5 Hidden Tax Benefits from the American Rescue Plan

By Mitchell J. Smilowitz, CPA

When President Biden signed the American Rescue Plan Act of 2021 into law, reports focused on the $1,400 stimulus payments most Americans would receive. But the $1.9 trillion legislation offers benefits that go far beyond the stimulus payment to taxpayers. Here are five additional programs for which you may qualify.

Stimulus Payments for College Students and Adult Dependents

Unlike previous pandemic stimulus legislation, the American Rescue Plan extends payments to college students and adult dependents. If you claim college students as dependents, you, as the taxpayer, will receive an additional $1,400 stimulus payment for each of them.

Similarly, if you claim an adult dependent, you will receive a $1,400 payment. As with college student dependents, the taxpayer receives the payment, not the dependent.

Please note that income limits apply to any of these stimulus payments. A single person must have modified adjusted gross income (MAGI) of $75,000 or less, $150,000 for married couples filing jointly, to receive the full payment. Payments phase out quickly for those whose income surpasses these limits.

Child Tax Credit

For 2021, the American Rescue Plan temporarily increases the amount of the child tax credit for low- and moderate-income taxpayers to $3,600 per child for children younger than 6 and up to $3,000 for children ages 6 to 17. The tax credit is fully refundable. The tax credit will be distributed to eligible taxpayers in monthly payments beginning in July, according to the IRS.

While the tax credit has increased for 2021, the income threshold was lowered. For married couples filing jointly, the tax credit begins to decrease when MAGI exceeds $150,000; $112,500 for a single head of household. Taxpayers can use their 2019 or 2020 MAGI, whichever is lower, to determine eligibility for the child tax credit.

Child and Dependent Care Credit

The American Rescue Plan expands the Child and Dependent Care Tax Credit by making it fully refundable, increasing the dollar amount of the credit, raising the percentage of expenses you can claim and raising the income limits. To claim the credit, a married couple generally must file jointly and both spouses must work.

The range of eligible expenses expands to include babysitters, day camps and before- and after-school programs as well as daycare. Expenses paid to care for dependents who are physically or mentally incapable of self-care and lived with you for more than half the year are also eligible for the credit.

The dollar limit on eligible expenses increases from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more.

The maximum percentage you can claim on eligible expenses increases from 35% to 50%. The credit is reduced once MAGI exceeds $125,000 and is eliminated completely once MAGI exceeds $438,000.

Student Loan Forgiveness

Changes to the way student loan forgiveness or cancellation is calculated can offer significant benefits to those who are paying off student debt. You won’t have to pay income taxes on forgiven debt if you’ve been in an income-driven repayment plan for the requisite number of years or if your school defrauded you. This provision remains in effect from January 1, 2021 through the end of 2025.

Unemployment Benefits

The American Rescue Plan exempts $10,200 of unemployment benefits received in 2020 from income taxes. Whether filing singly or jointly, a taxpayer must earn less than $150,000 to claim this exclusion. If you have already submitted your tax return (and paid federal taxes on unemployment benefits), you are entitled to a refund. Because the IRS has not yet provided guidance and instructions for those who have already filed their returns, check with your tax preparer to make sure you receive any refund for which you are eligible.

The American Rescue Plan greatly expanded eligibility for stimulus benefits to college students and adult dependents, the child tax credit and the child and dependent care credit. It also reduced tax liability for student loans that have been forgiven and unemployment benefits. Please check with your tax advisor to determine whether you are eligible for these valuable stimulus programs.


April 2021