The Direct Cash Assistance and Tax Cuts in the American Rescue Plan Act
The American Rescue Plan Act (ARPA) is on the verge of passage, as the U.S. Senate approved it on March 6. The House of Representatives is preparing for a vote today or tomorrow, March 9 or 10, setting it up for President Joe Biden’s signature.
To provide desperately needed relief to struggling families and speed the economy’s recovery from the COVID-19 pandemic, the bill includes an unprecedented amount of immediate cash relief and tax cuts to low- and middle-income families. Using illustrative examples, this column shows how low- and middle-income families will benefit enormously from the ARPA.
The rescue bill is a comprehensive response to the pandemic: It includes funding for vaccinations and other public health measures; aid to renters and homeowners to prevent evictions and foreclosures; nutrition assistance; aid to struggling small businesses, including those hit especially hard by the pandemic such as restaurants, bars, and shuttered venues; fiscal aid to state and local governments that will allow them to hire back workers and stave off further cuts in services and layoffs; and much more.
The cash relief and tax cuts that will go directly to households include:
- $1,400 direct payments. The ARPA provides direct payments of $1,400 per person that will begin hitting bank accounts this month. Low- and middle-income households will receive the full $1,400 amount per person. Single tax filers with incomes between $75,000 and $80,000, heads of household with incomes between $112,500 and $120,000, and married couples with incomes between $150,000 and $160,000 will receive a partial benefit; those with higher incomes are phased out.* Unlike the two prior direct payments, families can receive the $1,400 for dependents over age 16, such as elderly or disabled relatives, college students, or 17-year-olds.
- Extended unemployment benefits. The ARPA extends enhanced unemployment benefits through September 6. This will prevent 11.4 million out-of-work people—including self-employed workers, gig-economy workers, and people who have had to quit their jobs to care for their children during school closures, as well as long-term unemployed people—from having their unemployment benefits suddenly cut off over the next few weeks. The $300 per-week supplement for all 18 million workers who are currently receiving unemployment benefits, which was also imminently set to expire, is also extended through September 6.
- Tax exemption for up to $10,200 of unemployment benefits received in 2020. Unemployment benefits are generally counted as taxable income, and given the 40 million people who claimed them in 2020 and states not withholding taxes on many unemployment benefits, many families would have unexpectedly had to pay taxes on last year’s benefits. A provision added to the ARPA by the Senate makes up to $10,200 in 2020 unemployment benefits tax-free per worker, for singles and families with incomes up to $150,000.
- Historic child tax credit expansion. The ARPA expands the child tax credit (CTC) and extends the full benefit of the credit to all low- and middle-income families for the first time—a key reason the bill will cut child poverty in half. The CTC is currently $2,000 per child under age 17, but it excludes millions of low-income families from some or all of the benefit. The ARPA enhances the CTC for 2021 in several ways. It: 1) removes the earnings phase-in, so that all low- and middle-income families get the full benefit; 2) raises the amount of the credit to $3,600 for each child under age 6 and $3,000 for each child from ages 6 to 17, thus including 17-year-olds for the first time; and 3) directs the Department of the Treasury to begin distributing the credit in periodic installments beginning this July. For example, if distributed monthly beginning in July,** families would receive $300 for each young child per month and $250 for each older child per month, with the remaining $1,800 and $1,500 received at tax time early next year.
- Earned income tax credit for childless workers. The ARPA provides a substantial expansion of the earned income tax credit (EITC) for low-wage workers who are not raising children in their home, which nearly triples the maximum benefit for those workers from $543 to $1,502. The bill also allows childless workers who are ages 19 to 24, and those who are over age 64, to claim the EITC, among other improvements.***
- Child and dependent care tax credit. The ARPA provides a major expansion of the child and dependent care tax credit (CDCTC), which will provide substantial tax cuts for families with child care expenses. Low- and middle-income families will be eligible for a tax credit covering half of their child care expenses in 2021, up to a maximum credit of $4,000 for one child or dependent and $8,000 for two or more children or dependents.
- Reductions in health care premiums for people covered by marketplace insurance and for those who lose their jobs. The ARPA also benefits the 12 million people who have health insurance through the marketplaces established by the Affordable Care Act. It substantially boosts premium assistance for those families and covers the entire cost of COBRA premiums for workers who lose their jobs.
Illustrative examples show the benefits of the ARPA
The following examples illustrate how various people and families will benefit from these provisions of the ARPA, in addition to other ways they may benefit from the bill, such as faster vaccinations, relief on rent or mortgage payments, and help for small businesses.
Low- and moderate-income workers and families
- A single parent working full time and making minimum wage ($15,000 per year) with two children under age 6 will get $9,525. That includes $4,200 in direct payments arriving soon after the bill’s passage. The family will also see an increase in the CTC from $1,875 to $7,200, with $3,600 of the CTC benefits arriving over the second half of this year.
- A minimum-wage worker without children will receive $2,309. That includes an immediate direct payment of $1,400, plus a $909 increase in the EITC at tax time next year.
- A single worker over age 64 who works part time and earns $10,000 this year will benefit by $2,445. That includes a $1,400 direct payment and an EITC of $1,045 at tax time next year.
- A married couple making $40,000 per year with a 4-year-old child will receive $5,800: $4,200 in direct payments, plus a $1,600 larger CTC.
- A married couple making $40,000 with a 10-year-old child will receive $5,200: $4,200 in direct payments, plus a $1,000 larger CTC.
Middle-income workers and families
- A middle-income family of four with one child under age 6 and one child age 6 or above will receive $8,200 at minimum. That includes direct payments of $5,600 and a boost in the CTC of $2,600. Half of the family’s total CTC ($3,300 of $6,600) will arrive in installments over the second half of this year.
- Families with child care expenses will receive additional tax cuts at tax time next year. For example, a family of four with one child under age 6 and one child from ages 6 to 17, earning $75,000 of income per year and spending $5,000 on child care, will receive the $8,200, plus a $1,500 larger child and dependent care tax credit, for a total benefit of $9,700. If the family had $10,000 in child care expenses, they would receive a $3,800 increase in the CDCTC, for a total benefit of $12,000. The ARPA also makes the CDCTC refundable for 2021, so that low-income families can benefit from it as well.
- A middle-income family of four with a 14-year-old and a 17-year-old will receive $9,100: $5,600 in direct payments and an increase in the CTC of $3,500. (The CTC will increase from $2,000 to $3,000 for the 14-year-old, and the 17-year-old will be newly eligible for the $3,000 CTC minus the $500 nonrefundable credit that exists under current law for dependents not receiving the CTC.) Half of their total $6,000 CTC will arrive in installments over the second half of this year.
- A middle-income couple without children will receive $2,800 in direct payments.
- Because of the ARPA’s extension of Pandemic Unemployment Assistance (PUA) benefits, an average North Carolina worker who is self-employed and who has been receiving $222 in weekly state unemployment benefits plus the $300 monthly supplement will continue to receive those benefits and the supplement, providing them with $522 of weekly income that they would have lost entirely.
- Because of the ARPA’s extension of long-term unemployment benefits, the average worker in West Virginia who was laid off from a job in June and has been receiving $280 in weekly state unemployment benefits plus the $300 monthly supplement will continue receiving those benefits, providing them with $580 of weekly income that they would have lost entirely.
- Because the ARPA continues the $300 weekly supplement for all unemployment benefits, an average Mississippi worker who was laid off more recently and who has been and would have continued to receive a meager $190 in weekly state unemployment benefits without the ARPA, will continue to receive an additional $300 per week.
These additional unemployment benefits would be on top of the $1,400 per-person direct payment and any tax or health care benefits the workers would also receive.
Families who received unemployment benefits in 2020
- A couple with no children who had $50,000 of income plus $10,000 of unemployment benefits because one spouse was laid off during 2020 will benefit by $4,000. The couple will receive $2,800 in direct payments and will not have to pay $1,200 in federal taxes on their unemployment benefits on the tax return they file this spring. (Those in this situation who have already filed tax returns will be able to receive money back. The IRS will likely publish guidance soon on how best to do so. In addition, since most states’ income taxes are linked to the federal system, the change made by the ARPA will automatically relieve state income taxes on unemployment benefits in most states as well.)
Workers receiving health insurance through the Affordable Care Act marketplaces
In addition to the other savings within the bill, the ARPA would significantly reduce health care premiums for families who have insurance through the Affordable Care Act.
- A single parent who has a 5-year-old child and who makes $30,000 per year would pay nearly $1,300 less for health coverage.
- A family of five with children ages 3, 9, and 17 and an annual household income of $60,000 would see their annual premiums lowered by nearly $2,600.
- A family of four that makes $75,000 per year and has children ages 3 and 10 would save nearly $3,000 annually.****
In sum, families will receive an average benefit from the direct payments and tax cuts of more than $3,000, and those with children will receive an average benefit of more than $6,000, according to the Tax Policy Center, whose analysis does not even include the savings on ACA premiums or taxes on unemployment benefits. The aid is targeted, with lower-income families seeing the largest percentage increase in their incomes. And much of the aid will soon be arriving. On top of the many other important things the bill does, these benefits will provide urgent relief to millions of families while cutting child poverty in half. And they will help lay the groundwork for a rapid economic recovery.
Seth Hanlon is a senior fellow at the Center for American Progress. Galen Hendricks is a research associate at the Center.
* The payments that will go out soon are based on the information on one’s 2020 tax return, or one’s 2019 tax return if the IRS does not have the 2020 return yet. If an initial payment is based on a 2019 tax return and taxpayers are eligible for a larger amount based on their 2020 tax return, the IRS may send them an additional payment this year. If taxpayers are eligible for a larger payment based on their 2021 tax return, they can claim the difference when filing taxes next year, but no one has to pay amounts back if they are eligible for less based on 2021—if their income goes up, for example. The $1,400 is allowed with regard to an individual (whether taxpayer, spouse, child, or other dependent) only if that individual has a Social Security number, with the exception that military couples get a payment for both spouses if only one has a Social Security number.
** For reasons that are unclear, guidance from the Senate parliamentarian reportedly precluded the bill from specifying that the periodic advance payments of the CTC should be sent monthly. But the Treasury Department has said that it will aim to distribute payments monthly.
*** Under the bill, some former foster children and homeless children can also claim the EITC at age 18. Full-time students from ages 19 to 23 without children still cannot claim it.
**** Authors’ calculations based off of the American Rescue Plan Act and the Kaiser Family Foundation’s “Health Insurance Marketplace Calculator.”
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