What's included in the American Rescue Plan Act of 2021
Week number 53 means we are into the 2nd year of Covid-19. Does it feel like a year? Has our perception of time changed? Do we have better visibility into life after Covid-19? When will we be done with the pandemic? How will we look back at this last year? The answers to these questions, as well as many more will be forthcoming.
Another priority is an analysis of what the United States did right and did wrong so we can get better at this should we face similar circumstances in the future. With the passage last week of the American Rescue Act (ARA) we have definitely taken a step forward on managing and funding vaccinations, testing, a plan for schools reopening, and financial help to all Americans. This bill is more oriented to middle and low income Americans with less funding to businesses. The majority of the funds are characterized as a transfer of funds for the next year. The long awaited third stimulus package also includes some longer term benefits for families and children.
For us at SAS, the year has passed pretty quickly. Our business is very suitable for virtual/remote servicing so we moved seamlessly to Zoom although we started out using Google meet for a short period beforehand. Though the beginning of Covid-19 led to a severe and rapid sell-off in the stock market and a reduction of interest rates to zero, the equity markets recovered in record time. Believe it or not, the recession in the 2nd and 3rd quarter of 2020 has not even been declared. Not surprising because the declaration of a recession always lags the actual recession.
Funds from the ARA should hit bank accounts this week. Next week we will discuss the Act in more detail in regard to provisions that might apply to clients. In the meantime, the Federal Reserve meets this week and will issue its first summary of economic conditions since December 16th. Markets will respond and the ensuing movement could express some concerns in regard to the recent increase in intermediate and long term interest rates. How is the Fed going to respond to this massive fiscal stimulus? How will they set expectations for interest rates and monetary policy going forward? The economy is set to roar with GDP growth expectations at a level that we haven’t seen in decades.
A great deal of attention is being paid to the difference between the current ARA rescue package, the Trump administration CARES act, and the TARP fiscal package following the 2008 financial meltdown. The size of the current combination of packages dwarfs what was passed in 2009. The reason for the financial meltdown was financial excess and the rescue package was aimed mostly at large businesses especially financial institutions and the suffering happened to individuals and families. It was a black swan event that was characterized by internal greed and stressed the financial system to excess. The 2020 economic calamity was caused by a pandemic. A black swan that was external to the economic and financial system. We learned from the rescue package of 2009 that it was too small and led to tepid rebounding in growth for the decade following 2009. The lesson is to go big and then bigger. Also, the politics have changed. Concern about the debt in 2009 caused the rescue package to be smaller and also resulted in the emergence of the tea party movement. We see no evidence so far of that sort of backlash. Interesting.
Taxes May 17th, 2021
Tax date has been moved yet again. This year’s “tax day” has been pushed a month later, til May 17th. With the passing of the ARA, the IRS decided to postpone the tax filing deadline since there are new variables to tax filing this year that will impact the resulting stimulus individuals and families receive.
What's in the American Rescue Plan of 2021
The American Rescue Plan of 2021, is intended to drive $1.9T of economic stimulus and provide fiscal relief in response to the ongoing COVID-19 pandemic.
The plan includes a $1,400 round of stimulus checks to every individual who qualifies and eligibility is based on the most recent tax return’s AGI the individual has on file, either your 2019 return or your 2020 return for those who have already filed this year. Qualified parties include adults (single who earn less than $75k/year, and married who earn less than $150k/year. This round also includes ALL dependents in the household which can include children beyond age 17, and even expands to college students who are still claimed as dependents and parents who are claimed as dependents.
Income phase outs for this third round of stimulus are more stringent that the CARES act of 2020. The phase out for a single individual is a full $1,400 benefit to those earning less than $75k and a partial benefit to those earning between $75k-$79k. For married couples the threshold is a full benefit to those earning less than $150k and a partial benefit to those earning between $150k-159k.
Child tax credit edits (for 2021)
The ARA also expands the Child Tax Credit from $2,000 to $3,000 and up to $3600 for children under age 6. It also allows for a higher age threshold allowing for up to a 17 year old child to qualify in 2021 (same income thresholds as the stimulus apply here for the addition to the Child tax credit, while the previous $2,000 credit can still be received by families at higher income thresholds of $200,000 and $400,000 respectively). Households who earn beyond $400K annually will be phased out completely from the benefit, where in prior years they would have received a small benefit despite earnings above $400k. calculator:https://www.kiplinger.com/taxes/602334/2021-child-tax-credit-calculator
Expanded unemployment benefits
Includes a supplemental weekly $300 on top of the traditional $450 weekly payment, a continuation of what we saw through the CARES act.
Enables the self employed to continue to receive Pandemic Unemployment Assistance (PUA) through September 2021. This is great news for unemployed self employed individuals whom prior to 2020 have not qualified for unemployment benefits.
Final provisions of the American Rescue Plan also designate up to $10,200 of unemployment compensation received in 2020 to be tax-free so long as the taxpayer(s) are below $150k AGI, so effectively $149,999 since the threshold acts as a true cliff for benefits access triggered at $150,000. At $149,999, $10,200 of benefits are tax free. At $150,000 AGI ALL unemployment benefits are taxable.
Healthcare
COBRA subsidies for healthcare for the unemployed with no alternative access to health insurance
Student Loans
Student Debt forgiven from 2021 through 2025 will be income tax free.
In general, when an individual has debt that is discharged, the amount of the discharged debt becomes taxable income to the individual (as though they had received ‘bonus income’ that they used to pay off the balance of the loan). The ACA provides a pathway for forgiven debt to not turn into a tax obligation for the debtor whose debt was forgiven.
