American Rescue Plan Act enacts many tax provisions

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May 4, 2021

american Rescue plan Act enacts many tax provisions The american Rescue plan Act, P.L. 117–2, was enacted on March 11. The $1.9 trillion legislation contains many provisions for stimulating the economy and aiding businesses and individuals, including extending enhanced federal unemployment benefits, providing funds for COVID–19 vaccinations and testing, and helping K–12 schools and colleges […]

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American Rescue Plan Act enacts many tax pros

The American Rescue Plan Act, P.L. 117, was enacted on March 11. The $1.9 trillion legislation contains many pros for stimulating the economy and aiding businesses and individuals, including extending enhanced federal unemployment benefits, providing funds for COVID19 vaccinations and , and helping K1 schools and colleges and universities, and state and local governments.

Among the act’s many pros are several tax items, including making certain 00 unemployment benefits nontaxable, temporarily excluding student loan forgiveness from dischargeofindebtedness income, and expanding the tax edit and other edits.

Under the act, the first $10,00 in unemployment benefits received by a taxpayer will be taxfree in 00 for taxpayers with modified adjusted gross income (AGI) of less than $150,000 per year. For joint filers, each spouse can exclude up to $10,00. However, the modified AGI limit is per return. The IRS in March released a worksheet for computing modified AGI for these purposes (available at irs.gov).

The act eates a third round of economic impact payments to be sent to qualifying individuals. Like last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate edit. The act eates a new Sec. 648B that provides individuals with a $1,400 recovery rebate edit ($,800 for married taxpayers filing jointly) plus $1,400 for each dependent (as defined in Sec. 15) for 01, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS was to send out the advance payments of the edit.

For single taxpayers, the edit and corresponding payment will begin to phase out at an AGI of $75,000, and the edit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phaseout will begin at an AGI of $11,500 and be complete at AGI of $10,000.

The act uses 019 AGI to determine eligibility, unless the taxpayer has already filed a 00 return.

Under Section 9501(a) of the act, assistance eligible individuals (AEIs) are given a 100% subsidy for premiums for COBRA continuation coverage for the period beginning on April 1, 01 (the first day of the first month beginning after enactment), and ending on Sept. 30, 01. The subsidy is provided by not requiring AEIs to make premium payments but requiring the taxpayer to w the AEI otherwise would pay the premiums to treat them as paid.

Section 9501(b) of the act provides reimbursement to the taxpayers (a plan, employer, or insurer, unless the IRS provides otherwise) to which an AEI’s COBRA continuation coverage premiums are payable. It does so by eating new Sec. 643, which allows the taxpayer receiving the premiums a COBRA continuation coverage premium assistance edit, which can be taken against the Sec. 3111(b) Medicare tax. The edit is refundable, and the IRS may make advance payments to taxpayers of the edit amount. It applies to premiums and wages paid after April 1, 01, and through Sept. 30.

Under new Sec. 670C, a penalty is imposed on AEIs if they fail to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.

AEIs who receive the COBRA continuation coverage premium assistance are not also eligible for the Sec. 35 health coverage tax edit.

Under new Sec. 139I, continuation coverage premium assistance is not includible in an AEI’s gross income.

The act expands the Sec. 4 tax edit in several ways and provides that taxpayers can receive the edit in advance of filing a return. The act makes the edit fully refundable for 01 and makes 17yearolds eligible as qualifying ren.

The act ineases the amount of the edit to $3,000 per ($3,600 for ren under 6). The ineased edit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $11,500 for heads of household, and $75,000 for others, reducing the expanded portion of the edit by $50 for each $1,000 of income over those limits.

The IRS is directed to estimate taxpayers’ tax edit amounts and pay monthly in advance onetwelfth of the annual estimated amount. Payments will run from July through December 01.

The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.

The taxpayer in general will have to reconcile the advance payment amount with the actual edit amount on next year’s return and inease taxable income by the excess of the advance payment amount over the actual edit allowed. But taxpayers whose modified AGI for the tax year does not exceed 00% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the inease for an excess advance payment reduced by a safe harbor amount of $,000 per .

The Sec. 3 earned edit is changed in several ways. The act introduces special rules for individuals with no ren: For 01, the applicable minimum age is deeased to 19, except for students (4) and qualified former foster youth or eless youth (18). The maximum age is eliminated.

Also, the edit’s phaseout percentage is ineased to 15.3%, and the phaseout amounts are ineased. The edit will be allowed for certain separated spouses. The threshold for disqualifying investment income is raised from $,00 to $10,000. Temporarily, taxpayers will be allowed to use their 019 income instead of 01 income in figuring the edit amount.

Effective for 01 only, the act makes various changes to the Sec. 1 and dependent care edit, including making it refundable. The edit will be worth 50% of eligible s, up to a limit based on income, making the edit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. edit reduction will start at household income levels over $15,000. For households with income over $400,000, the edit can be reduced below 0%.

The act also ineases the exclusion for employerprovided dependent care assistance to $10,500 for 01.

The edits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFA), P.L. 11617, are codified by the act as Secs. 3131 (edit for paid sick leave), 313 (edit for paid family leave), and 3133 (special rule related to tax on employers). The edits are extended to Sept. 30, 01. These fully refundable edits against payroll taxes compensate employers and selfemployed people for coronavirusrelated paid sick leave and family and medical leave.

The act ineases the limit on the edit for paid family leave to $1,000.

The number of days a selfemployed individual can take into account in calculating the qualified family leave equivalent amount for selfemployed individuals ineases from 50 to 60.

The paid leave edits will be allowed for leave that is due to a COVID19 vaccination.

The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 01.

The edits are expanded to allow 501(c)(1) governmental organizations to take them.

The employee retention edit is also codified by the act as new Sec. 3134, and it is extended through the end of 01. The employee retention edit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116136, and it allows eligible employers to claim a edit for paying qualified wages to employees.

Under the act, the employee retention edit is allowed against the Sec. 3111(b) Medicare tax.

The act expands the Sec. 36B premium tax edit for 01 and 0 by changing the applicable percentage amounts in Sec. 36B(b)(3)(A). Taxpayers who received too much in advance premium tax edits in 00 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 01 as an applicable taxpayer.

Sec. 108(f) was amended by the act to specify that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 00, and before Jan. 1, 06.

The act amends Sec. 16(m), for years after 06, to add a corporation’s five highestcompensated employees (besides the employees already covered by Sec. 16(m)) to the list of individuals subject to the $1 million cap on deductible compensation.

The act extends the Sec. 461(l) limitation on excess business es of noncorporate taxpayers for one year, through 07.

The act also repeals Sec. 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis.

The act provides that targeted Economic Injury Disaster Loan grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis inease. Similar treatment is afforded SBA restaurant revitalization grants.

The act temporarily delays the designation of multiemployer pension plans as in endangered, itical, or itical and declining status and makes other changes for multiemployer plans in itical or endangered status.

the author

Alistair M. Nevius, J.D., is the JofA’s editor-in-chief, tax. To comment on this article or to suggest an idea for another article, contact him at Alistair.Nevius@aicpa-cima.com or 919-40-405.


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