This week congress passed—and President Biden signed into law—the American Rescue Plan. Just like the two relief bills passed last year, the headline of this package is the amount of money being sent to qualifying individuals in the form of “stimulus checks”.
We’ll follow up later this month with a more in-depth breakdown of the entire bill, but today our sole focus will be on the stimulus payments and how yours could be impacted by when you file your taxes for 2020.
The bottom line: if your income in 2019, 2020, and 2021 (estimated) is anywhere near the threshold to qualify for a payment, then read carefully to determine the ideal time for you to file your taxes. Additionally, before you file your taxes for 2020, it may make sense to explore ways to reduce your 2020 income.
Okay, let’s discuss these stimulus checks.
When will payments be sent out?
According to President Biden, the payments will start getting sent out this month.
How much are the payments?
The payments are $1,400 per household member, including adults, children, and even adult dependents such as college students or elderly dependents.
So, a single taxpayer with no kids would receive $1,400.
A married couple with two minor children, one college student, and one adult child would receive $7,000 ($1,400 X 5 eligible members—2 parents, 2 minor children, 1 college student). Their adult child is not an eligible member for them.
Are there income limits?
Yes. Just like the previous two rounds of stimulus payments, not everyone is eligible to receive these checks. See below for the income thresholds and phaseout ranges:
Note that these phaseout ranges are much narrower than the first two rounds of stimulus payments. On the previous rounds, the single filers range extended all the way up to $100,000 and the married filers range all the way up to $200,000, but not this time.
What tax year is used to determine my income?
Now, we’ve come to the million-dollar question. And the answer is complicated.
This payment is technically a tax credit for tax year 2021. But rather than wait until you file your taxes next year to see if you qualify, the IRS is going to “front” you the payment now, using your most recent tax return they have on file as the best guess to see if you qualify or not.
If your income on file is high and you don’t qualify for a payment, but your 2021 income ends up being low enough, you’ll receive the payment when you file your taxes next year. On the other hand, if your income on file does qualify you for a payment, but your 2021 income ends up being high enough that you shouldn’t have received a check, you don’t have to pay it back come tax-time next year. You get to keep it.
This is largely the same way it worked with last year’s payments, just shifted forward one year. Last year, you were either sent stimulus checks (or not) based on your 2019 income. So, if you got nothing last year due to 2019 income, you may be receiving them when you file your taxes this year, assuming your 2020 income enables you to qualify.
There’s one additional wrinkle with this round. There’s potentially three different times or “checkpoints” at which the IRS will verify to see if you qualify for the stimulus:
Checkpoint 1: Right now, they verify using the income on file when they send the payments
Checkpoint 2: When you file your 2020 taxes, they verify using your 2020 income (if you've already filed your 2020 taxes, Checkpoint 2 is the same as Checkpoint 1)
Checkpoint 3: Next year when you file your 2021 taxes, they verify using your 2021 income
Let's look at some examples to illustrate.
What if my 2019 income was too high to qualify, but I do qualify based on my 2020 income?
For last year’s stimulus payments, you didn’t receive those at the time they were sent out—because your 2019 income showed that you were ineligible—but you will receive them once you file your taxes for 2020.
For this round of payments, whether you receive a payment now, when you file your taxes, or not at all, depends on when you file your taxes.
Example. Joe, a single taxpayer, earned $105,000 in 2019 but only $70,000 in 2020 due to COVID. He expects to earn closer to $105,000 again in 2021. He has not filed his taxes for 2021 yet.
Last year, Joe didn’t receive either of the stimulus checks that got sent out, because his 2019 income showed that he was not eligible. When Joe files his 2020 taxes this year, he will be “trued up” and receive his payment then.
For this round of payments, currently, Joe will not receive a check when payments go out this month, since the IRS will still be using his 2019 income. If Joe files his 2020 taxes now, or at least before the deadline, his 2020 income will show that he is eligible to receive this round of payments, and he will get his payment at that time.
If Joe files an extension, however, and files his taxes after September 1st, Joe won’t ever receive a payment for this round. The IRS won’t send him a check now, since his 2019 income shows he isn’t eligible. He’ll miss Checkpoint 2—filing his 2020 taxes—by filing an extension. And he won’t get “trued up” when he files his 2021 taxes next year because his 2021 income likely won’t qualify him to receive it.
Conclusion: Joe should file his 2020 taxes as soon as possible, or at least before the deadline. He should not file an extension this year.
What if I qualified based on my 2019 income, but not on 2020 income?
For last year’s stimulus payments, you did receive those when they were sent out. Even though—based on your 2020 income—you technically shouldn’t have been eligible to receive them, you’ll still get to keep those payments.
For this round of payments, you should wait a few weeks to file your taxes. Your 2019 income qualifies you to receive a payment, and that’s the most recent year the IRS has on file. You don’t want to file your 2020 taxes—which shows an income that doesn’t allow you to qualify—because then you would not receive a payment (at least until you file your 2021 taxes, when they’ll check again!).
Example. Ward and June Cleaver, married taxpayers with two boys, earned $140,000 in 2019 and $175,000 in 2020. They have not filed their taxes for 2020 yet.
Last year, the Cleavers received checks in both rounds of payments because their 2019 income qualified them to do so. Note that not only did they receive payments for themselves, but they also received a smaller check for each of their two boys.
For those two rounds of payments, even though the Cleavers’ 2020 income is in the phaseout range—meaning technically they should have received a partial payment, not the whole thing—they will still get to keep everything they received.
For the third round of payments, currently the Cleavers will receive a payment because the IRS will view their 2019 income and determine that they are eligible. Note that with this round, the amount of the check that Ward and June will receive for each child is also $1,400—equal to the amount they will receive for themselves. With a family of four, that’s a total of $5,600.
If the Cleavers don’t think about it and they file their 2020 taxes now—early enough for the IRS to have their 2020 income on file before sending out payments—they won’t receive any payments right now. Also note that with 2020 income of $175,000, for this round of stimulus, not only are they ineligible to receive the whole benefit, but they’re phased out entirely from any benefit at all, given the narrower phaseout range.
Conclusion: The Cleavers should wait to file their taxes until after they receive this round of stimulus payments. In their case, filing too early would be a $5,600 mistake.
Are there still ways I can reduce my 2020 income before I file my taxes?
Yes. If your 2020 income is near the phaseout range, it’s a good idea to explore ways you can reduce 2020 income. Options for doing this before you file your taxes include contributing to a Traditional IRA, a Health Savings Account, or a SEP IRA—assuming you haven’t already maxed out your contributions to those accounts.
We want to make sure to point out that everyone should make his or her own ethical calculation when it comes to these stimulus payments. You may feel that even though you may qualify to receive a payment, if you don’t need that payment, then it wouldn’t be right for you to take it. Or perhaps it wouldn’t be right for you to change when you file your taxes in order to make yourself eligible to receive the benefit.
From our perspective, this presents a planning opportunity that we want to make sure you’re aware of.
If you think this may apply to your situation, but you’re not sure what action (if any) to take, don’t hesitate to reach out!