If you’re one of the millions of Americans that need a bit of financial help during these trying times then you’re probably elated over President Biden’s American Rescue Plan.
The $1.9 trillion economic stimulus package may sound like it’s too big, worrying some people that it may have harmful effects on our economy. But that couldn’t be further from the truth, as it is actually designed to help countless individuals start fresh, so to speak.
It’s been over a month since it was signed on March 11, but if you’re still unsure of how it’s supposed to work, read on to find out where the money is being sent and why. Pretty much every American household will be impacted, with most people believing that those who suffered the most during the COVID-19 pandemic will be getting a significant amount of help.
Is this true? The fact of the matter is that even they won’t see a huge or meaningful impact right off the bat, largely because there are too many Americans that need help, so the money is stretched thin. But does that mean that the stimulus package is insignificant? Far from it.
In fact, today we’ll show you exactly how the $1.9 trillion economic stimulus package will go above and beyond in order to help millions of people keep some money in their pockets when they need it most!
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$1,400 Stimulus Checks
It seemed like the entirety of the U.S. breathed a sigh of relief when the $1,400 stimulus checks were announced. Granted, some individuals would have hoped for more while others were worried that the government was giving away far too much money. Still, it’s undoubtedly clear that the people needed it.
Eligible people got $1,400, couples got $2,800, and dependents of any age also got $1,400- but only if their income was under a certain number. As you well remember, the same thing happened with the first and second stimulus checks, meaning that some Americans didn’t receive anything, allowing the money to reach only those that needed it the most.
Single filers with an adjusted gross income (AGI) of $75,000 will have noticed by now that their stimulus checks have been phased out. Heads of households with an AGI above $112,500 and married couples who filed jointly with an AGI of $150,000 would have experienced the same reduction in terms of the first and second stimulus package.
$1,400 Stimulus Checks, Part 2
For single filers with an AGI above $80,000, joint filers with an AGI over $160,000 and heads of households with an AGI that exceeded $120,000, the third round of checks have been phased out.
But what about nonresident aliens? They and anyone who could have been claimed as a dependent on someone else’s tax return did not qualify for a stimulus check either.
But some eligible individuals who did not get the third stimulus check are worried. Should they be? No. In fact, if you are eligible but did not receive the full amount you can claim the difference as a recovery rebate credit when you file your 2021 tax return.
How many people suddenly lost their jobs due to the coronavirus pandemic? As unemployment skyrocketed, millions of Americans were left to fend for themselves, especially since actually getting their unemployment benefits proved to far more difficult than initially anticipated, largely due to the sheer number of individuals that applied.
Thankfully, these benefits were also provided for self employed people and independent contractors, as well as many others who wouldn’t have been able to claim them otherwise. Through July 2020, weekly benefits were increased to $600.
Then December came and more changes were made though the COVID-Related Tax Relief Act. Even those who didn’t normally qualify for unemployment were able to get benefits. Due to another payment being authorized, people received $300 per week instead of the usual $600 as the number of weeks an individual could claim unemployment benefits rose to 50 from 39.
Millions waited for March 14, when these benefits were set to expire, hoping for the government to catch up and provide further aid.
Unemployment Benefits, Part 2
That’s where the American Rescue Plan comes in, extending the deadline to September 6, 2021. What this means is that eligible people would receive $300 per week in addition to the normal unemployment compensation. But did you know that the original number was set to $400 by progressives? During negotiations with the Senate, this was pushed down to $300.
It doesn’t stop there, as a new tax break was also introduced for those unemployed. The first $10,200 in employment benefits you received in 2020 is exempt from tax for certain households, namely those with an AGI of $150,000 or less. Unemployment compensation received does not count towards the $150,000 cut off.
If you already filed your 2020 tax return, then the IRS is still figuring out how you could claim this new tax exemption- you have not been forgotten!
Child and Dependent Care Tax Credit
If your family had to juggle work, the dangers of the pandemic, and child care all at once over the past year, you’re not alone. Thankfully, the American Rescue Plan expanded the child and dependent care tax credit for one year, allowing countless households some much needed relief. After all, child care is a major expense during normal years, but it became much more than some families were able to afford during the pandemic.
Here’s the difference between then and now.
For the 2020 tax year, you were eligible for a 20% to 35% non-refundable credit for up to $3,000 in child care expenses for one child under the age of 13, or $6,000 for two or more children under the age of 13. As income exceeded $15,000, the percentage went down.
Child and Dependent Care Tax Credit, Part 2
Now, the American Rescue Plan makes the credit refundable for this year, helping households with lower income. Why? Because when the credit is non-refundable, they are likely to lose all (or some, in certain scenarios) of the credit’s worth. Not only that, but the plan also boosts the percentages to 35% – 50%.
The credit is also boosted from $3,000 for a single child to $8,000 and from $6,000 for two or more children to $16,000. The top credit for this tax year will sit at $4,000 for one child and $8,000 for multiple children when combined with the 50% maximum credit percentage.
Families that make less than $125,000 a year will receive the full credit, those that make between $125,000 and $440,000 will receive at least a partial credit, after which the credit starts to phase out.
Child Tax Credit
A child tax credit increase is also on the menu. In 2020, for a child 16 and under, the credit is worth $2,000, but it starts to also phase out as income rises above $200,000 on heal-of-household and single returns, $400,000 on joint returns.
Some lower-income taxpayers that earn an income of at least $2,500 get a partially refundable credit of up to $1,400 per qualifying child. In this case, the IRS will issue a refund for the refundable amount if the credit is worth more than the income tax liability.
The American Rescue Plan also affects child tax credits.
Child Tax Credit, Part 2
The plan provides a one-year expansion for the 2021 tax year. Furthermore, it also changes the amount of the credit, from $2,000 to $3,000, including $3,600 for children 5 and under.
Families with higher incomes will see a partial or full reduction of the credit. For example, if you’re single with an AGI above $75,000, the extra amount starts to phase out. Married couples filing jointly with an AGI above $150,000 and heads of households with an AGI above $112,500 will also experience this phase-out.
The best news is that the credit is also fully refundable, while 17-year-old children also qualify for this 2021 credit. So if you qualify and have a child that turned 17 this year, you can expect an additional $3,000.
When will the credit amount be paid? In advance through periodic payments issued between July and December 2021. Whether these payments will be monthly or not is up to the IRS.
Earned Income Tax Credit
The earned income tax credit, also known as EITC, is a great incentive for people to work.
The maximum EITC sits between $538 and $6,660 for the 2020 tax return, and it all depends on your income and how many children you have- of course, there are also income limits for this credit.
Singles with no children must have a 2020 earned income and AGI under $15,820, while joint filers must not go above $21,710. Things change if you have children, as married couples with three or more kids can have a 2020 earned income and an AGI as high as $56,844.
Don’t have a qualifying child? In that case, you must be between 25 and 64 to claim the credit.
Earned Income Tax Credit, Part 2
Here’s how the American Rescue Plan expands the 2021 EITC. First, for those without children, it lowers the minimum age to 19, though certain full-time students don’t qualify. Not only that, but it also removed the upper age limit, allowing seniors over the age of 65 to claim the 2021 credit as well.
For childless workers, the credit is boosted from $542 to $1,502. You can use your 2019 earned income instead of your 2021 income to boost your credit amount, providing extra help for those who lost their jobs this year.
In addition to this, the American Rescue Plan also introduces some permanent changes to EITC. If your children cannot satisfy the identification requirements, you can claim the childless EITC instead. What’s more, some married but separated couples can claim the EITC on separate tax returns, and finally, the limit on an individual worker’s investment income is also increased to $10,000 from $3,650.
Student Loan Debt
Student loan forgiveness has been a hot topic since even before Biden took office. And while these changes aren’t anywhere close to loan forgiveness, they’re definitely going to improve the lives of countless students that are struggling financially, or that will struggle once they finish their studies.
When a portion of a debt is forgiven, canceled, or discharged, it must be reported on your tax return. For example, you must report $20,000 of additional income on your tax return if a $20,000 loan is forgiven. It’s because of this rule that student loans that are forgiven lean to higher tax bills.
Student Loan Debt, Part 2
The new plan adds an exception to this rule for student loans, albeit temporarily. That means that starting in 2021 to 2025, student loan debt forgiveness is not subject to federal income tax, though the plan does not actually forgive any student loan debt. This means that this new rule only applies to debt canceled under current student loan forgiveness plans.
As such, not a lot of students or former students have their student loans swiped away. But will this change? Supposedly, yes, as President Biden promised to forgive up to $10,000 of student loans per person while he was running for office. Whether he will keep that promise or not remains to be seen.
Here’s how it’ll work. Say you’re in the 22% tax bracket. If you have $10,000 of forgiven student loan debt taken off your tax return, you will save $2,200.
We hope this article has cleared the air as to how exactly the American Rescue Plan will affect you or your loved ones. It’s important to be aware of these changes, especially if you’re one of the millions of Americans that will benefit from them!
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