Here We Go Again

The pandemic is over a year old now, and President Biden has officially signed the American Rescue Plan (ARP).  The ARP is the third major federal government effort to keep the economy afloat.  The purpose of this blog post is to examine some of the very unique and intriguing elements of the latest stimulus package and what families can expect over the rest of the calendar year (with some aspects lingering until you file your 2021 taxes in 2022).  

Shot Through The Heart, And COVID’s To Blame, Darlin’, You Give Stimulus A Bad Name

The word “stimulus” has become a lightning rod as Democrats and Republicans squabble over how much the stimulus checks are for and what should qualify someone to receive money.  But the Federal Reserve engages in stimulus efforts as part of its regular mandate to control inflation and maximize employment.  When times are hard, the “Fed” buys assets to inject liquidity into the economy.  Or they lower the reserve requirements for banks to help them lend more.  Among a few other tools in their toolbox. So it’s unfortunate that the stimulus packages have been so partisan, because the Fed has been engaging in its own version of stimulus activities via open market operations for almost 100 years.  

As I’ve written about before, the U.S. economy is largely driven by consumption.  That is, you and me going out to dinner, buying a new chainmail scrubber for my cast iron skillet (I’m very excited), and bulk sunscreen (have you seen the sun today?  beautiful and murderous).  

Many, many Americans have lost their paychecks, or had COVID drive a proverbial truck through their usual level of earnings due to furloughs, reduced hours, etc.  So without their usual level of spending, we all suffer from a sluggish economy.  An easy (relative, anyway) fix to this problem is give the people money.  The stimulus checks will be a 2021 tax credit, paid in advance based on the most recent tax information the IRS has on file.  So, if you haven’t filed yet and your 2019 tax return makes you eligible for the stimulus check, there’s nothing else for you to do.  You should receive your stimulus check in the next few weeks.  If your 2020 income would make you eligible but your 2019 would not (i.e., you made less in 2020 than 2019), you’ll receive your stimulus check by the earlier of 90 days after the tax filing deadline (currently 4/15/2021) OR 9/1/2021.  So for my tax preparation friends reading this, as if you couldn’t already see the writing on the wall, it seems like there’s a good chance tax season is extended again.  Finally, if your 2021 income is lower than 2020 and 2019 and you were actually eligible for the stimulus check, you’ll receive it when you file your 2021 taxes in 2022.

I know, I know.  I’m getting long-winded here.  But I want you to know when you’ll have that money in your pocket!  If you have not yet filed your 2020 tax return and you expect that your 2020 return will make you eligible, I would recommend you file ASAP to get your money faster.  

So how much will you receive from Uncle Sam?  That depends on how much you make and how many dependents you have.

At a high level, the stimulus checks will be a multiple of $1,400 per person, depending on how many eligible individuals are in the household.  For example, are you married with no kids?  $2,800  Single with no kids? $1,400.  

What’s different about this round of stimulus checks is the expanded eligibility for dependents.  Previous rounds of stimulus only included children for whom a Child Tax Credit (CTC) could be claimed.  Now, each dependent (including children over 16 and elderly parents claimed as a dependent) adds an additional $1,400 to the household total.  For example:

Married with 2 young kids?  $5,600
Single but claiming Dad as a dependent?  $2,800

But.  Similar to previous rounds of stimulus, there are income limits to Americans that qualify for the stimulus money and they’re not quite as forgiving as the previous rounds (for higher earners).  In fact, the phaseout ranges for the stimulus checks are much narrower and Americans will start to lose their potential benefit faster than they did with previous stimulus checks.  

Single filers start to lose part of the benefit once their Adjusted Gross Income (AGI) exceeds $75,000, and will lose all of it by the time their AGI reaches $80,000.
Married filers start to lose part of the benefit once their Adjusted Gross Income (AGI) exceeds $150,000, and will lose all of it by the time their AGI reaches $160,000.
Head of household filers start to lose part of the benefit once their Adjusted Gross Income (AGI) exceeds $112,500, and will lose all of it by the time their AGI reaches $120,000.

Suppose a married couple, filing jointly, with two children (ages 7 and 3) has an AGI of $140,000.  Their benefit would be $1,400 x 4 = $5,600.
Suppose that same couple has an AGI of $155,000.  In other words, they’re 50% through the phaseout range, so they’ll lose 50% of their benefit, or $2,800.
Suppose that same couple has an AGI of exactly $160,000.  They get nothing.  Nada.  Zilch.  

Finally, absolutely NONE of the stimulus money will be “clawed back,” or taken away from you if your 2021 income is high enough that you wouldn’t be eligible.  So if your 2020 income is low enough that you ARE eligible, there’s no reason not to file ASAP, unless you owe taxes and need time to come up with the cash.  You can find a handy dandy stimulus check calculator here.  

Can’t Find No Job, Therefore I Ain’t Got No Money To Pay The Rent

Or the taxes on unemployment compensation! 

The pandemic has interrupted the work history of many, many millions of Americans.  Even today, over a year into the pandemic, over 700,000 Americans are still filing new unemployment claims.

Historically, unemployment compensation (UC) has been taxable.  Congress addressed that through the American Rescue Plan.  Or, at least partially addressed it. 

If you had an AGI up to $150,000 in 2020 (regardless of your filing status), Uncle Sam will give you a pass on up to $10,200 of UC.  But you have to include the UC in your AGI calculation.  A married couple could theoretically receive up to $20,400 of UC, tax-free, if their combined UC benefits and other income amounted to less than $150,000 (AGI). 

Speaking of Unemployment

The federal government has extended (again) “regular” unemployment, Pandemic Unemployment Assistance (PUA), and Federal Pandemic Unemployment Compensation (FPUC) through September 6th, 2021.  It also established more federal money for states to keep paying for the first week of unemployment (some states required you to go at least one week without pay).  

This is welcome, if not entirely novel, news.  The government is keeping money flowing to households that have experienced long bouts of unemployment, would otherwise be ineligible for unemployment, and adds an additional $300/week for a few more months. 

It Pays To Be A Parent

I’ve already mentioned the increased stimulus checks for dependents.  But there are two additional, VERY significant benefits in the latest stimulus package for parents.  First up is a robust expansion of the Child Tax Credit, followed by a widening of the Child & Dependent Care Credit.

Do You Have Children?

If so, you may be accustomed to receiving up to $2,000 per child under the age of 17.  The American Rescue Plan temporarily increases this age limit to 18 for the year 2021 with an additional $1,000 or $1,600, with some strings attached.

Not only do you get an extra year of tax credit (for this year only, so far), but those little cherubs might ALL be worth more too, thanks to an enhanced .  Instead of the traditional Child Tax Credit (CTC) of $2,000/child, the American Rescue Plan temporarily increases this to $3,000/kid under 18 or $3,600/kid under the age of 6 on 12/31/2021 via enhanced Child Tax Credits.  So everybody with kids under the age of 18 gets at least another $1,000, if not $1,600 per child.  But.  You knew this was coming, right?

There are income limits.  You will lose the extra $1,000/$1,600 by $50 for each $1,000 you are over separate phaseout thresholds of $75,000/$150,000/$112,500 for Single/Married Filing Jointly/Head of Household filers, respectively.

So let’s say a married couple, filing jointly, has an AGI of $160,000 and they have a child that is nine years old.  Their AGI exceeds the phaseout threshold by $10,000.  So their CTC would start at $3,000, but the additional $1,000 above the normal CTC of $2,000 would be reduced by 10 x $50 = $500.  Therefore, their CTC would decline to $2,500.

It’s important to point out that the phaseout for the “regular” CTC of $2,000 remains the same.  It’s only the “enhanced” CTC of the additional $1,000/$1,600 that has lower phaseout limits. 

The “regular” CTC still phases out at $200,000/400,000 AGI for single/married filers, respectively.  The “regular” CTC will be reduced by $50 for every $1,000 over those aforementioned $200k/$400k AGI thresholds.  

The CTC is also fully refundable for 2021, which will be a benefit to households on the lower end the of the income spectrum.  Prior to the American Rescue Plan, up to $1,400 of the CTC was refundable.  For 2021, the full amount of the $3,000 (or $3,600 per child under 6) credit per child is refundable.  

In the spirit of getting money into American wallets as fast as possible, the government will actually be paying half of the anticipated 2021 CTC in advance.  The government will use the tax information on file to pay 50% of the estimated 2021 CTC in equal installments from July through December this year.  So that could be as much as $300 (for children under 6) or $250 (children over 6 but under 18 on 12/31/21) PER MONTH from July through December.  The IRS might update and recalculate the advance once your 2020 taxes are filed though, for what it’s worth.  While the stimulus checks won’t be “clawed” back, advance payments of the CTC WILL be rescinded at tax time if it turns out they were overpaid based on your eventual 2021 tax return.

For those of you keeping score at home, that’s an additional $1,400 per child PLUS an extra $1,500-$1,800 per child (depending on their age) in your pocket this year.  

Are You Paying Someone Else To Watch Your Kids While You Work?

I wrote about previous changes to Flexible Spending Accounts here.  

But the American Rescue Plan makes BIG changes to the Child & Dependent Care Credit for 2021.  Prior to the American Rescue Plan, Americans could claim a credit for a percentage of their qualified childcare expenses up to $3,000 for one child, or up to $6,000 for two or  more children, provided the child(ren) were under the age of 13.  

For 2021 only, the American Rescue Plan bumps these figures up to $8,000 for one child or $16,000 for 2+ children!  Not only that, but the percentage of the expenses that can be claimed to determine the credit has been increased significantly, and the credit is fully refundable!  

Previously, taxpayers could claim up to 35% of their eligible dependent care expenses, but the percentage that be claimed declined to a maximum of 20% as a taxpayer’s AGI grew.  So, the absolute most a taxpayer could previously claim was $1,050 fore one child or $2,100 for two children.

Thanks to the American Rescue Plan, the maximum percentage of eligible expenses has increased to 50% and doesn’t start phasing out until after $125,000 (regardless of filing status), which means taxpayers could see Child and Dependent Care tax credits up to $4,000 for one child or a maximum of $8,000 for two or more children.  

Unfortunately for some high earners that have been used to receiving a tax credit for at least 20% of their dependent care expenses, the income phaseout for 2021 might actually exhaust their entire tax credit by the time their AGI has reached $440,000.  For high income earners, this means they could be missing at least $1,050 or $2,100 in tax credits for 2021, depending on how many children under 13 they have.  

Feel Like Giving To Charity?

This wasn’t in this stimulus package but keep in mind everybody is entitled to a $300 above-the-line charitable deduction this year!  

So What Should You Do With The Money?

Well, I guess the kneejerk advice is to spend it.  At least that’s the idea anyway.  Use the money to support yourselves and your local economy.

But suppose you find yourself not really needing this extra money to cover bills?  Might I recommend rebuilding your emergency fund?  Or, you could fund a Roth IRA for 2020 up until the time you file your taxes (or 4/15/2021).  If you’re sitting on a bunch of money in a savings account that is surely not paying much interest, you can book a meeting with a Philadelphia fee-only financial planner.

As always, I’m here to help you answer any questions and be a resource for you and the folks you care about that stand to benefit from these stimulus packages.  There were additional significant elements to this package for folks that need rental assistance, pension plans with fuzzy math, and healthcare.  You can read more about those changes here.  

-Brendan