How will the American Rescue Plan impact your 2021 tax liability?

By Alex Brill, Kyle Pomerleau, and Grant M. Seiter

Last week, President Biden signed into law the $1.9 trillion American Rescue Plan (ARP). The plan provides economic relief to households through the tax code, making several credits fully refundable and advanceable and providing stimulus checks that already started arriving in bank accounts this past weekend.

The ARP includes four major tax provisions: a $1,400 recovery rebate credit (aka stimulus checks or economic impact payments), an expansion to the earned income tax credit (EITC), and expanded benefits for most households with children through the child tax credit (CTC) and child and dependent care tax credit (CDCTC). These major tax provisions, in effect only for 2021, are estimated to cost the federal government over $554 billion. (This economic relief follows multiple rounds of legislation in 2020 that included stimulus checks of $1,200 last March and $600 last December.)

We have created a web application to help users explore how the American Rescue Plan will impact their 2021 federal tax liability. Users can specify basic demographic information (age and marital status), the number and age of dependents, the level and composition of their income, and any itemizable expense that a taxpayer may report. The app then calculates income and payroll tax liabilities, as well as the value of refundable and nonrefundable credits. It also allows users to see the plan’s impact on average and marginal tax rates compared to previous law.

For example, for a joint filer earning $75,000 in yearly
wage income with two children under six years old, the application shows that the
plan would zero out all income tax liability and provide a net income tax
refund of $7,210 — for a total income tax reduction of $8,800, net of
refundable credits (see Figure 1).

Figure 1. Tax Liabilities for a Married Taxpayer with Two Young
Children Earning $75,000, 2021

  Previous
Law
American
Rescue Plan
Change
Individual Income
Tax
$1,590 -$7,210 -$8,800
Marginal Income
Tax Rate
12% 12% 0%

Source: Authors’ calculations using the Tax-Cruncher-ARP application.

In addition to tax liability calculations, the application creates a series of interactive charts that allow users to explore how a taxpayer’s average and marginal income and payroll tax rates would change if their earnings (or a different income measure of their choosing) were to vary (as shown in Figure 2). Similarly, the app generates other charts that show how total income and payroll tax liability and credits — such as the child tax credit, child and dependent care credit, earned income tax credit, and recovery rebate credit — would vary by income.

Figure 2. Tax Rates by Taxpayer Earnings, 2021

Source: Authors’ calculations using the Tax-Cruncher-ARP application.

As the web application verifies, and several tax experts have noted, marginal tax rates can exceed 100 percent for some families caught in the phase-out range of the ARP’s expanded credits (with incomes above $150,000). The web application also shows the significant impact these provisions have on the after-tax income of low-income households. You can access the web application here.