Sometime soon the American Rescue Plan Act of 2021 will become law. (See text of House bill H.R. 1319)
It even has some big claims, like “Will cut childhood poverty in half.” That seems good.
So… Where does all that money go? And… How will this impact retirees and aspiring retirees?
The American Rescue Plan Act of 2021
Generally speaking, the rescue plan is intended to provide a cash infusion to Americans continuing to struggle from the COVID pandemic. At present, over 500,000 people have died, 18 million people are on unemployment (pdf), and 100,000 small businesses have closed permanently. States are also facing massive revenue shortfalls, particularly those states heavily dependent on oil (Texas -10%, Alaska -40%) and tourism (Florida -11%, Hawaii -13%.)
By distributing cash to those in need and providing funding to accelerate vaccine rollout, in theory we get back to normal faster and with less pain.
At ~600 pages, it’s a big bill. The following is the most interesting to me with some colorful commentary.
This is probably the part that most people get immediately excited about. It does seem to get the most attention in headlines…
Each American will be getting a direct “check” of $1,400, with some income limitations (now including students and dependents.) As a family of 4 we will be getting $5,600, for example.
The income requirements are more restrictive than the CARES Act, so some people who previously received stimulus checks will be ineligible for this round, which seems kinda dumb. I’d much rather see just giving money to everyone for speed and efficiency, and clawing back at tax time for higher income households if that was important.
Anyhoo, based on the more restrictive Senate version of the bill, for married couples filing jointly the checks will be reduced if income exceeds $150,000 and eliminated completely at $160,000. For Single filers those thresholds are $75k and $80k, and for Head of Household they are $112,500 and $120k.
These checks will be distributed asap based on your 2019 or 2020 tax returns – because of the income requirements, we don’t qualify based on our 2019 tax return so I spent a few days last week doing our 2020 return. If you are in the same boat, file your 2020 taxes asap.
Affordable Care Act improvements
This is my favorite part of the bill…unfortunately it’s only for 2 years (2021 and 2022) with the intention of making it permanent.
There are 2 main changes –
- The complete elimination of the ACA Subsidy cliff!
- Increased subsidies for everyone under 400% of FPL, with particular benefit to those earning <150% FPL
If you can benefit from these changes, open enrollment continues until May 31st, 2021.
Many people will now benefit from a higher level of coverage at lower cost – Don’t miss out.
Elimination of the ACA Subsidy Cliff
One really ugly aspect of the Affordable Care Act was the subsidy cliff.
For a household earning 400% of the Federal Poverty Level, the cost of health insurance was limited to ~10% of adjusted gross income. But if you earned 400% FPL + $1, you were on the hook for the full cost of health insurance. (For full details, see: Obamacare Optimization vs Tax Minimization.)
When I explored the idea of our moving back to the US, this cliff would raise the cost of insurance for us as a 3-person household from ~400/month at 400% fPL to $1,000/month, costing an additional ~$8,000/year.
But now, the cost of insurance is limited to 8.5% of AGI no matter how high income goes. The cliff is now just a reasonable off ramp.
Increased Premium Tax Credits (Subsidies)
At all ACA qualifying income levels, subsidies are increased / premiums are lower. The following chart shows the difference
The benefits are particularly strong for households earning less than 150% FPL, although all households benefit. A beautiful way to look at this is a chart from the Kaiser Family Foundation (from their excellent overview of the health insurance changes in the ARPA.)
Not shown here, but of huge importance… many low income households would previously choose a Bronze plan because it came with a $0 premium. Not without price though, as those plans often had a deductible of as much as $13,000, which meant choosing between necessary medical care and paying rent or buying food. Now those same households can get a very good Silver plan with reasonable deductibles and additional cost sharing subsidies. Win win win.
(For full details on how the ACA works and how income levels impact premiums, deductibles, etc… see my overview: Obamacare Optimization in Early Retirement.)
ACA Tax Optimization
With the change in premium subsidies, the way the ACA acts as a tax also changes. The following chart shows how we can model additional income as a tax, with a marginal tax rate of ~15% for income between 150% and 400% FPL. This is useful for deciding whether to do Roth conversions or IRA withdrawals in retirement. Numbers are rounded.
For more details on the prior law and tradeoffs for taxes, see: Obamacare Optimization vs Tax Minimization.
ACA Subsidy Calculator Updated
To explore how these ACA changes impact you, check out our updated ACA Premium Calculator.
Set the Coverage Year to 2021x to explore the changes related to the American Rescue Plan, and to 2021 for the default / prior legistlation.
Expanded Child Tax Credit
The American Rescue Plan massively expands the Child Tax Credit for one year only (2021.)
The CTC is increased to $3,600 for kids under 6 and $3,000 for kids up to age 17 (was 16.)
The credit phases out as incomes exceed the thresholds of $150k MFJ, $112.5k HoH, and $75k Single at a 5% rate ($50 per $1k of income.)
- The credit is fully refundable (will get the credit even if owe zero tax, so ACTC is basically eliminated)
- There is no earned income requirement (previously required earned income to get ACTC)
- Payments will be made “periodically” (probably monthly) starting in July 2021 (with remainder credited on 2021 tax return)
If income is high such that the CTC is reduced to $2,000, then the fall back is current tax law which allows a $2,000 credit up to higher income levels ($200k single, $400k MFJ.)
With 2 kids, age 6 and <1 year we will get $6,600 in Child tax credit in 2021, up from the expected $4,000.
Unemployment Benefits and Tax-Free Income
Unemployment benefits have been extended and expanded again, continuing levels from previous stimulus legislation through September 2021.
New in the Senate version of the Rescue Plan is an exclusion for $10,200 of unemployment benefits for households earning <$150k. This ~$10k will not be taxed in 2020. (All unemployment income is normally taxed as ordinary income, but not subject to FICA taxes.)
I dislike this implementation in part because it is messy – changing 2020 tax law in March 2021 means anybody who already filed 2020 taxes will need to file an amended return with the time, energy, and expense thereof.
It’s also highly regressive – a household with <$24k in 2020 income will get zero benefit. A household with $150k income will benefit by $2,200… better, imho, would be to just distribute an additional $X to anybody who received unemployment benefits in 2020.
And finally, one of the things I’ve advised people to do in low income years (such as years of unemployment) is to do Roth conversions at 0% / low % tax rates to help with retirement. But that opportunity closed on Dec 31st… alas, you can’t put the milk back in the cow.
Expanded Child and Dependent Care Credit
Again, for 2021 only…
This credit has been expanded from a maximum of $3,000/year to $8,000/year for households with up to $16,000 in care expenses. The credit is 50% of expenses, up from the prior 35%.
The credit has also been made fully refundable (you get the $ even if you owe $0 tax.)
Earned income is required for this credit.
Expanded Earned Income Tax Credit
The qualifying age range for the EITC has been expanded and the maximum qualifying income more than doubled for childless households (or households with children who do not live with them.)
This will namely benefit students and low-income Seniors… who can receive up to ~$1,500 in credit.
This would have been super helpful when I was a student.
More on EITC: Hacking the Earned Income Tax Credit
Additional direct aid to households
The American Rescue plan offers additional indirect aid through existing agencies:
Rental assistance – $25 billion towards emergency assistance to renters
Energy assistance – $4.5 billion to HHS to assist low-income households with utility bills
Backing up the money truck
All of the above has been related to direct aid to households. The American Rescue Plan also offers significant aid to states, municipalities, schools, and the vaccination effort.
Schools – $170 billion to school for reopening efforts and improvements
Internet – $7.6 billion to FCC to expand internet connectivity to students
State and city aid – $350 billion to overcome revenue shortfalls
Vaccine effort – $170 billion to HHS to detect, diagnose, trace, and monitor Covid-19.
Restaurant revitalization fund – $25 billion to SBA to aid small businesses
The $1.9 trillion American Rescue Plan Act of 2021 is a massive piece of legislation.
Key provisions include direct checks to households, expansion of the Child Tax Credit, expansion of the Earned Income Tax Credit, expansion and improvements to the Affordable Care Act, expansion of the Child and Dependent Care Credit, and more.
It also includes significant funding to the vaccine rollout effort, school reopening efforts, and helping states and municipalities (which would otherwise have been forced to cut services / layoff staff / raise taxes.)
Because this was all passed through reconciliation (avoiding the filibuster) it is all temporary, limited to 1 to 2 years. This does make it difficult to plan long-term, but hopefully many of these provisions become permanent in the near future.
In the mean time, households will benefit with an abundance of direct aid.
- Update your ACA enrollment based on the improved subsidy structure prior to May 15th
- File your 2020 tax return asap if you would not qualify for direct stimulus checks based on your 2019 return
- Amend your 2020 tax return if you’ve already filed and collected unemployment benefits in 2020
- Plan 2021 income based on the phase-out levels for the expanded Child Tax Credit if applicable
- Explore how the ACA subsidy changes using our ACA Premium Calculator (set Coverage Year to 2021x for ARPA changes.)