After congress passed the most recent stimulus (which included something called a vote-a-rama) there are a lot of new details to cover!
The big news was the approval of Stimulus checks of $1,400. Similar to the previous rounds of stimulus payments, this will be an advanced credit. This will be in advance of your 2021 tax return. The previous two stimulus checks were advanced credits on your 2020 return.
Even though that sounds pretty straightforward, quite a few things have changed this time around.
Eligible individuals has now been expanded to include tax filers and ANY tax dependents. A dependent could be an adult child or a relative.
The income phase out, which reduces your stimulus check, is more aggressive than the previous two rounds. The phaseout occurs at the following income ranges:
- Individual $75,000- $80,000
- Head of Household $112,500- $120,000
- Married Filing Joint $150,000- $160,000
Example: A couple with no dependents & a potential stimulus check of $2,800 would be reduced to 60% of that value if they have earned income of $156,000.
($156,000 – $150,000 ) Divided By ($160,000- $150,000) = 60%
60% of $2,800 = $1,680
One welcomed change is how quick this should be rolled out. It’s possible as soon as this weekend that some would see their direct deposits. If you received a check or debit card previously, be sure to check your mail over the next few weeks.
The income limits that will be reviewed to estimate your stimulus payment will be based on your most recent tax return on file. If you filed your 2020 return, then that is the most current. If you haven’t filed your 2020 return, your 2019 return will be used.
If your 2019 income was in the phaseout limits mentioned above or higher, but have fallen below those numbers in 2020 and you haven’t filed your 2020 return, you will still have an opportunity to receive your stimulus, though it will be delayed.
After you file your return the IRS will review records again in the future.
If you don’t qualify with your 2019, or 2020 return, there is still a final chance you may be eligible to receive the stimulus payment as a credit on your tax return when you file your 2021 tax return if your income is below those limits.
Like the previous two stimulus payments, if you received more than your income shows you should have when you file your 2021 tax return, you will not have to pay it back!
Child Tax Credit
For those with children, this is the biggest news out of the stimulus package. Most people fully expected the additional $1,400 for a stimulus check, but a TEMPORARY increase on the child tax credit was a welcomed surprise to families. Not only may you be seeing additional tax credits for your child, but you may begin receiving advanced payment of your child tax credit.
Children dependents age 17 and under (normally 16 and under, but this is a special increase for 2021) are eligible for the child tax credit. The maximum child credit increased to $3,000 with an enhanced maximum credit to a max of $3,600 for a qualified child under the age of 6.
Like many aspects of the stimulus and tax credits in general, there are income phaseouts to be aware of. To make things a little more complicated there are two different phaseouts
Phaseout for first $2,000 of the child tax-credit:
- Single $200,000
- Married Filing Jointly $400,000
Phaseout for the special increase in the child tax credit in 2021 at a rate of $50 reduction per $1,000 above the following amounts:
- Single $75,000
- Head of household $112,500
- Married Filing Jointly $150,000
Your credits will start coming in the form of monthly payments. Using the most recent tax return on file, the IRS will estimate your child tax credit and begin paying 50% prorated over the 6 month period from July to December. The remaining 50% will be credited to your 2021 tax-return.
One big difference between stimulus payments and this new advanced child tax credit is that if the IRS’s estimate of your credit is off from what you are actually entitled to, you may have to pay back the credit when you file your 2021 tax return.
This is especially problematic for divorced parents who take turns claiming a child for tax purposes on alternate year. For lower income filers, there is a slight reprieve that allows you to keep up to $2,000 of overpayments per child.
Those income limits are:
- Individual $40,000- $80,000
- Head of household $50,000- $100,000
- Married Filing Joint $60,000- $120,000
Another huge benefit that came out of the most recent stimulus is that a portion of unemployment benefits will now be considered tax-free income up to $10,200. Currently this only applies to unemployment received in 2020. There is an income limit that you must stay below in order for your unemployment benefits to be considered tax-free. That limit is $150,000 and it appears to be across all filing statuses.
Additionally, the $300/week additional unemployment benefits has been extended through September 6th 2021.
Tax-Free Student Loan Forgiveness, but not Student Loan Forgiveness
One last important note I’ll make on the most recent stimulus is that they added a provision that will consider any student loan forgiveness made from 2021 to 2025 will be income tax-free. Not to be confused with an announcement of student loan forgiveness, which wasn’t a part of this package. A very interesting thing to add proactively, but further increases the possibility for potential student loan forgiveness will be on the table for future discussions.
I’m looking forward to things returning to normal and future stimulus’s not being required. If that is not the case, I’m honored to be your resource on these important details.
I want to thank the amazing team at Kitces.com for quickly providing a summary to financial planners so that we can distill down the critical details for our clients.