amount’ of Caryn’s 2021 Recovery Rebate is 3 × $1,400 = $4,200.
Other highlights related to individuals in the legislation include:
Taxation of unemployment compensation—Create a tax exclusion for unemployment compensation (not to exceed $10,200) received in 2020 for households with AGI of less than $150,000.
Child tax credit (CTC)—For 2021, increase the CTC to $3,000 ($3,600 for certain children under the age of six years), expand refundability, and expand application to U.S. territories.
Earning income tax credit (EITC)—Expand the EITC for certain childless individuals for 2021; expand application in U.S. possessions; modify credit for certain separated spouses; and make other modifications.
Child and dependent care tax credit—For 2021, expand the credit for workers with $185,000 or less in income and reduce the credit for those with over $400,000 of income (fully phasing out for those with income over $440,000), and increase refundability.
Employer-provided dependent care assistance—For 2021, increase the maximum amount of qualifying child-care expenses that eligible taxpayers may exclude from income from $5,000 to $10,500.