The Third Stimulus Package Brings Big Windfall to Families
5 minute read
The American Rescue Plan Act was signed into law on March 11th by President Joe Biden. The latest round of stimulus weighs in at a whopping $1.9 trillion with a vast majority of the money being delivered directly to individuals. The third round of ‘stimulus checks’ is slightly more targeted than the previous rounds and is especially generous to families with kids. Here are the three biggest benefits coming to families:
1. $1,400 Direct Stimulus Payments
The centerpiece of the American Rescue Plan is a third round of ‘stimulus checks.’
How much do I get?
$1,400 for each individual and qualifying dependent.
For example, Michael and Jan are married and file a joint tax return with three children claimed as dependents. They will qualify for $1,400 x 5 = $7,000
Who qualifies
Single and married filing separately:
Full payment if your AGI is under $75,000
Partial payment if between $75,000-$80,000, and
Phaseout (receive nothing) if over $80,000
Married filing jointly:
Full payment if your AGI is under $150,000,
Partial if between $150,000-$160,000
Phaseout (receive nothing) if over $160,000
Note: Your Adjusted Gross Income (AGI) is your total wages minus income adjustments. You can find this on the first page of your previous year tax return or, for a very quick projection, take your total estimated income for the year and subtract pre-tax retirement account contributions, student loan interest, and alimony payments.
When do I get it?
You will receive a check (or debit card) in the mail if your most recent AGI on file (2019 tax return, or 2020 tax return if already filed) is under the phaseout. Payments have already started, but it could be months before you receive anything. It simply takes a long time to administer these payments and there is no preference in ordering.
You will receive a credit on your 2021 tax return if you are over the AGI phaseout on your 2019 or 2020 tax return but qualify under on your 2021 return. This could be a scenario in which you lose your job this year.
Will I owe the IRS if I receive a check, but later don’t qualify?
This could be the result if you lost your job in 2020 but regained employment with a substantial salary in 2021. The IRS has said they will not ‘claw-back’ any direct payments, meaning if you receive the money, it’s yours.
2. Child Tax Credit
The American Rescue Plan temporarily increases the Child Tax Credit in 2021. The tax credit will consist of the ‘regular child tax credit’ and a new ‘enhanced child tax credit.’ If you have kids under the age of 17, there could be a lot of money headed your way.
How much do I get?
Regular Child Tax Credit of $2,000 per child under the age of 17
+ $1,600 per child under the age of 6
+ $1,000 per child between the ages of 6-17
Who qualifies?
Single and married filing separately:
Regular Tax Credit: Full payment if your AGI is under $200,000
Enhanced Tax Credit: Full payment if your AGI is under $75,000 and partial payment if between $75,000-$107,000.
Married filing jointly:
Regular Tax Credit: Full payment if your AGI is under $400,000
Enhanced Tax Credit: Full payment if your AGI is under $150,000 and partial payment if between $150,000-$182,000.
When do I get it?
You will receive a check (or debit card) in the mail equal to 50% of your expected credit if your most recent AGI on file (2019 tax return, or 2020 tax return if already filed) is under the phaseout. You will receive equal installments from July 1, 2021 to December 31, 2021. The remaining 50% will be a tax credit on your 2021 return.
You will receive a credit on your 2021 tax return if your AGI is over the phaseout on your 2019 or 2020 tax return, but you qualify under your 2021 return, possibly due to a job loss this year.
Will I owe the IRS if I receive a check, but later don’t qualify?
Yes! Unlike the stimulus checks. If you receive an advance payment due to your 2019 or 2020 return, but your 2021 earning are over the phaseout, the IRS will want the money back when it comes time to file taxes for 2021. There are a few exceptions to explore with your CPA or financial planner.
3. Child and Dependent Care Tax Credit
The American Rescue plan brings more good news for families with children under 13.
How much do I get?
If your AGI is less than $125,000 in 2021 (regardless of filing status) you could be entitled to a credit worth 50% of childcare expenses (such as daycare) to a maximum eligible expense of $8,000.
If your AGI is between $125,000 and $185,000 in 2021 (regardless of filing status) you could be entitled to a credit of between 20%-50%. The percentage is reduced by 1% for every $2,000 over $125,000.
If your AGI is between $185,000 and $400,000 (regardless of filing status) you could be entitled to a credit equal to 20%. Anyone over $400,000 AGI will not be eligible for the credit.
Other notable changes made by the American Rescue Plan Act
Student debt forgiveness will be tax-free: Student debt forgiven between 2021 and 2025 will be tax-free. Previously, student debt forgiveness was taxable to the borrower.
Additional $300 per week in unemployment insurance: While this was introduced in a previous stimulus package, it has been extended to September 6th, 2021.
Extended health care coverage through COBRA at $0: If you are involuntarily terminated from your job between April and September, your former employer is required to continue paying for your health coverage. The employer's cost will be reimbursable through a tax credit on their 2021 return.
The American Rescue Plan primarily aims to financially assist individuals and families through the tail-end of the COVID crisis. While the rules around receiving payments are complex, hopefully, this serves as a primer to understanding your eligibility for certain payments. Contact me to begin the financial planning process that will provide you with personalized long-term guidance on this and other complex financial opportunities.