The third stimulus bill to address the COVID pandemic was signed by President Biden on Thursday of last week. As with the preceding relief bills, the amount of direct assistance to citizens was hotly contested. Many of the bill’s features will affect HCM clients and, as before, there’s much to uncover.
What’s in the American Rescue Plan?
The contents of the American Rescue Plan can be broken down into several key categories: direct assistance, tax provisions, assistance to local government, and public health funding. There are additional provisions in the law that fund grants to small businesses, housing, and education which we’ve chosen not to focus on in this article.
The direct payments in the current stimulus bill take the form of $1,400 per-person checks to households across America. The full amount will be sent to people with an adjusted gross income (AGI) of $75,000 or less, and to couples with an AGI less than or equal to $150,000. These payments will also be issued to their qualified dependents regardless of their age. After $75,000 (or $150,000 for couples), payments begin to taper off, until dropping to zero at $80,000 AGI (or $160,000 for couples).
Federal unemployment benefits have been extended through September 6, 2021, at $300 per week. The number of available weeks of assistance was increased from 50 to 79. Additionally, the first $10,200 of 2020 benefits, per spouse (total of $20,400 per couple), is tax-free for families making $150,000 or less. Paid emergency leave was extended to over 100 million Americans. If you had taxes withheld from unemployment benefits in 2020, you can get that money back via your 2020 tax return or an amended tax return if you’ve already filed.
Increased food assistance via the Supplemental Nutrition Assistance Program (SNAP) was maintained through September 2021, and roughly $800 million was allocated to increase the participation in and benefits of WIC (Women, Infants and Children Supplemental Nutrition Program). Also, for folks who may have been laid off or otherwise lost their jobs, the Act provides 100% COBRA insurance premium subsidy so people can remain on their former employer’s health plans through the end of September. Billions more were allocated for emergency rental assistance, emergency housing vouchers, and homeless assistance, as well as millions for tribal and rural housing.
The Child Tax Credit maximum was increased to $3,000 for each child 6 to 17 and $3,600 for children 6 and under for families with $150,000 or less in income and single parents who make $112,500 or less. These annual totals will be paid via direct deposit to qualifying households on a monthly basis. The Child and Dependent Care Credit was made fully refundable, the maximum benefits were increased ($4,000 for one eligible individual, $8,000 for two or more), and the income limit was increased to $125,000 with the stipulation that these changes are for 2021 only. The Earned Income Tax Credit’s eligibility was expanded, the maximum benefit for adults not claiming a qualified child was increased, and the limit on investment income was raised from $3,650 to $10,000 and is now indexed by inflation. Going the other direction, reporting requirements for “third party settlement organizations” have been reduced from $20,000 and 200 transactions to $600 with no minimum number of transactions. It is projected to generate $8.4 billion in revenue in the next decade and will primarily affect gig workers, independent contractors, casual eBay sellers and other similarly situated individuals that made up a big part of the underground economy.
Additionally, even though the bill doesn’t forgive student loan debt, it does make it such that any student loan forgiveness done between Dec 30, 2020 and Jan 1, 2026 will be tax free. Normally, loan forgiveness is taxable income. President Biden made a campaign promise to forgive $10,000 in student loan debt per borrower but wants Congress to pass legislation to implement it. Senators Chuck Schumer (D-NY) and Elizabeth Warren (D-MA) want President Joe Biden to forgive $50,000 in federal student loans per borrower via executive order.
Assistance to Governments
State, local, and tribal governments will be receiving a total of $350 billion to mitigate the fiscal shock of ongoing budget shortfalls. $195 billion will go to states and the District of Columbia, tribes and territories will receive about $25 billion, $60 billion will go to counties, and $10 billion is allocated to a Coronavirus Capital Projects Fund.
The Plan puts considerable resources into a nationwide COVID vaccination plan. It allocates funding to set up community vaccination sites across the country, increase testing and tracing, address supply shortages, and improve vaccine distribution. This will also fund 100,000 public health workers to do work such as vaccine outreach, contact tracing, and eventually build up long-term health capacity for underserved communities. $10 billion was allocated under the Defense Production Act for PPE and other medical gear and equipment. Approximately $750 million is allocated to global health security to monitor and fight COVID-19 and other emerging infectious diseases.
Projected Impact of Stimulus Bill
There are very high hopes for the impact of this new law. The OECD projects U.S. economic growth to be 6.5% this year, which is more than double the growth rate projected in December, driven largely by increased federal aid. The Plan takes a more bottom-up approach to economic stimulus than previous attempts, boosting the poorest quintile’s income by 20% while the richest quintile will only see their income rise by 1.1%, according to the Tax Policy Center. Lower income individuals have lower savings rates than wealthier individuals in normal times, and with the prolonged economic hardships experienced as a result of COVID, their spending needs have only increased. Demand is predicted to increase so much that some economists are worried that this may trigger inflation. These concerns are the key factors causing interest rates to begin to rise. HCM has started to take these factors in to our investment policy as we have restructured our bond portfolios to restructure duration risk, and we have reallocated our stock exposure away from our longest duration assets in favor of value sectors.
Either way, we’ll begin to see evidence soon. Stimulus payments are already going out to individuals, meaning the relief so many need will hopefully get to them soon.
| Mike Hengehold, CPA/PFS MST RICP®
Mike is the Founder and President of HCM Wealth Advisors. Over the last 30 years, he’s provided financial planning guidance to a myriad of families to help them realize their financial dreams. Mike is an avid homebrewer and animal lover, and when he’s not at work you can often find him on the golf course working on his short game.