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By Jon Aldrich

Last Thursday, President Biden signed into legislation the long awaited COVID Relief package for Americans, named The American Rescue Plan of 2021 (ARP). It provides $1.9 Trillion (with a “T”) to drive economic stimulus and fiscal relief for the millions suffering from the fallout of the ongoing pandemic.

Many of you may have already received your $1,400 per person stimulus check or “Stimmy” as the kids on the Reddit forums like to call the funds primed for their next investment in GameStop stock. 🙂 There is a lot in this stimulus package, so let’s summarize some of the major provisions affecting the most people, so that you can look like an expert when you discuss the nuances of the ARP with your friends on your next Zoom call.

In the big picture, the $1.9 Trillion package has $350 Billion set aside for state and local government support, $170 Billion for schools to update their capabilities to operate in a pandemic environment, $90 Billion for transportation and infrastructure programs and about $85 Billion for Coronavirus testing, vaccination and contact tracing. You can get more details on where all the money is going here.

Before we summarize some of the key provisions affecting the largest number of folks, it is worth taking a look at some of the provisions that were NOT included in the final legislation that were being discussed up until the last minute:

Student Loan Forgiveness – Although there was no Student Loan Forgiveness in the ARP, it did make any student loans forgiven from 2021 to 2025 income tax-free. Thus, it may be setting the stage for some type of forgiveness in the near future. Normally, any debt forgiven is considered taxable income to the person receiving the forgiveness.

Minimum Wage Hike – There was plenty of discussion that there was going to be a national mandate of a $15/hour minimum wage, but this did not make the final cut.

Required Minimum Distribution (RMD) Relief – In 2020, those taking RMD’s from their IRA or 401k’s were given the option to not take their RMD. No such relief was provided for 2021, thus, for those of you that are taking RMD’s, you will have to take one for 2021.

Those were the things that did not make the ARP, now let’s take a brief look at the main provisions that did:

Stimulus Checks

  • $1,400 for individuals with Adjusted Gross Income (AGI) of $75,000 or less, for Head of Households AGI below $112,500 and for married couples filing jointly, AGI below $150,000. However the phaseouts are much quicker than the previous stimulus checks, and are entirely phased out at AGI of $80,000, $120,000 and $160,000 for Singles, Head of Household and Married filing Joint taxpayers, respectively.
  • Thus, some that qualified for a check in the first two rounds, may not qualify for the third one.
  • One big change is there is more credit available for all dependents, not just for those under 17 like the last 2 “Stimmys”. Now, if you qualify, you can get up to $1,400 for any dependent, this may include your 21 your old son in college or even for an elderly parent that you claim as a dependent.
  • Therefore, a married family of 4 with one child that is 20 and in college and another that is 15, could qualify for up to $1,400 x 4 = $5,600 of stimulus checks, if their AGI was below the phaseouts. One could do a lot with that kind of money.
  • If you already filed your 2020 taxes the IRS will use this to see if you qualify, otherwise they will refer to your 2019 tax return or the most recent information they have on file to see if you qualify.
  • So, if you haven’t filed yet this year and you expect your 2020 income to be higher than 2019, you might want to hold off on filing until you receive a refund based on 2019.
  • Then, if you end up not qualifying in 2020 because your income ends up being too high, you are not required to pay the stimulus back. There is no “clawback” provision.
  • The stimulus check is actually a “Tax credit” and you do not pay taxes on the amount of stimulus you received, even if you received it but do not qualify because your income was too high in 2020.
  • For those yet to file 2020 tax returns and their income was significantly less than in 2019, they may potentially qualify for a larger stimulus check based on 2020 income. But since the IRS had to utilize their 2019 return as 2020 has yet to be filed, these people would get an additional stimulus check later in the year for the amount they were entitled to receive based on 2020 income.

Changes to Child Tax Credits

  • For 2021 only, the credit jumps to $3,600, up from $2,000 for each child under age 6 as of Dec 31, 2021. However, the additional $1,600 of credit phases out for the same income limits as the stimulus checks mentioned above ($75,000, $112,500, $150,000)
  • For 2021 only, the credit bumps to $3,000, up from $2,000 for each child between ages of 6 to 17 @ Dec. 31. 2021. (This additional $1,000 credit also phases out the same as above).
  • Half of this expanded credit is expected to be paid out in advance to qualifying families in the summer and fall of this year with additional checks. The IRS will do this based on amounts from their 2020 tax return. The remainder would be received when they file their 2021 taxes in 2022.
  • The original Child Tax Credit of $2,000 starts phasing out for singles with AGI above $200,000 and joint filers about $400,000.

Changes to Child & Dependent Care Tax Credit in 2021

ARP also increased the expenses eligible for a credit for child and dependent care costs. Yet it also changed to disqualify those taxpayers with more than $440,000 from getting any of this credit. Previously, these high earners could get a partial benefit.

This new expanded credit is also refundable for 2021, meaning that even if the credit is more than you paid in taxes, you can still get the full amount of credit refunded. This means there will be some taxpayers that may get more in refunds back than they pay in for taxes with this credit.

Here is a table that summarizes the increases:
Child and Dependent Tax Credit
Source: kitces.com

COBRA subsidies in 2021 for Terminated Employees

  • This is an awesome benefit for those that have lost jobs to be able to keep their health care coverage at NO COST!
  • Normally, when an employee is terminated, they can continue on COBRA insurance coverage for up to 18 months, but must pay for the total cost of coverage which can be as much as 102% of the total cost of coverage. For a family, this could be over $2,000 a month easily.
  • For those who have lost their job, the ARP allows people to maintain their existing health insurance, with COBRA coverage, from April through September, 2021 at a cost of NOTHING!
  • The premiums will be paid for by the former employer and the employer will be reimbursed by the government with a refundable payroll tax credit.

Unemployment Benefits Tax Break

  • Normally, all unemployment benefits are taxable, but the American Rescue Plan made the first $10,200 of unemployment benefits tax free for all taxpayers with AGI less than $150,000, and the first $20,400 for those married filing jointly, note, though, that the $150,000 AGI limit applies to all taxpayers.
  • The $150,000 is a cliff for this tax break. Thus someone that has AGI of $149,999 could get up to $10,200 of tax-free unemployment benefits in 2020, but had that person made just $1 more dollar of income, the entire $10,200 would be taxable.

Ok, there is a lot in the ARP of 2021 that will, hopefully, give many of those struggling at least some help during these trying times. Most agree that fiscal help is needed for many as we navigate this pandemic, however, how we will pay for this down the road with higher inflation or higher taxes will be debated for a long time now and only time will tell how that turns out. You have to tackle one large problem at a time.

There are a lot more provisions in here beyond the scope of this article, so if you are interested you can really get into the gory details here.