Yesterday, President Biden signed into law his first legislative act related to the COVID-19 crisis. Among its near 600-page content, the American Rescue Plan Act of 2021 (ARPA) provides a 2021 $1,400 Recovery Rebate Credit (RRC) per eligible individual and dependent. Dependents include qualifying children and qualifying relatives. Contrarily, the rebates under the CARES Act only included qualifying children. Today we will discuss the details of the 2021 RRC, including the advanced payments, which are expected to begin disbursement soon.
Adjusted Gross Income Limitations
If you have adjusted gross income (AGI) of $75,000 or less ($150,000 for married filing joint) you will receive the full 2021 RRC. If your income is over this threshold, the credit will be reduced and phase out completely for those with AGI of $80,000 and above ($160,000 and above for married filing joint). By contrast, the 2020 RRC under the CARES Act phased out completely at $99,000 ($198,000 for married filing joint).
Advanced payments of the 2021 RRC will not be offset by any debt referred to the treasury offset program, debts owed to other federal agencies, past state income tax obligations, unemployment compensation debts, or other assessed federal taxes and back child support. You may recall, under the CARES Act, the 2020 RRC was subject to offset for back child support.
Advanced payments of the RRC will be made based on your 2019 income tax return, unless you have already filed your 2020 income tax return when the advanced payments are sent. If you have already filed for 2020, the advanced payment will be based on your 2020 income tax return.
Prepaid debit cards used to send advanced payments of the 2020 RRC will not be used again for the 2021 advanced payment. Advanced payments for the 2021 RRC will be paid on a new prepaid debit card, where applicable. However, most will receive the payment by direct deposit or check.
Advanced Payments in Excess of 2021 Recovery Rebate Credit
The 2021 RRC is a refundable credit that cannot be reduced below zero. Therefore, if you receive an advance payment based on your 2019 or 2020 tax return, but your 2021 AGI is above the limits described above, you will not have to repay the credit.
Maximizing the Recovery Rebate Credit
If your 2020 AGI is higher than your 2019 AGI, you may want to delay filing your 2020 return until you have received the 2021 advanced payment based on your 2019 return. If you have not received the advanced payment by April 15, 2021, you can file Form 4868 to request an extension of time to file until you receive the advanced payment.
If your 2019 AGI does not qualify and your 2020 AGI is just above the threshold to receive an advanced payment of the 2021 RRC, consider making a deductible IRA contribution before April 15, 2021, to reduce your 2020 AGI and file as soon as possible.
If you could be claimed as a dependent in 2019 but cannot be claimed as a dependent in 2020, you should file your 2020 tax return as soon as possible to claim your 2020 RRC and ensure you will receive the 2021 RRC advanced payment, assuming your AGI is below the limitations noted above.
Unmarried parents who share custody and have an agreement to alternate claiming their child(ren) as dependents should work together to maximize their 2020 and 2021 RRC. With proper planning, you may be able to receive double the RRC for your child(ren). We recommend working with a tax advisor to review your options.
The ARPA builds upon many measures in the 2020 CARES Act and the Consolidated Appropriations Act of 2021. There is a lot to digest in its near 600-pages, and all a month before the individual tax filing deadline. Stay tuned as The Tax Warriors of Drucker & Scaccetti continue to review the new law and provide you with a breakdown its tax-related provisions.