The American Rescue Plan Act of 2021 (ARPA) is the most recent US government Coronavirus relief package, consisting of $1.9 trillion of comprehensive economic assistance to individuals, businesses, and state and local governments. This article will cover the key provisions of ARPA which impact American expatriate taxpayers and their families.
The Third Stimulus (Economic Impact) Payment
ARPA ushered in a third round of stimulus payments to send much-needed relief to American taxpayers, the biggest payments yet, as compared to the payments sent out under the two earlier COVID-19 economic relief acts.
Starting in March 2021, ARPA provides a $1,400 stimulus (economic impact) payment to qualified individual taxpayers (including US citizens and green-card holders living abroad) plus an additional $1,400 for each dependent reported on the taxpayer’s return. In the case of a married couple filing jointly, the third stimulus payment would be $2,800 – $1,400 each for taxpayer and spouse.
As opposed to the first two stimulus payments, which limited payments to dependents to eligible children under the age of 17, ARPA expands the definition of dependents to include older children and other family members, such as elderly parents, who qualify as dependents for tax purposes.
To qualify to receive the third stimulus payment under ARPA, individual taxpayers must have an adjusted gross income (AGI) of up to $75,000 per year, $112,500 for heads of households, and $150,000 for married couples filing jointly. The payments phase out completely and are not paid out when AGI exceeds $80,000 for individuals, $120,000 for heads of household and $160,000 for married joint filers. These thresholds are somewhat lower than for the first two stimulus payments, so some higher-income taxpayers who may have qualified to receive full or partial stimulus payments under the first two rounds, will not qualify at all to receive the third payment.
In order to qualify to receive the third stimulus payment, taxpayers, spouses and dependents must be US citizens or resident aliens (which includes green-card holders), and must have a Social Security Number to receive the stimulus payment. The IRS bases eligibility on the most recent federal tax return filed to determine how much the stimulus check will be – either the return filed for 2020 or 2019.
The IRS began issuing the third stimulus payment to eligible taxpayers, spouses and dependents in March 2021 by either paper check or debit card, unless the taxpayer elected to receive an overpayment as a refund on his or her 2020 or 2019 federal return via direct deposit to a US bank account. If the direct deposit option was chosen on a 2020 or 2019 return as filed, the IRS will also issue the third stimulus payment via direct deposit to the same US bank account listed on the return.
Stimulus payments are not taxable income, but will need to be reported by taxpayers on their 2021 tax return. If a taxpayer (or spouse or dependent) was eligible for a stimulus payment, but did not receive it or the payment amount was too small, the difference can be claimed as a Recovery Rebate Credit on the 2021 tax return, on Page 2 Line 30. The Recovery Rebate Credit is a fully refundable credit, meaning that the credit will be paid out as a refund to eligible taxpayers, even if their federal tax liability is zero. American expats who do not have a US bank account may alternatively open a US dollar-denominated account online, in order to be able to receive their stimulus payments via direct deposit.
The Expanded Child Tax Credit (CTC)
ARPA dramatically expands the amount of the Child Tax Credit (CTC) to assist families, but American expat taxpayers should note that the higher CTC amounts apply to the 2021 tax year only, and only for taxpayers and dependents who lived in the US for at least half of the year.
Under ARPA, the CTC amount for 2021 is $3,600 for each child under the age of 7 at year-end, and $3,000 for each child between the age of 7 and 17 at year-end, and is a fully-refundable credit (explained below), provided that the taxpayer and dependents lived in the US for at least half the year. Those credit amounts are limited to $2,000 if the taxpayer’s MAGI is above certain thresholds: $150,000 for married couples filing jointly or a surviving spouse, $112,500 for taxpayers using head of household filing status, and $75,000 for taxpayers using single or married filing separately filing status. In addition to being limited to $2,000, the credit is only partially refundable, up to $1,400.
There is no minimum earned income requirement for claiming the CTC.
Under ARPA, a taxpayer may claim a CTC for a child who:
- Is age 17 or under at year-end
- Lived with the taxpayer over half of the year
- Had received a Social Security Number (SSN) by the original due date of the tax return (April 15th of the following year); and
- Modified Adjusted Gross Income (MAGI) was less than $400,000 for a couple filing jointly, or less than $200,000 for a taxpayer using any other filing status. MAGI is essentially a taxpayer’s AGI as reported on Line 11 of Form 1040, adding back any Foreign Earned Income Exclusion (FEIE) claimed or excluded income from Puerto Rico or American Samoa.
A refundable credit means a credit is payable to a taxpayer as a refund, even if his or her tax liability is zero. The CTC is fully refundable if the taxpayer and dependents lived in the US for at least half the year, and the taxpayer’s MAGI was below the thresholds listed above ($150,000 for married couples filing jointly or a surviving spouse, $112,500 for taxpayers using head of household filing status, and $75,000 for taxpayers using single or married filing separately filing status). Above those threshold amounts, the maximum CTC amount is limited to $2,000 and only $1,400 is refundable, as outlined above.
Most US expats live abroad more than half of the year, and as a result, they will not be able to claim the maximum CTC amounts of $3,600 for a child under the age of 7, and $3,000 for a child between the age of 7 and 17. However, they can still qualify for a CTC of $2,000, partially refundable up to $1,400, provided that their MAGI was less than $400,000 for a couple filing jointly, or less than $200,000 for a taxpayer using any other filing status.
A US expat who meets certain tax rules may claim a Foreign Earned Income Exclusion to exclude his or her foreign earned income from US federal income tax, up to a certain threshold ($108,700 for 2021).
US expats should be aware that claiming the FEIE makes them ineligible to receive the refundable portion of the CTC, which is $1,400 per child. Fortunately however, many expats may still be able to significantly reduce or even eliminate their US tax liability through claiming the Foreign Tax Credit (FTC) instead of the FEI, and thereby still remain eligible for the refundable portion of the CTC.
The Expanded Child and Dependent Care Tax Credit (CDCTC)
In addition to the CTC, there is a similar-sounding tax credit designed to help working families afford their childcare expenses, called the Child and Dependent Care Tax Credit (CDCTC).
For the 2021 tax year only, ARPA provisions increase the maximum available CDCTC from $3,000 to $4,000 for childcare expenses for 1 child,, and from $6,000 to $8,000 for 2 or more children, based on 50% of qualified expenses, up dramatically from the 20% previous cap. The credit was also expanded under ARPA by making it fully refundable, so that even low-income taxpayers with little to no tax liabilities can still benefit from the full amount of the credit. Previously the CDCTC was a non-refundable credit only, and was only based on 35% of qualified expenses.
Furthermore, ARPA increases eligible expenses to $8,000 for households with 1 child and $16,000 for households with 2 or more children, and increases the income threshold at which the CDCTC begins to phase out, to $150,000.
Several other provisions in the ARPA relief package offer American expats potential opportunities to reduce their tax liabilities.
Any student loan debt forgiven between January 1, 2021 and December 31, 2025 will receive tax-free treatment – fully discharged public and private student loan debt will be excludible from taxable income, for US federal tax purposes.
ARPA also increases and expands the availability of Affordable Care Act (ACA) subsidies for taxpayers seeking to obtain insurance in the ACA marketplaces in 2021 and 2022.