What Is P.L. 117-2? American Rescue Plan Tax Changes

Public Law 117-2, the American Rescue Plan Act of 2021, was a legislative response to the COVID-19 pandemic. Signed into law on March 11, 2021, this $1.9 trillion package provided relief through direct financial assistance to individuals, aid for businesses, and funding for public health. It followed previous relief measures like the CARES Act and aimed to deliver targeted support to various sectors of the U.S. economy.

Tax Relief for Individuals and Families

The American Rescue Plan Act authorized a third round of Economic Impact Payments. These payments were $1,400 for each eligible individual and qualifying dependent. Eligibility was based on adjusted gross income (AGI), with payments phasing out for individuals with an AGI over $75,000 and married couples with an AGI over $150,000.

The payments were structured as advance distributions of the 2021 Recovery Rebate Credit. The IRS used 2019 or 2020 tax information to issue the payments automatically. Individuals who did not receive the full payment they were entitled to based on their 2021 income could claim the remaining amount when they filed their federal income tax return in 2022.

A cornerstone of the act was the one-year enhancement of the Child Tax Credit for the 2021 tax year. The law increased the credit amount to $3,600 for each qualifying child under age six and to $3,000 for each child between ages six and seventeen. The qualifying age limit was previously sixteen.

For 2021, the credit was made fully refundable, meaning families could receive the full amount even if they had no tax liability. A new feature was the introduction of advance monthly payments. From July through December 2021, the IRS issued half of the total estimated credit amount in periodic payments directly to eligible families.

The remaining half of the credit was claimed on the 2021 tax return. To facilitate this, the IRS required taxpayers to reconcile the advance payments they received with the total credit amount they were eligible for using Schedule 8812. The IRS sent Letter 6419 to taxpayers detailing the total amount of advance payments they received. These enhancements were temporary, and the credit has since reverted to its prior rules. For the 2025 tax year, the credit is worth up to $2,000 per child, with a refundable portion of up to $1,800.

The act also temporarily expanded the Earned Income Tax Credit (EITC) for the 2021 tax year, specifically targeting workers without qualifying children. This group, often referred to as “childless workers,” saw the maximum credit available to them nearly triple. The income limit to qualify for the credit was also raised, and the minimum age to claim the childless EITC was lowered from 25 to 19 for most workers. The upper age limit of 64 was also eliminated for 2021, but these expanded benefits have since expired.

Significant changes were made to the Child and Dependent Care Credit for the 2021 tax year, making it more generous. The credit was made fully refundable, and the maximum credit rate increased from 35% to 50% of qualifying expenses. The amount of eligible expenses that could be claimed rose to $8,000 for one qualifying individual and $16,000 for two or more. The income threshold at which the credit begins to phase out was raised to $125,000 of AGI. These enhancements were for the 2021 tax year only.

Support for Businesses and Employers

The American Rescue Plan extended and enhanced the Employee Retention Credit (ERC), a refundable tax credit for businesses and tax-exempt organizations that was created under the CARES Act. For 2021, the credit was calculated as 70% of qualified wages, with the wage limit set at $10,000 per employee per calendar quarter. This meant a business could claim a maximum credit of $28,000 per employee for the year.

Eligibility for the 2021 credit required a business to have experienced either a full or partial suspension of operations due to a governmental order or a significant decline in gross receipts. It is important to note that the Infrastructure Investment and Jobs Act later retroactively terminated the ERC for most employers as of September 30, 2021.

The legislation also infused the Paycheck Protection Program (PPP) with additional funding. It expanded eligibility to include a broader range of nonprofit organizations and certain internet-only news and periodical publishers. The act allocated funds to ensure the program could continue accepting and processing applications until its statutory expiration date.

A new initiative established by the act was the Restaurant Revitalization Fund (RRF). This program provided $28.6 billion in grants for restaurants, bars, food trucks, and other eligible food businesses that suffered pandemic-related revenue loss. The grants were intended to cover operating expenses, including payroll, rent, and utilities. The Small Business Administration stopped accepting new applications in July 2021 after the initial funding was exhausted.

Grant amounts were calculated based on the business’s pandemic-related revenue loss, with a maximum of $10 million per business group and $5 million per physical location. The grants were not considered taxable income at the federal level, and businesses could still deduct the ordinary business expenses that were paid for with the grant funds.

The act extended the availability of paid sick and family leave credits that were first established under the Families First Coronavirus Response Act (FFCRA). These credits reimbursed employers for the cost of providing paid leave for specific COVID-19 related reasons from April 1, 2021, through September 30, 2021.

For this extended period, the limit on the amount of paid family leave wages eligible for the credit was increased to $12,000 per employee. The list of qualifying reasons for leave was expanded to include time taken to receive a COVID-19 vaccine or to recover from any health issue related to it. The 10-day limit for paid sick leave per employee was also reset on April 1, 2021.

Healthcare Affordability and Insurance Provisions

A healthcare provision in the American Rescue Plan created a temporary, 100% federal subsidy for COBRA continuation coverage premiums. This assistance was available from April 1, 2021, through September 30, 2021, for individuals who had lost their employer-sponsored health insurance. To be eligible, an individual must have lost their group health plan coverage due to an involuntary termination of employment or a reduction in hours. The subsidy covered the entire COBRA premium for the eligible period and was not considered taxable income.

The act also implemented enhancements to the Premium Tax Credit (PTC), a credit that helps cover premiums for health insurance purchased through the Affordable Care Act (ACA) marketplace. These changes, originally for 2021 and 2022, were extended by the Inflation Reduction Act of 2022 and are currently set to last through the end of 2025.

First, it eliminated the “subsidy cliff.” Previously, PTC eligibility was cut off for households with incomes above 400% of the federal poverty line. The American Rescue Plan removed this upper income limit, ensuring that no one would have to pay more than 8.5% of their household income for the benchmark silver plan.

The second change was an increase in the amount of the credit for all eligible taxpayers. The law reduced the percentage of household income that individuals were required to contribute toward their health insurance premiums at all income levels. This made coverage more affordable for those purchasing plans on the ACA marketplace.

Changes to Information Reporting and Other Provisions

The American Rescue Plan enacted a change to the information reporting requirements for third-party settlement organizations (TPSOs), such as PayPal and Venmo. The act lowered the reporting threshold for Form 1099-K, “Payment Card and Third Party Network Transactions.” Previously, a TPSO was only required to issue a Form 1099-K if payments for the year exceeded $20,000 and there were more than 200 transactions.

The new rule lowered this threshold to a flat $600 in total payments for the year, with no minimum transaction count. This change was intended to capture more income from the gig economy and online sales, thereby improving tax compliance. While the act set this lower threshold to take effect for the 2022 tax year, the Internal Revenue Service (IRS) has delayed its implementation. For the 2024 tax year, the IRS has planned a phased approach with a reporting threshold of $5,000.

Another provision addressed the tax treatment of forgiven student loan debt. The law stipulated that most student loan debt discharged for any reason from January 1, 2021, through December 31, 2025, would be excluded from federal gross income. This means that borrowers whose loans are forgiven during this period will not have to pay federal income tax on the discharged amount.

This tax-free treatment applies to a wide variety of student loans, including federal loans, loans issued by private lenders, and loans from certain educational institutions. The provision was enacted to prevent a large tax bill for individuals who might benefit from future student loan forgiveness programs. It provides a five-year window during which the cancellation of student debt will not create a federal tax liability.