ARPA: Key Individual Provisions

Unemployment Received in 2020 Partially Excluded from Income for Some Taxpayers

Under ARPA, in the case of any tax year beginning in 2020, if the adjusted gross income (AGI) of the taxpayer for the tax year is less than $150,000, the gross income of the taxpayer does not include so much of the unemployment compensation received by the taxpayer (or, in the case of a joint return, received by each spouse) as does not exceed $10,200. The new law does not provide for a phase-out based on AGI. Therefore, if a taxpayer makes $150,000 or more, the exclusion does not apply, and all the individual’s unemployment compensation would be included in gross income. The same $150,000 limit applies to returns filed jointly, as head of household, or with single status. However, in the case of a joint return, the $10,200 exclusion applies separately to each spouse.Some taxpayers already filed their returns before the passage of ARPA. If these taxpayers included unemployment compensation in their gross income, they should file amended returns if they qualify for the exclusion.

2021 Individual Recovery Rebate

Under ARPA, an eligible individual is allowed an income tax credit for 2021 equal to the sum of: (1) $1,400 ($2,800 for eligible individuals filing a joint return) plus (2) $1,400 for each dependent of the taxpayer. A dependent of the taxpayer, as defined for purposes of the dependency exemption, includes a qualifying child and a qualifying relative. For purposes of the credit, an “eligible individual” is any individual other than a nonresident alien or an individual who is a dependent of another taxpayer for the tax year.Children who are (or can be) claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.

The amount of the credit is ratably reduced (but not below zero) for taxpayers with adjusted gross income (AGI) of over: 

  • $150,000 for a joint return;
  • $112,500 for a head of household; and 
  • $75,000 for all other taxpayers.

The credit is completely phased out (reduced to zero) for taxpayers with AGI of over:

  • $160,000 for a joint return;
  • $120,000 for a head of household; and
  • $80,000 for all other taxpayers. Advance rebate of credit during 2021. Each individual who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the advance refund amount for 2019. (Code Sec. 6428B(g)(1), as added by ARPA Sec. 9601(a))

The “advance refund amount” is the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019. However, if a taxpayer has filed his or her 2020 tax return when IRS determines the amount of the rebate, information on that 2020 return is used to determine the amount of the rebate. Thus, although the credit is technically for 2021, the law treats the rebate as an overpayment for 2019 (or 2020, if the return for that year has been filed) that IRS will rebate as soon as possible during 2021.

IRS will refund or credit any resulting overpayment as rapidly as possible. No interest will be paid on the overpayment. If an individual hasn’t yet filed a 2019 or 2020 income tax return, IRS will determine the amount of the rebate using information available to IRS and determine the rebate amount without regard to the phaseout rules discussed above (unless IRS has reason to know those rules would apply). A return isn’t treated as filed for these purposes until it has been processed by IRS. Most eligible individuals won’t have to take any action to receive an advance rebate from IRS. This includes many low-income individuals who file a tax return to claim the refundable earned income credit and child tax credit. IRS will try to make the payments electronically if appropriate. No advance rebate will be made or allowed after December 31, 2021. The amount of credit that is allowable for 2021 must be reduced (but not below zero) by the aggregate advance rebates made or allowed to the taxpayer during 2021. If an advance rebate was made or allowed for a joint return, half of the rebate is treated as having been made or allowed to each spouse who filed the joint return.