7 Hidden Tax Credits in Democrats’ Latest Relief Bill

The most widely known provision of the $1.9 trillion relief package before Congress might be a third round of stimulus payments, but that measure is hardly alone. The American Rescue Plan Act of 2021, as it’s currently known, is hundreds of pages long.

The stimulus payments, which are technically tax credits, aren’t even the only provision of the legislation that stands to affect Americans’ income taxes. For example, the relief package would change multiple federal tax credits, at least temporarily.

So, here’s a look at some of the ways your federal income taxes could change if the version of the American Rescue Plan Act passed by the Democratic-controlled House of Representatives on Saturday becomes law.

Discussions in the Senate indicate that some parts of the pandemic-related legislation are liable to change before passage. But the following provisions are not among those hotly contested, for the most part. Additionally, many of these provisions are actually echoes of campaign promises made by Democratic President Joe Biden.

Another recovery rebate credit

Your potential third stimulus payment technically would be a tax credit that is paid in advance. It’s called the recovery rebate credit.

So, just as most taxpayers received two stimulus payments last year and eligible folks who didn’t receive the payments can instead claim the recovery rebate on their tax return this filing season, the same rules would be in effect for this latest stimulus payment: Either you get the payment this year, or claim the rebate next tax season.

You can learn more about the third round of payments in “Why Your Next Stimulus Check Might Be Bigger Than You Expect.” Note, however, that at least one aspect of these $1,400-per-person payments is expected to change before legislation is signed into law: the upper end of the eligible income ranges.

The Hill reported Wednesday that under an alternate version of the relief package that the Senate is considering, individuals earning $80,000 or more would not receive a payment at all, whereas that cutoff was $100,000 in the version of the bill passed by the House. Couples earning $160,000 (as opposed to $200,000) or more would not receive a payment at all.

This basically would mean fewer households with well-above-average incomes would qualify for a third stimulus payment. The lower end of the eligible income ranges would not change.

A more generous earned income credit

The American Rescue Plan Act calls for several changes to the earned income credit, which is a refundable tax credit for taxpayers with low to moderate incomes.

For example, current eligibility requirements for the credit say you must have at least one qualifying child — or, if you don’t have a qualifying child, you must be at least 25 but less than 65 years old. The House’s legislation would lower the minimum age from 25 to 19 for some taxpayers (24 for typical college students), and eliminate the maximum age for 2021. That would enable more young adults and seniors to qualify for the credit when they file their taxes next year.

The House-passed version of the legislation would also make the earned income credit more valuable for people without qualifying children. The maximum amount of the credit would rise from $543 to $1,502 for such taxpayers.

Biden’s official campaign platform also called for expanding the earned income credit to make it available to older workers, as we detailed during the campaign season in “5 Ways Joe Biden Would Reshape Retirement.”

A more generous child and dependent care credit

The child and dependent care credit is a nonrefundable tax credit for eligible taxpayers who pay for child care so that they can work.

The American Rescue Plan Act would make the credit more valuable, including making it refundable, for the 2021 tax year.

A nonrefundable tax credit can lower your tax bill but cannot increase your refund or result in you receiving a refund when you otherwise wouldn’t. A refundable credit, on the other hand, potentially puts more money in your hand: It can increase your refund or result in you receiving a refund even if you don’t owe any taxes.

Biden’s campaign platform also promised an expansion of the child and dependent care credit, including making it refundable, as we detailed in “7 Ways Your Taxes Could Change Under Biden.”

A more generous child tax credit

The child tax credit is a partially refundable tax credit for eligible parents who have qualifying children age 16 or younger.

Under the House-passed American Rescue Plan Act, the credit for the 2021 tax year would be:

• Fully refundable
• Worth more money — $3,000 per child ($3,600 per child under age 6)
• Available for qualifying children age 17 or younger

The legislation also directs the Treasury Department to set up a program to pay out the child tax credit in advance installments. So, instead of someone who qualifies for the credit in 2021 receiving the money when they file their return in 2022, they would receive the money in installments this year.

All of these changes to the child tax credit are exactly as proposed by Biden when he ran for president (although he did not specify for how long he intended them to last). So, you might think it’s safe to assume that with a Democratic-led Congress, these changes will survive the rest of the legislative process intact. But it’s possible that at least the provision calling for advance payments of the child tax credit could change.

In a press announcement issued Tuesday, Sen. Mike Crapo (R-Idaho) of the Senate Finance Committee and Sen. Chuck Grassley (R-Iowa) of the Senate Judiciary Committee noted that they have requested more information from the IRS about the feasibility of regular, advance payments of the child tax credit.

Their latest letter to the IRS, dated March 1, notes that the federal agency would need nine to 12 months to update its technology for the change, and an estimated $393.1 million to cover the costs of technology changes, staffing and outreach.

3 health-related tax breaks

The American Rescue Plan Act also includes several new or improved tax credits that are for health insurance premiums or designed to help households stricken by the coronavirus. The Journal of Accountancy reports that these credits include:

• COBRA premium credit: The legislation creates a refundable, advanceable credit for COBRA continuation coverage premiums. (“COBRA” refers to a federal law that enables workers to continue to be covered by employer health benefits for a temporary period, such as after a job loss.)
• Premium tax credit: The legislation expands this credit (which is for Affordable Care Act insurance premiums) for 2021 and 2022, which also echoes Biden’s campaign platform.
• Family and sick leave credits: The legislation extends these credits for paid sick leave associated with the pandemic (which were established by the Families First Coronavirus Response of 2020) to Sept. 30.