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Why is the American Rescue Plan important?

What does it mean for me?

The American Rescue Plan Act of 2021 (the Act) provides immediate assistance to individuals and families with children in the form of cash payments outright in the coming months or benefits claimed on your 2021 tax return. These benefits are for 2021 only and are intended to lessen the impact from COVID-19 and provide much needed assistance to individuals and families with children. All are based on the level of income you report and are reduced as income exceeds certain limits.

Dependent Care Assistance
The credit for child/dependent care expenses you pay is increased so that up to $8,000 of expenses for one child and $16,000 of expenses for two or more children are eligible. The credit is increased from 20% of expenses to 50% of expenses meaning that 50% of expenses incurred create a dollar for dollar credit against 2021 income tax. If the credit exceeds your income tax you receive the excess in a check from the government. The available credit phases out as joint income exceeds $125,000. Just to compare, the credit in 2020 was limited to $600 per child based on expenses of $3,000 (that is a credit of 20%). The Act was specific in its intent to helps families afford to pay child care expenses This credit is taken on your filed 2021 tax return. It is not an advance of funds during 2021.

Advances of Funds:

Third Economic Impact Payment
The attached link is the best and quickest way to understand the third Economic Impact Payment otherwise known as COVID-19 recovery payments. If you received the first ($1,200 per adult and $500 per child) or second payments ($600 per adult and $600 per child) during 2020 you should be receiving the third ($1,400 per adult and $1,400 per child). The payments are based on tax filing information. You should file your 2020 tax return now. The IRS has websites to assist you in filing and there are many tax site preparation sites on-line. Alternatively, visit a national tax preparation firms such as H&R Block or Jackson Hewitt. The three Economic Impact Payments are not additional income to you. But the only way for the government to know you qualify is to file a tax return. If possible, supply direct deposit information to funds can be wired.

Link: Third Economic Stimulus

Advance of 2021 Extra Child Credit
The other advance of funds is directed to families with children. The extra 2021 child care credit equals $1,600 for children under 6 (those children who have not attained the age of 6 as of December 31, 2021) and $1,000 for children under 18. The extra credit is in addition to the $2,000 credit which applies to dependents under age 18. Beginning this Summer, the additional credit will be advanced through direct deposit to you (again a good reason to immediately provide this information on your 2020 tax return) or otherwise paid before the filing of your 2021 tax return.

Filing a tax return provides the Internal Revenue Service with sufficient information to process the various credits. Despite the filing deadline being extended for 2020 until May 17, 2021, please file quickly. As with all government benefits there is a wide variety of phase outs for those who do and who do not qualify. Most phase-outs are based on your Adjusted Gross Income (AGI) on line 11 of the tax return. You will generally qualify for the above payments and credits if you are single with AGI up to $75,000 or married with AGI up to $150,000.

Most likely the extra credits and stimulus will end in 2021. Please be vigilant in follow through for these funds and have a plan for the best use of the resources that are provided. It has been a difficult time and we hope the future is brighter for everyone.

Article courtesy of Mitchell E. Benson, CPA, MT, CFF
Partner, Savran Benson, LLP