American Rescue Plan Act of 2021
The United States provided around $ 6 trillion in total economic relief to the American people during the coronavirus pandemic, including the $ 1.9 trillion that was approved when President Biden passed the American law on Thursday Rescue plan (ARP) signed, which is roughly 27 percent of gross domestic product (GDP). Much of the economic relief in the American bailout plan will be administered through tax law in the form of direct payments (stimulus checks) and extended tax credit for children (CTC) in 2021. The scope and method of the relief will reinvigorate debates about the proper role of spending in the tax code and whether the temporary benefits should become permanent after the economy recovers.
Policy makers need to determine whether the tax code is the correct means of paying out such cash benefits and whether the IRS can take on the additional responsibilities. Over many years, the IRS has been tasked with an ever-growing list of administrative tasks that go well beyond simply collecting revenue – from poverty reduction to education, housing, and health services. The US bailout would now, in addition to other pandemic control measures, require the IRS, like a traditional spending agency, to administer additional benefits monthly while processing more than 160 million tax returns.
While some of the provisions of the American rescue plan are targeted at the pandemic, such as the expanded unemployment insurance benefits, other aspects, such as the expanded child tax credit, are unrelated and not well aligned with the pandemic. In total, approximately $ 850 billion is directed to individuals and approximately $ 65 billion to corporations.
Most of the provisions are temporary extensions for 2021 to combat the pandemic. However, some policymakers are already considering taking some of the newly expanded benefits like the child tax credit on a permanent basis later this year, which would cost well over $ 1 trillion in household costs over the next 10 years.
Below are three key American Rescue Plan tax benefits: a third round of direct payments, expanded Unemployment Insurance (UI) benefits, and an Unemployment Insurance Income Exemption of $ 10,200 for 2020, as well as an expansion in child tax recognition.
$ 1,400 stimulus payments (economic impact payments)
The US bailout plan provides for a third round of stimulus payments up to $ 1,400 for adults and all dependents. Households with income greater than $ 80,000 for single enrollment, $ 120,000 for head of household, and $ 160,000 for spouse enrollment will not receive payment. Payments expire from $ 75,000 for single applicants, $ 112,500 for Head of Household applicants, and $ 150,000 for joint applicants. This means that around 89 percent of applicants receive a payment (see Table 1).
The payment design creates high exit rates for higher earners, which means they face high marginal tax rates and work incentives and could encourage applicants to increase traditional pension contributions in 2021 in order to lower their AGI and get an additional payment.
|Income level||Percentage change in profit after tax||Release of filters with a discount||Average discount amount|
|0% to 20%||24.70%||100%||$ 2,172|
|20% to 40%||10.81%||100%||$ 2,537|
|40% to 60%||6.41%||100%||$ 2,431|
|60% to 80%||4.21%||99.5%||$ 2,611|
|80% to 90%||1.97%||74.5%||$ 1,792|
|90% to 95%||0.40%||25.0%||$ 509|
|95% to 99%||0.01%||1.6%||$ 17|
|99% to 100%||0.00%||0%||$ 0|
Source: Tax Foundation General Equilibrium Model, January 2021.
The American rescue plan also extends the three federal unemployment insurance extensions created by the CARES Act through September 6, 2021. The American rescue plan increases the total number of benefit weeks for people who cannot safely return to work from 50 to 79 Expiry of the broader UI benefits.
The law keeps the federal surcharge at its current level of $ 300 per week for weeks beginning after March 14 and before September 6, 2021. The American rescue plan calls for 53 weeks of federal UI benefits after state benefits expire, of 24 weeks.
The American Rescue Plan includes a new provision to exempt unemployment benefits of $ 10,200 received in 2020 from income taxes. The exclusion is retroactive and applies to unemployment insurance benefits received in the past year, mainly to alleviate the problem of surprise tax burdens. This only applies to individuals with an income below $ 150,000. The Joint Committee on Taxation (JCT) estimates the exemption will cut federal revenues by $ 24.9 billion.
More than 45 million tax returns have been filed with the IRS in the current tax season, which currently ends April 15. The last minute exemption creates confusion for taxpayers and puts additional pressure on the IRS too quickly to provide instructions and guidance for those who have already submitted their returns. Ideally, the exemption would have taken place before the start of the tax season in mid-February to ensure a smoother tax season for the agency and taxpayers.
Finally, the American bailout plan significantly expands the child tax credit by allowing households with children to claim up to $ 3,600 for younger children or $ 3,000 for children 6 years and older, regardless of income. While the CTC currently kicks in with income and only $ 1,400 can be refunded to low-income households, the U.S. bailout plan allows full credit for low-income households, increasing marginal tax rates for those applicants because they don’t have the credit more is made available when income increases. As such, it introduces a new incentive to work for low-paid workers, although the extent of the incentive is controversial.
The extended CTC would also be paid monthly, which will be a major administrative challenge for the IRS. The agency must determine an estimated income, enrollment status and the number of eligible dependents for each eligible household in order to be able to advance payments correctly. While the Biden government hopes to have this process ready by July, it may be an unrealistic timeline; It took the IRS two years to prepay the Affordable Care Act tax credits.
Hopefully, as the public health and economy improves this spring and summer, policy makers will have an opportunity to assess the effectiveness and cost of the enhanced benefits in the US rescue plan and determine whether they will expire or otherwise To be reformed wisely.
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