As one of his first major moves in office, President Biden signed into law the third stimulus package of the COVID-19 pandemic era, dubbed the American Rescue Plan (ARP). This $1.9 trillion stimulus plan is meant to extend, renew, and enact relief for those affected by the virus. While many parts of the plan are aimed at low-income households, there are a few ways high earners can still benefit. Below is a breakdown of this new legislation as well as insight on how the major components could affect you.
1. Stimulus Checks
Unfortunately, individuals earning over $80K and married couples earning over $200K are not eligible to receive any stimulus from the American Rescue Plan; individuals earning between $75K and $80K (and married couples earning between $150K and $200K) will receive a reduced amount, and those earning under $75K and $150K respectively will receive the full $1,400 amount.[i] The stimulus also provides $1,400 per dependent child for eligible parents.
Keep in mind, this third stimulus will be based on 2020 earnings rather than 2019, if you have already filed them with the IRS. So, if your situation has changed since the first two waves of stimulus and you fall under the income cap for the 2020 year, you may be receiving assistance in the near future (if you haven’t already).[ii]
2. Small Business and the PPP
Overall, this bill allocates $50 billion toward assisting small businesses affected by COVID-19.[iii] The Paycheck Protection Program (PPP) that has allowed so many businesses to stay afloat through this difficult time will receive an additional $7.25 billion to be used up until the March 21, 2021 deadline.
Additionally, the Employee Retention Credit (ERC) will be extended through the end of 2021. This refundable tax credit allows business owners to claim up to $7,000 per employee per quarter as an incentive to keep these employees…well, employed![iv]
3. Unemployment Payments
Even as a high-net-worth individual, you may have been one of millions of Americans laid off or furloughed during the pandemic. And if you filed for unemployment during that period, you may now be wondering how to handle this type of income on your taxes.
Typically, individuals who file for unemployment would have to pay income tax on their benefit, but the ARP provides a tax break on the first $10,200 in unemployment benefits received. Any amount received above $10, 200 will be taxed as ordinary income.[v]
If you filed your 2020 taxes before the stimulus plan was signed into law, talk with your tax professional about amending your return to take advantage of this change. If you are still collecting unemployment, you’ll be eligible for an extra $300/ week through early September as provided in the ARP.[vi]
4. Tax Credits for Parents
In addition to the $1,400 stimulus provided for each dependent child, the American Rescue Plan also offers parents two other forms of relief: (1) an additional child tax credit and (2) a bump in tax credits for childcare expenses.[vii]
Child Tax Credit
Previously, the child tax credit offered eligible families a $2,000 tax credit per child under the age of 17. With changes made under the new legislation, though, this credit is temporarily expanding.
Families will receive up to $3,600 per child under age 5 and $3,000 for children ages 6-17. Not only does this increase the child tax credit, but it extends it to include children age 17. Of course, eligible children must be both (1) related to you and (2) reside with you for at least six months out of the year.
In addition to the higher credit amount, the ARP provides that:
- The $2,500 earnings floor will be waived
- The credit will be fully refundable
- Eligible families will receive credit in advance between July and December 2021
Again, high-income earners won’t likely be eligible for the full child tax credit. Only individuals earning less than $200,000 and couples earning less $400,000 are eligible for the full amount. The Washington Post has provided this calculator to see how much you could be eligible for.[viii]
Child and Dependent Care Tax Credit
This third stimulus package also increases the Child and Dependent Care Tax Credit from a maximum of 35 percent of qualifying childcare expenses to a maximum of 50 percent. That’s an increase of $3,000 to $4,000 for one child and from $6,000 to $8,000 for two or more children.
The credit amount is calculated from the percentage of work-related expenses incurred for the care of your child. The percentage depends on your adjusted gross income (AGI). It starts at 35%, but it’s then reduced (but not below 20%) by one percentage point for each $2,000 that your AGI spills over $15,000. So, for example, if your AGI is $25,000, then your credit is worth 30% of allowable expenses.[ix]
5. Tax-Free Status for Student Loan Forgiveness
All types of student loan forgiveness will be tax-free through December 31, 2025, including those in an income driven repayment plan. What does this mean exactly? That should the federal government decide to cancel student loans between now and the end of 2025, the amount that gets forgiven will not be treated as income (at the federal level) and will be forgiven tax-free. This could be a major source of financial relief for those repaying student loans.[x]
6. Earned Income Tax Credit Expanded
Not only will more workers without qualifying children be able to claim the Earned Income Tax Credit (EITC) in 2021, but the total credit available will increase as well, moving from $543 to $1,502. And in order to reach older and younger Americans, the ARP provides that age limits to qualify for the EITC will also temporarily change. Now individuals over age 65 and as young as 19 (except for certain full-time students) will be eligible to claim the 2021 credit.[xi]
7. Increased Limits on Dependent Care Flexible Spending Account (DCFSAs)
Dependent Care Flexible Spending Accounts (DCFSAs) just got a little more flexible—at least for 2021—with increased contribution limits provided for under this new legislation. For married couples filing joint tax returns, the cap is $10,500, up from $5,000. For single filers, the limit is $5,250, up from $2,500.[xii] The limit for health FSAs, though, remains the same as 2020 at $2,750.
Even though companies can allow employees to contribute more to their DCFSAs, they don’t have to. You’ll want to check with your company’s HR department to see if this is a provision they will be adopting before allocating more to your account.
Under the Consolidated Appropriations Act signed into law in December 2020, you can also temporarily rollover any unused FSA funds from 2020 to 2021 (from any type of FSA account if your company chooses to permit it). Typically, FSAs do not allow for rollover year after year and put individuals in a “use it or lose it” position at the end of their company’s calendar year. But with so fewer opportunities for individuals to use their benefits during the pandemic-induced lockdowns of 2020, the government is cutting everyone a break. Again, confirm with your company to ensure they are adopting these permissions.[xiii]
One of the biggest benefits of a DCFSA is that it is compatible with a Health Savings Account (HSA), unlike with a traditional health FSA. This means that you can take advantage of both the employer sponsored DCFSA while also saving for qualified medical expenses in an HSA (if you have a High-Deductible Health Plan). Not only does this strategy allow you to maximize your savings, but to benefit from two tax-reduction outlets, as well.[xiv]
While all of this stimulus sounds promising, there are risks present in this unprecedented economic climate. We are receiving historic fiscal stimulus and enjoying record-low interest rates all while markets continue to soar. An economy that runs so hot for so long could kick back in the form of inflation, recession, or perhaps both—one followed by the other. Of course, we take all of this into account when creating and reviewing your individual portfolios, but should you have questions or concerns, we are always here to address them.
With all of legislative changes and financial curveballs the pandemic has thrown our way, it may be time to perform an annual financial check-up. Contact us today to schedule your virtual meeting or book a consultation with one of our advisors. We’d be happy to walk you through these and other changes so you can see where you stand.
[i] https://www.congress.gov/bill/117th-congress/house-bill/1319 1 April 2021
[xii] https://www.cnbc.com/2021/03/12/flexible-spending-account-rules-are-more-generous-what-to-know.html 2 April 2021
[xiii] https://www.jdsupra.com/legalnews/consolidated-appropriations-act-of-2021-1916768/ 5 April 2021
[xiv]https://healthequity.com/learn/dcfsa 5 April 2021
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