Tax Aspects of President-Elect Biden’s Proposed Stimulus Bill

President-elect Joe Biden is a mere six days from relocating to the Oval Office, and with Democrats holding majorities in both the House of Representatives and the Senate, any and all of the former Vice President’s proposals are now in play.

As promised, however, before turning to tax reform, student loan relief, or other policy considerations, Biden is prioritizing another round of COVID relief. Earlier today, he introduced the American Rescue Plan (ARP), a $1.9 trillion stimulus package designed to address the devastating economic and public health impacts of the ongoing pandemic.

Were he so inclined, Biden could seek to pass much of the bill using the streamlined budget reconciliation process, which would come in particularly handy as it requires only 51 votes for passage in the Senate, where the Democrats currently possess…51 votes. Biden would prefer the package be passed on a bipartisan basis, however, which would require the buy-in from ten Republican Senators.

While the ARP contains a number of critical provisions — from an increase in the minimum wage to rental assistance to the development of a national vaccination program — in this space, we focus on the tax law, and Biden’s plan contains several provisions that will be implemented through the pages of the Internal Revenue Code.

Let’s take a look…

Additional Stimulus Payments

In March of 2020, Congress passed the CARES Act, which sent $1,200 stimulus checks to eligible individuals. Just weeks ago, the Consolidated Appropriations Act, 2021 (CAA) sent a second round of payments, this time in the amount of $600.

The ARP would supplement the payments made last month with additional checks of $1,400, bringing the recent total to the $2,000 preferred by both Biden and President Trump. Perhaps more importantly, while the previous stimulus payments were only available to parents on behalf of a dependent who was under the age of 17, Biden’s plan would expand eligibility to “adult dependents who have been left out of previous rounds of relief and all mixed status households.” Presumably, this would provide a payment to those who care for both college-aged and elderly dependents.

Biden would also make the checks available to households with mixed immigration status; the previous rounds of checks excluded the spouses of undocumented immigrants who did not have Social Security numbers.

Extension of Required Family Leave/Sick Pay

The Families First Coronavirus Response Act, passed in February of 2020, required employers with more than 50 and fewer than 500 employees to offer employees 10 weeks of family leave and two weeks of sick pay for certain COVID-related situations. You can read about it all here. In turn, the employer would receive a payroll tax credit in the same amount. While the CAA extended the credit provisions until March 31, 2021, it did NOT extend the requirement for employers to pay family and sick leave.

Biden’s plan would extend the paid family/sick leave program through September 2021, while making several tweaks, including:

• Eliminating the exemptions for employers with fewer than 50 and more than 500 employees,
• Increasing the total paid leave to 14 weeks, at a maximum benefit of $1,400 per-week,
• Extending the benefits to healthcare workers, federal workers, and first responders.

The payroll credit would remain available only to those employers with fewer than 500 employees.

Unemployment Increases

The CAA granted supplemental unemployment insurance of $300/week through March. Biden’s plan would increase the weekly payments to $400 and extend the program through September.

Child Tax Credit Increases

Under current law, a parent is entitled to a federal income tax credit of up to $2,000 for each qualifying child under the age of 17. A credit is more valuable than a deduction because it represents a dollar-for-dollar reduction in your tax liability. Once you run out of tax liability, however, a credit is only useful to the extent it is “refundable.”

To illustrate, if you have tax due of $1,200 and are entitled to a $2,000 credit, if the credit is not refundable, you can only use the credit to reduce your liability to zero. If, however, the credit is refundable, not only would you reduce the tax to zero, the government would then cut you a check for $800. At the moment, only $1,400 of the $2,000 child tax credit is refundable.

For 2021 only, Biden would expand the child tax credit to as much as $3,600 for children under the age of 6 — $3,000 for children aged 6-17— and make the credit fully refundable. Thus, whereas under current law, parents of two toddlers would only receive a credit of $4,000 — with $2,800 of the credit refundable — the Biden plan would bring that total to $7,200, with the full amount of the credit refundable.

Child and Dependent Care Credit

Similar to the child tax credit, President-elect Biden is calling for a one year increase to the child and dependent care credit. Under current law, when parents pay childcare costs for a child under the age of 13, they can claim a tax credit for between 20% – 35% of the costs, up to $3,000 per child ($6,000 per family). Thus, the maximum credit for a family is $2,100 (35% * $6,000). None of the credit, however, is refundable.

Biden’s plan would increase the credit for 2021 to a maximum of $4,000 for one child or $8,000 for two or more children. The credit would be fully refundable, but would begin to “phase out” once the income of the family exceeds $125,000, and would completely disappear once income exceeds $400,000. For a low-income family with no tax liability, however, the change would put an extra $8,000 in their pockets.

Earned Income Credit

Biden’s plan would expand the Earned Income Tax Credit for 2021, raising the maximum credit for childless adults from roughly $530 to close to $1,500, while also increasing the income limit for the credit from about $16,000 to about $21,000, and expanding the age range that is eligible by eliminating the age cap for older workers.

It’s worth nothing that while Biden’s proposals to increase the Child Tax Credit, Dependent Care Credit, and Earned Income Credit are for 2021 only, each provision was included as part of his plan for tax reform. As a result, should the President-elect pass broader reform in the next year, we can expect to see these three provisions made permanent.

Small Business Relief

While not technically a tax provision, Biden’s proposal to earmark $15 billion for grants to over one million small businesses will certainly interest the regular readers of the Forbes’ Taxes page.

What’s Next

If the history of this country has taught us nothing else, it’s that when one party regains control, the other will immediately tighten the purse strings. The ARP comes on the heels of multiple rounds of 2020 stimulus that significantly added to the deficit, which may make it difficult for Biden to find ten Republican Senators willing to cross the aisle and support the bill. Of course, the budget reconciliation process remains an option, which would obviate the need for Biden to obtain any Republican votes.

While the future of the ARP is unclear, one thing is certain: for the President-elect, this is only the beginning. In a a speech earlier tonight, he explained that he will soon lay out his plan to invest in infrastructure, jobs, and the climate crisis.