The $1.9 trillion American Rescue Plan Act, signed into law by President Biden on March 11, 2021, contains significant aid for families, individuals, small businesses, farmers, state and local governments, schools and more. With tax season in full swing, however, many filers may wonder how these new provisions affect their 2020 returns. There is no easy answer to this – as timing and individual financial circumstances play a major part in determining the way forward. Below, we look at key considerations for some of the legislation’s biggest tax changes, some of which are retroactive to the start of 2020.
Third round of direct stimulus payments
Eligible taxpayers will receive a direct payment, referred to in the act as “recovery rebates,” of $1,400 ($2,800 for married joint filers). Each dependent will also receive a $1,400 payment. This round of stimulus checks phases out at a lower income rate than the first and second rounds – adjusted gross income between $75,000 and $80,000 for single filers, between $112,500 and $120,000 for head of household filers and between $150,000 and $160,000 for joint filers. The payments are an advance of a credit that will be reconciled on 2021 income tax returns.
The IRS determines payment eligibility based on 2019 tax returns, or 2020 if already filed and processed. Given the financial and employment fluctuations experienced by many during 2020, income levels between the two years may differ. If you have not yet filed, your RKL advisor can determine the most advantageous time to do so.
Expanded eligibility for ACA premium tax credits
Each year, taxpayers who purchase health insurance through the Affordable Care Act exchange must reconcile premiums paid in advance either through tax credits or repayment of any excess. For 2021 and 2022, the American Rescue Plan adjusts this process in two ways:
- Increases the premium tax credits available for health insurance purchased
- Expands credit eligibility for household incomes exceeding 400 percent of the federal poverty level
The act also suspends repayment of excess advance premium tax credits, retroactive to 2020. This provision could delay the filing of your 2020 federal tax return or require an amendment.
Extended and tax-exempt unemployment benefits
The American Rescue Plan extends federal unemployment benefits at a rate of $300 per week through Labor Day. It also suspends the federal taxation of the first $10,200 (single filers) or $20,400 (married filers if both received unemployment) for adjusted gross income of $150,000 or less retroactive to 2020. Keep in mind, unemployment insurance benefits have always been tax-free in Pennsylvania.
Big questions: File now or amend later? Will states conform?
Since some of the American Rescue Plan provisions are retroactive to 2020, there will be a lag until tax software companies and the IRS update their systems and forms. Taxpayers who already filed should discuss a possible amendment, which can take place up to three years after the original return date. Taxpayers who have not yet filed should consider when to file their 2020 return to preserve stimulus payment eligibility.
Some states never tax unemployment benefits, while others will follow the American Rescue Plan and exempt a portion of unemployment from taxation. Others will decouple from this federal legislation and continue to tax unemployment benefits. Be sure to discuss your state’s specific tax regulations with your RKL advisor.
Questions about these provisions or other elements of the American Rescue Plan? Contact your RKL advisor or one of our local offices today.