The American Rescue Plan Act was signed into law by President Joe Biden on March 11, and it comes with a series of provisions that will impact the tax landscape in a major way. In addition to its COVID and stimulus provisions, the act changes credits in the areas of child and dependent care, earned income tax, and employee retention. To give us an overview of the tax changes contained in this landmark legislation, we are joined by Julio Gonzalez, CEO of Engineered Tax Services and an official member of the Forbes Finance Council.
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
The American Rescue Plan Act was signed into law by President Joe Biden on March 11th, 2021, and with it comes a sweeping series of provisions that will once again rock the tax landscape. On today's episode, we will touch on just some of the areas to be affected, including the stimulus package, the child tax credit, COBRA continuation coverage, employee retention incentives, and more. Joining us for the discussion is Julio Gonzalez, chief executive officer for Engineered Tax Services and official member of the Forbes Finance Council.
What do you think the general tax impact of the recently signed American Rescue Plan Act will be?
[Gonzalez] Certainly, on the individual and small-business side, there's a lot of tax issues to dissect and it's great that you guys are getting that education out because the CPA and accounting community has been hit by so many tax changes since 2017 tax reform and then, last year, two different significant tax acts. Now we have the stimulus act here, so a lot of changes and more coming.
A lot to touch on here, so we'll just hit on some of the highlights: Can you give us a summary of the stimulus payments, which are being set up as recovery rebate credits?
[Gonzalez] $1,400 per individual, 2,800 per couple. And, of course, children as well. $1,400 each. So again, this is being based off the last filed tax returns. If you filed 2019 tax returns, you have not filed 2020, they're going to be looking at that because this cut-off here is really $75,000 per individual, $150,000 per household. It creeps up a little bit, but that's really the maximum. So they'll be looking for whatever's filed most recently. If you need to track this, you can go to irs.gov. There's a tracking link there so everyone can at least track this as well. One important thing here that we should say: if you did not get your stimulus checks in the last two acts, you can file that on your current tax return on line item 33, showing that you did not receive that, and that can be refunded to you during the 2020 tax return. Hopefully you're getting these payments as well.
What do you think the impact will be in the area of a continuation of COBRA coverage?
[Gonzalez] They're going to continue it. Really, through the Affordable Healthcare Act, it's going to be significantly discounted free up to $19,000 in earnings and then significantly discounted to $51,000 in earnings. So those payments are going to be far more affordable going through this year to help those people in certain stress that have lost their jobs or are just trying to get back on their feet.
The first in a series of credits that are being affected here: What are the details on the expansion of the child tax credit?
[Gonzalez] Here in 2021, the tax credit goes up to $3,600 for children zero to five. Then it drops down to $3,000 for children six to 17. Again here, like the stimulus check, that's up to $75,000 income per individual, $150,000 for families as well.
Now, the child tax credit doesn't go away for people over $150,000 in households. It still stays at the $2,000 mark for household income up to $400,000. The big change here is that this tax credit is fully refundable. You put it on the tax return and, to the extent that it exceeds income tax due, it's fully refundable, where in the past year is it just carried forward. That's a big change as well.
What are we seeing in relation to the child independent care credit?
[Gonzalez] Very similar. Here, with the child independent care credit program, you're basically now getting some additional funds for children care at home, or outsourced as well. So again, some additional money, not as significant, but these are really prevalent for all families.
What impact will we be seeing on the earned income tax credit?
[Gonzalez] The earned income tax credit obviously is significant in the sense if we look at our earnings jointly, right? Now, we're going to get a tax credit up to 10% of those earnings, again, stipulated to these household income levels. Really, if you think about it ties into the employee retention tax credit. So, in 2020, we had a max of $5,000 per employee. This changes in 2021 to max of $7,000 a quarter, or 28,000 per employee. That's significant. $7,000 per quarter, so a total of 33,000 in employee tax credits.
Now, in 2020, you had to have shell 50% decrease in gross receipts for the quarters of 2021. That drops down to 20% of revenue or a partial shutdown. Again, this was decoupled with the PPP program, which remember when we first had the CARES Act come out, you had to take one or the other. They decoupled that and so now you can take both. So, really you can go back and amend last year's tax return to take advantage of the $5,000 credit, even if you took the PPP funds, and now you can take the $7,000 credit per quarter through 2021.
How about the family and sick leave credits? What's being altered there?
[Gonzalez] Altered there really is the sense that it's more forgivable to the employer and the employees. Last year, obviously we had some limitations as an employer to the fact that the employee can earn some of those credits up to a significant time of being out of employment.
That was due to the COVID testing. That's been far less expanded in a sense that it's much more friendly in 2021.
So we're going to have friendlier rules, and people can continue to be careful and not be concerned about losing their job because of COVID and testing positive and taking some time for that. Obviously, the employer now can also refund some of those credits of the Social Security tax and healthcare tax paid in for that employee.
Like we said, such a huge piece of legislation. We're hitting on some of the highlights here and we'll close it with another credit that's received immense attention: the employee retention credit. What are the developments there?
[Gonzalez] Significant, significant. So really this is the home run for every small business. Now this relates to drop in income.
So if you had drop in income, if you experienced some partial shutdowns, significant credits per employee that you maintained salary with, that's the big part of it. You maintain to pay the employee, even though you had a significant drop in revenues. Ultimately, now you can claim that as a credit against your 2020 and 2021 returns. Those are really important. I think every employer should make sure that they claim them in 2020, and also make sure that they're taking advantage of them in 2021.