The American Rescue Plan Act of 2021 was signed into law on March 12, 2021 for the purpose of addressing the financial fall out for so many families from COVID 19. The provisions range from agriculture and nutrition assistance to education and health care, housing and homelessness, business loans, unemployment and tax provisions as well as state, local and tribal financial assistance.
What does it have to say about divorce issues? Probably most directly it involves stimulus payments and tax benefits for supporting children and their care, so adults can go back to work.
- Stimulus Payments. A new round of stimulus payments, the full amount of $2,800, will be sent out to taxpayers who have adjusted gross income of less than $150,000 per year if filing jointly; and $1,400 for those earning less than $112,500 per year if filing head of household or less than $75,000 per year if filing single. In addition, $1,400 will be paid for each dependent child under the age of 18 at year end. These payments phase out if income is above these thresholds.
- Child Tax Credit for 2021. The child tax credit for 2021 will increase from $2,000 to $3,000 per child up to age 17 and will increase to $3,600 per child under the age of 6. This increased child tax credit phases out for income over $75,000 ($150,000 for joint returns). The child tax credit is fully refundable for single parents who have no income tax liability. That means they will get a check from the government for the amount of the credit. This will change the assumption that the child dependent status should go to the higher earner. The refundable portion of the tax credit can also be prepaid by the government on a monthly basis between July 1, 2021 and December 31, 2021 so people have the use of that money earlier.
- Child Care Credit. The child care credit, which gives a credit against taxes for a percentage of child care costs for children up to age 13, increases to 50% of expenses up to $8,000 for 1 child and $16,000 for 2 or more children. So, the maximum credit in 2021 is $4,000 for 1 child and $8,000 for 2 or more children. This is $3,000 to $6,000 more than the credit in other years. And if you don’t owe any tax, this is fully refundable by check from the government as well. The trade-off is that for very high-income taxpayers the credit can be reduced to zero.
- Earned Income Credit. The value of this credit increases temporarily in 2021 and the income qualifications have been loosened.
- Unemployment Insurance relief. The Act created a $10,200 tax exclusion for unemployment compensation in the tax year 2020 for those with incomes under $150,000. It extends enhanced unemployment insurance until 9/6/2021, including the extra $300 Federal Pandemic Unemployment Compensation. This is also extended to self-employed, gig workers, freelancers and others who would otherwise not regularly qualify for unemployment insurance.
- Limited to 2021. Most of these benefits are limited to 2021 unless reauthorized by Congress.
As CDFAs we use specialized software which takes into account these changes as they impact negotiations on support and other financial issues relative to divorce and separation. However, this is no substitute for expert tax advice.
As many divorcing couples with children are facing extraordinary economic hardships due to COVID 19, these provisions should provide some short- term economic relief.