2021 American Rescue Plan Update – Tax Implications
The highlight of the 2021 American Rescue Plan from an individual perspective are the direct Internal Revenue Service (IRS) payments to taxpayers. Direct payments of $1,400 will be issued to individuals and qualifying dependents along with $2,800 for joint filers. The payments would begin to phase out for individuals with an adjusted gross income (AGI) of $75,000 ($150,000 for couples) and would be zero for AGIs of $80,000 ($160,000 for couples) or more. Heads of households will receive the full amount if they earned up to $112,500, with the payments being cut off completely at $120,000 total head of household income. However, in addition to the direct payments that may impact you personally, there are several changes in tax provisions that will impact your organization’s human resources and payroll policies. Below are the key highlights:
The act makes the first $10,200 in unemployment benefits tax free in 2020 for taxpayers earning less than $150,000 per year.
COBRA Continuation Coverage
The act provides COBRA continuation coverage premium assistance for individuals who are eligible between the date of enactment and Sept. 30, 2021. The act also creates a new Sec. 6432, which allows a COBRA continuation coverage premium assistance credit to taxpayers. This refundable credit applies to premiums and wages paid after April 1, 2021 and through September 30, is allowed against the Sec. 3111(b) Medicare tax, and the IRS may make advance payments to taxpayers of the credit amount.
Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance. Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit. Under new Sec. 139I, continuation coverage premium assistance is not includible in the recipient’s gross income.
Family and Sick Leave Credits
The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, as Secs. 3131 (credit for paid sick leave), 3132 (credit for paid family leave), and 3133 (special rule related to tax on employers). The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers for coronavirus-related paid sick leave and family and medical leave. The act increases the limit on the credit for paid family leave to $12,000 and increases the number of days from 50 to 60 a self-employed individual can take into account in calculating the qualified family leave equivalent amount. Paid leave credits will also be allowed for leave that is due to a COVID-19 vaccination. The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021. The credits are expanded to allow 501(c)(1) governmental organizations to take them.
Employee Retention Credit
The act codifies the employee retention credit in new Sec. 3134 and extends it through the end of 2021. The employee retention credit allows eligible employers to claim a credit for paying qualified wages to employees. Under the act, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax. Please refer to our most recent blog post on the Employee Retention Credit for additional guidance.
Miscellaneous Tax Provisions
-The act changes Sec. 162(m), for years after 2026, to add an organizations five highest-compensated employees (besides the employees already covered by Sec. 162(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 losses of noncorporate taxpayers for one year, through 2027.
-The act provides that targeted Economic Injury Disaster Loan (EIDL) 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 increase.
-The act temporarily delays the designation of multiemployer pension plans as an endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.
If you have any questions regarding these tax changes, please do not hesitate to contact us.
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