The American Rescue Plan Act (ARPA) was signed into law in 2021, to help the country recover from the COVID-19 pandemic. The pandemic had severe knock-on effects for the economy. But ARPA aims to help remedy that, by bringing relief to families across the country.
As such, the plan could affect your tax planning, especially in terms of credits and deductions for individuals and small businesses. And even though some of the provisions of the Act have already expired, others remain valid. These should be accounted for in your tax strategy. In this blog, we’ll help you navigate ARPA to maximize your potential benefits.
Understanding the ARPA
The American Rescue Plan Act aimed to budget around $1 trillion for economic recovery for working families, through a few key tax provisions.
These include:
- An increased credit amount for the Child Tax Credit (CTC). The amount was increased from $2000 per child to $3,600 for children under 6, and $3,000 for children from 6 to 17. The Act also enacted advanced monthly payments for eligible families, of up to 50% of the total credit value. Finally, this credit was made totally refundable.
- A higher expense limit for the Child and Dependent Care Tax Credit. The limit rose from $3,000 to $8,000 for one qualifying individual, and from $6,000 to $16,000 for two or more. Similarly, the maximum credit percentage was increased from 35% to 50%, and it was made fully refundable.
- Expanded eligibility for the Earned Income Tax Credit (EITC). The Act lowered the minimum age to claim the childless EITC from 25 to 19, and eliminated the upper age limit of 65. The maximum credit for childless workers also increased to nearly triple the amount, while allowable investment income rose from $3,650 to $10,000. Finally, certain married but separated individuals became eligible to claim the credit as single filers.
- A third round of Stimulus Payments. $1,400 was provided for each eligible individual, including dependents.
- Subsidies for premium tax credits. This helped reduce many healthcare premiums. Also, the Federal Poverty Level (FPL) cap was eliminated.
- Exclusion of Unemployment Compensation. For the 2020 tax year, individual taxpayers with adjusted gross income (AGI) under $150,000 were allowed an exclusion of up to $10,200 in unemployment benefits from taxable income.
The purpose of the amendments
Despite the wide-ranging relief options granted by the American Rescue Plan Act, it was signed into law for the sole purpose of helping Americans. This includes increasing the amount of money available to a lower or middle-income family. That way, the Act helps citizens guard against any surprise tax bills on unemployment insurance, and ensures families can stay in their homes.
How the Act Affects your 2024 Taxes
By now, several of the key features of the American Rescue Plan Act mentioned above have expired, or changed back to their original status.
But some changes still apply. You’ll need to keep these in mind during tax preparation. These can influence your individual income tax strategies, as well as those for small businesses.
Individuals
Premium tax credits have been extended through 2025. While the ARPA temporarily expanded eligibility, they were once again extended under the Inflation Reduction Act. So you can still benefit from the credits when buying health insurance through the ACA marketplace.
Small businesses
As with the premium tax credits for individuals, if your small business buys health insurance through the ACA marketplace, you might still benefit from the 2025 extension. This is especially true if your income is variable or if your business’s revenue impacts your personal AGI.
Speaking of credits, be cautious with retrospective Employee Retention Credit (ERC) claims. The credit itself is no longer available for wages paid in 2022 and beyond. However, if your business qualified for the ERC in 2020 or 2021 and did not claim it, you can still do so retroactively by amending your payroll tax returns (Form 941-X).
The same is true for paid sick leave, and family leave credits. If your company didn’t claim these credits for eligible periods, you can still file amended payroll tax returns to capture any missed credits.
If you’re unsure of how to file amended returns to make use of any unclaimed credits for which your business was eligible, we can help.
While many of the American Rescue Plan Act’s federal provisions may have expired, your small business may still be eligible for extended or similar relief measures at state level. As such, make sure you stay informed about any potential programs that are available.
Impact on Current Tax Planning
With some of the Act’s benefits still available, and the possibility of claiming credits retroactively, it’s important to factor the Act’s tax changes into your tax strategy.
For example, if you buy health insurance through the ACA marketplace to make use of Premium Tax Credits (PTCs), you’ll need to accurately estimate your annual income to avoid repayment at tax time. This might mean that you’ll need to adjust your income to stay within the optimal range for maximum eligibility. One way to do this effectively is through tax-efficient investments. By contributing the maximum allowable amounts to tax-advantaged accounts, you can reduce your AGI, which can help in qualifying for other credits and deductions.
It is also still possible to apply for any of the credits and deductions available under the Act. But remember that these will have reverted to their lower pre-ARPA levels. As such, it’s worth contributing to retirement accounts or timing your income – especially if you sell assets and may be liable for capital gains tax – to maximize the credit by staying within the income limits.
For advice tailored for your family or business, consider reaching out to a tax professional who can help you create bespoke strategies for your financial situation.
That way, you can also ensure that you are compliant with all tax regulations.
Tax Compliance
Understanding and abiding by tax changes introduced by the American Rescue Plan Act or other acts is a crucial aspect of maximizing any potential benefits. It can also help you minimizing possible penalties.
This includes careful tracking and reconciliation on your tax return. Any errors could result in IRS fines, audits, and being disqualified for other credits. Also, in worst-case scenarios, there may even be legal action against you or your business. This is especially true if your business is retroactively claiming credits.
It’s essential to ensure that your tax strategy doesn’t just account for how to maximize savings for credits and deductions still available. You also need to document, track, and report any claims as accurately as possible.
For help navigating any aspect of your personal or business taxes, schedule a Discovery Call with one of our CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.
