Exactly one year after the WHO declared COVID-19 a pandemic, on March 11, 2021, President Biden signed the historically large $1.9 trillion American Rescue Plan Act of 2021 (ARP) into law. Included in the ARP are the third round of COVID-19 stimulus checks for taxpayers, changes to the taxation of unemployment benefits received in 2020, significant changes to the Child Tax Credit (CTC) and Childcare and Dependent Care Credit (CDCC) for 2021, and more. This post will focus on the stimulus checks and 2020 unemployment benefits, with some things to consider before filing your 2020 taxes.
I think it’s safe to say that pretty much everyone knows that the stimulus checks are $1,400 per person. However, not everyone will get the full $1,400, and many people who received money from the first two stimulus packages won’t be getting any from the third.
The reason for this is a lower income limit, and potential planning opportunities have arisen due to the small phaseout windows. Single taxpayers are phased out between $75,000 - $80,000, Heads of Households from $112,500 - $120,000, and Married Filing Jointly from $150,000 - $160,000. These phaseout ranges are both lower and smaller than for the previous stimulus checks.
The main questions I’ve been hearing about, especially as we continue through the middle of tax season are, “if I make less money this year, can I get more stimulus money?” and, “if I make more money this year, will the government make me pay my stimulus back?” The answer to the second is a resounding “NO”. There is no clawback for the stimulus checks, so future tax returns can’t be used to demand repayment. To answer the first, let’s look at the three “checkpoints” taxpayers will pass when assessing eligibility for stimulus payment.
The three checkpoints are: now, with your 2019 or 2020 tax return currently on file; before the “Additional Payment Determination” (APD) date if your 2020 return hasn’t been filed before the first checkpoint; and your 2021 tax return filing.
Your stimulus payment at each checkpoint essentially boils down to this: subtract the total amount of ARP stimulus received so far (not the payments from 2020) from the amount of stimulus you’d be entitled to at the current checkpoint. If the difference is greater than $0, that’s how much you’ll get. If it’s $0 or negative, you get nothing at that checkpoint but also don’t have to repay stimulus money previously received.
Checkpoint 1 is NOW (or when you receive a payment)
Your 2019 and / or 2020 return has been filed. If you’re entitled to the full $1,400 per person, that’s what you’ll get soon (or it may have been direct deposited already), and you can ignore the rest of the checkpoints since you’ve received the full amount and there is no clawback.
If you received a partial or no stimulus, move to Checkpoint 2 if the payment was based off of your 2019 return or Checkpoint 3 if it was based off of your 2020 return.
Checkpoint 2 is before the Additional Payment Determination (APD) date
The Additional Payment Determination (APD) date is the earlier of 90 days after 2020’s return filing deadline or September 1, 2021. Currently the APD is 90 days after April 15th (June 15th for the entire state of Texas, portions of OK, LA, and other areas specified by the IRS). However, this may change as there is some pressure on the IRS to delay the April 15th deadline like they did last year. Note that the APD date is earlier than the 6-month filing extension date – keep that in mind if you normally file later!
Your 2020 tax return must be filed before the APD date for your 2020 return to be used. If your 2020 income wouldn’t result in any money received, it doesn’t really matter, but if your 2020 income would result in a check being cut, make sure to file before the APD date.
When you file your 2020 tax return, your stimulus amount will be recalculated based on your 2020 income, and the IRS will send an additional check to “true-up” the difference if eligible.
Once again, if you received the full stimulus up to this point, ignore Checkpoint 3. Otherwise…
Checkpoint 3 is when 2021 returns are filed
If your 2021 AGI is lower than your 2019 and / or 2020 AGI (and below the phaseout), the applicable credit will be applied on your 2021 tax return.
$300 per week benefits have been extended to September 6, 2021. Unemployment benefits are generally taxable income, however, the ARP has partially changed this for 2020 (and only 2020) to prevent a surprise tax bill for millions of unemployment benefit recipients. Up to $10,200 per person in 2020 is non-taxable if your AGI including the unemployment received is less than $150,000 (regardless of your filing status). At $150,001, this tax break disappears completely.
If you’ve already filed your 2020 tax return and included unemployment as taxable income, the IRS has emphasized to not file an amended return at this time until the IRS issues additional guidance.
It’s hard to substantially change your 2020 income at this point, but you do have a few weeks to contribute to your tax-deductible IRAs and HSAs if eligible. If you’re toeing AGI limits, these deductible contributions could be the change that gets you a stimulus check or tax-free unemployment benefits.
If your 2020 income is higher than your 2019 income, wait until you get the initial check (if eligible for one) so your higher 2020 income doesn’t get used instead.
It’s easier to plan around 2021 income. For those who typically contribute to ROTH IRAs or ROTH 401ks, the deferral for Traditional 401ks and IRAs could lower your income enough to become eligible for stimulus payments. Deductible HSA contributions can also reduce income by a few thousand dollars.
If you’re trying to get a stimulus payment with your 2021 return, be wary of anything that can increase your income unintentionally in 2021. ROTH conversions, capital gains transactions, etc. However, it’s critical to balance receiving “free” stimulus money with making decisions that lower your income. Quitting your job just to get stimulus money might be shooting yourself in the foot, and completely stopping diversification of concentrated stock or exercising options could cause far more damage over time than the benefit of receiving $1400 per person.
If you’re right above the AGI limit, something you might consider is requesting an extended vacation (preferably near the end of the year so you can better calculate the amount of vacation needed) that exceeds your paid vacation time. You can get a couple extra weeks of vacation and lower your income enough to get the stimulus payment. Sure, you’ll make less money this year, but if you took the same vacation in a different year, you wouldn’t get an extra check. At least in 2021 you can get something for taking the vacation.
Bonus timing – if you normally get bonuses at the end of the year, you might consider requesting them in January 2022 instead. Of course there are risks to this that must be weighed, and it may not be possible at your company. But it’s a request worth considering.
There’s a lot going on with the American Rescue Plan Act of 2021, and this post dials in just on the $1,400 per person checks and other considerations for the 2020 tax year. Filing deadlines are coming up fast, the unique APD date deadline has the potential to trip up people hoping to use their 2020 tax returns to get a bigger stimulus check, and the $150,000 AGI cliff for tax-free unemployment benefits can be a missed opportunity for some taxpayers right above that limit.
Expect a post regarding the changes to tax credits in 2021 soon. I was originally going to include them here, but since they apply to the 2021 tax year, I decided to separate that out. If you have any questions or want to see if there are any last-minute changes you can make before your 2020 income is locked in for good, schedule a time to talk.