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On March 11, 2021, President Biden signed into law the $1.9 trillion American Rescue Plan Act of 2021 (“ARPA”), the third relief package implemented to address the COVID-19 pandemic.

The bill extends aid to millions of households and provides money for small businesses, schools, governments, and vaccine distribution. The package also includes several tax changes that are effective for the 2021 tax year. It is important to consider how these changes may affect your overall tax situation.

Individual Tax Provisions

Economic impact payment/recovery rebate credit. The ARPA includes a maximum payment/credit of $1,400 for a single taxpayer ($2,800 for joint filers), in addition to $1,400 per dependent of the taxpayer. For purposes of this credit, dependent includes both children and nonchild dependents. The credit is subject to phaseouts and is reduced to zero for all taxpayers at the $80,000, $120,000, and $160,000 AGI levels, depending on filing status.

Unemployment insurance. The bill extends the weekly federal benefit of $300 a week through September 6 (it was scheduled to run out on March 14). The bill also includes tax relief on the first $10,200 in unemployment payments in 2020 for workers in households earning up to $150,000. Taxpayers that may have already filed their 2020 returns before passage of the ARPA should consider amending returns if they qualify for the exclusion.

Child tax credit. The child tax credit is fully refundable for 2021, and the maximum amount has increased from $2,000 to $3,000 per child ($3,600 for a child under age 6). The increased credit amounts are subject to phaseouts, and those taxpayers who aren’t eligible to claim the increased credit can claim the regular child tax credit, subject to phaseouts.

Child and dependent care tax credit. The ARPA includes several modifications for 2021. For example, the credit would be fully refundable, and the maximum credit rate would be raised to 50%. The phaseout threshold would begin at $125,000 instead of the previous much lower threshold of $15,000.

Student loan discharges. The ARPA excludes certain discharges of student loans from taxable income after December 31, 2020, and before January 1, 2026.

Business Tax Provisions

COBRA. Eligible individuals may receive a 100% subsidy for COBRA premiums for any period of COBRA coverage during the period beginning on April 1, 2021, and ending on September 30, 2021.

Employer-provided dependent care assistance. The exclusion for employer-provided dependent care assistance increases from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

Employee retention credit. The credit for keeping employees on the payroll has been extended through December 31, 2021.

Revisiting Your Wealth Plan

The American Rescue Plan Act of 2021 is ushering in several changes to the tax environment. Whenever there are tax law changes, it’s always a good idea to review how these changes affect your personal situation.

For more information, please contact your Key Private Bank Advisor.

Publish Date: March 11, 2021.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

KeyBank does not provide legal advice.

Investment products are:

NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY