How did the major COVID-19 pandemic relief bills affect taxes?
The onset of the COVID-19 global pandemic in early 2020 prompted a sharp and severe global recession, as health authorities urged individuals to isolate as much as possible to slow the spread of the disease. To help keep businesses afloat during this period and aid people who lost work as layoffs surged, Congress adopted a series of measures, including tax cuts, to mitigate the economic damage and promote a faster recovery.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (Pub. L. No 116–136, 134 Stat. 281 [2020]) was signed into law on March 27, 2020. It was preceded by other federal legislation measures to counter the economic downturn, such as the Coronavirus Preparedness and Response Supplemental Appropriations Act (Pub. L. No 116–123, 134 Stat. 146 [2020]) and the Families First Coronavirus Response Act (Pub. L. No 116–127, 134 Stat. 178 [2020]). The CARES Act provided about $2 trillion in aid to fight the COVID-19 pandemic and provide economic relief to households and businesses.
Individual Income Tax Relief
Under the CARES Act, individuals were eligible for one-time tax rebate checks of up to $1,200, as well as $500 checks for each child under 17 years of age. The Congressional Budget Office estimated that these rebates cost about $290 billion. The rebates began to phase out for individuals with adjusted gross income of $75,000 ($150,000 for couples filing jointly and $112,500 for single parents).
Other individual income tax relief measures put in place by the CARES Act were expanded deductions for charitable contributions (including a $300 per person above-the-line deduction), a temporary waiver of penalties for early retirement account withdrawals meant to cover COVID-19 related hardships, and making student loan debts paid off by an employer tax-free for 2020.
Tax-Related Aid for Businesses
Although much of the aid for businesses came via the Paycheck Protection Program (PPP)—for which the CARES Act made available $360 billion in potentially forgivable loans for small businesses—and lending facilitated by the Federal Reserve, the law also included multiple business tax relief provisions:
These measures were introduced to give businesses the ability to maintain as much liquidity as possible as the economy began to slow.
As part of a year-end appropriations package, Congress approved an additional round of relief checks for individuals and provided a new tranche of PPP funding, along with more favorable deduction rules for small businesses who received the aid. The Consolidated Appropriations Act, 2021 (Pub. L. No 116–260, 134 Stat. 1182 [2020]) contained a few minor tax provisions, including temporarily allowing a full deduction for business meal expenses (a deduction curbed by the Tax Cuts and Jobs Act), making the $300 above-the-line charitable deduction under the CARES Act $600 for joint filers, and extending through 2025 the CARES Act provision stipulating that student loan debts paid off by an employer would not count toward an individual’s taxable income.
Second Round of Individual Rebate Checks
Using the same income thresholds as the CARES Act, individuals were eligible for payments of $600 each and $600 for each child under 17.
Tax Deductibility of Business Expenses Covered by PPP Relief
Because many PPP loans were eligible to be forgiven, policymakers began debating whether business expenses covered by the loans should also be deductible on their tax returns. In May 2020, the IRS issued guidance confirmed that “no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.”
Members of Congress from both parties responded by including language in the December bill that allowed firms to deduct costs that were subsidized by PPP loans. Neither the Congressional Budget Office nor the Joint Committee on Taxation scored the cost of this tax deduction, but an analysis by Adam Looney of the Brookings Institution estimated it could reduce government revenues by $120 billion.
After President Joe Biden took office in early 2021, his administration prioritized passing another round of COVID-19 pandemic relief to ensure a faster economic recovery. Along with additional health care funding, substantial fiscal aid for state and local governments, and a final round of economic impact payments (rebates), the American Rescue Plan Act (Pub. L. No 117–2, 135 Stat. 4 [2021]) made significant—though temporary—expansions to the child tax credit, the earned income tax credit, and the child and dependent care tax credit. It also made unemployment benefits and forgiven student loans (which were previously taxable in most circumstances) nontaxable. The latter paved the way for the Biden administration’s proposal to forgive a significant portion of student debt through an executive order.
CBO estimated that the ARPA would cost $1.8 billion over 10 years. The bill also kicked off a debate about the potential for high inflation. Supporters argued that the fiscal support would prevent a repeat of the slow recovery following the Great Recession, while opponents countered that the economy was already close enough to full potential that the plan would create serious challenges for the Federal Reserve in preventing the economy from overheating. Unlike prior COVID-19 relief legislation, the ARPA did not pass with bipartisan support. Only Democrats voted for the measure, using the budget reconciliation process to pass the bill in the Senate without the backing of 60 members.
Economic Impact Payments
ARPA enacted the third and final round of rebate check payments during the COVID-19 pandemic and recovery. The government issued checks of up to $1,400 each individual and dependent in an eligible household. For individuals with adjusted gross income above $75,000 (or $150,000 for joint filers), the payments phased down before being cutoff for individuals earning more than $99,000 ($198,000 for couples) with no children, and a slightly higher cutoff for households with children.
The 2021 Expanded Child Tax Credit and Child and Dependent Care Credit
Before 2021, the full benefit of the child tax credit was only available to families that met a certain income threshold. ARPA changed that by implementing full refundability, meaning that low- or no-income households with children could receive the full credit. The law was in place for calendar year 2021 but expired after that due to congressional gridlock on measure to extend the more generous CTC and other measures.
The maximum credit in 2021 increased from $2,000 for each child under age 17 to $3,000 for those ages 6 to 17, with up to $3,600 available for each child under age 6. Previously, filers with children age 17 could only claim a nonrefundable credit of up to $500. The ARPA made those children eligible for the full, refundable credit as well.
Another benefit for families was the temporary expansion of the child and dependent care tax credit. The ARPA converted the credit from nonrefundable to refundable, raised the maximum credit for each child from $3,000 to $8,000 and lifted the maximum credit amount per household from $6,000 to $16,000 for those with two or more qualifying children. The law also increased the percentage of expenses the credit could cover from 35 percent to 50 percent.
The 2021 Expanded Earned Income Tax Credit
For individuals without children, ARPA temporarily expanded the EITC, raising the percentage of wages used to determine the credit from 7.65 percent to 15.3 percent and raising the income level where the EITC maxes out to $9,820. Combined, these changes made the maximum available credit $1,500 for 2021, up from $500. The number of people eligible also increased in 2021 under ARPA, as the age range for eligibility was expanded to include younger workers and the income phaseout ranges were raised.