BY Ben Jennings, Director of Planning Research

On March 11th, President Biden signed the most recent stimulus package to come out of Washington. As with most tax and economic legislation, there are too many details to discuss in a brief article. However, there are a very few key points we want to highlight for you, your friends, and family members.

 
RECOVERY REBATES 

The predominant feature of the Act are recovery rebates of up to $1,400 per person (including dependents) based on adjusted gross income (AGI). Full payments are available if your income is below $150,000 (married filing jointly), $75,000 (single), or $112,500 (head of household). Your income in what year? Great question!

There are three tests to look at sequentially. If you get the full rebate amount after the 1st test, you can stop. Otherwise, go on to the second test: if you are eligible for the full rebate, stop. Finally, you can go to the third opportunity (which will be based on your 2021 AGI). Note: whatever you qualify for under the earliest of these tests in sequence is what you get to keep as a minimum – there’s no “claw back” if you fail to qualify under the later test(s).

Test 1 (Latest Return Filed - 2019 or 2020):

If the most recent return you’ve filed (2019 or 2020) is below the lower threshold noted above, checks for the full amounts should be on the way. If the 2019 return is the most recent return and shows AGI in the phase-out range, you will receive a partial rebate. This can increase later.

If your income on your 2019 tax return is below the thresholds above, and you haven’t yet filed your 2020 return – don’t be in a hurry to file. This is especially true if your 2020 AGI will be higher. The check(s) should be on their way soon; you can ignore the following tests.

Test 2 (2020 Return):

If your 2020 AGI was less than 2019, they will base your rebate on the 2020 AGI if your return is filed before a certain date (to be determined - potentially as early as July 15th, 2021, but likely September 1st, 2021). If you haven’t already qualified based on Test 1 for the maximum rebate, this might get you a bigger check.

If you are due a partial rebate or refund based on the 2019 return, but you should get more based on 2020 – you may want to wait to file the 2020 return until you’ve received what you are due based on the 2019 return, so you don’t slow the process down.

Test 3 (2021 Return):

If your 2021 AGI is below the upper threshold ($80k singles, $160k married, $120k head of household), the IRS will send additional amounts if an adjustment is needed.

INCREASED TAX CREDITS FOR 2021

There are expanded benefits to the healthcare premium assistance tax credit for 2021 and 2022, but we want to emphasize here the child-related credits.

Child Tax Credit

These have “extra” amounts for 2021: up to $3,600 for children under 6, or $3,000 for children 6 through 17. The extra amounts are subject to lower than usual phase-outs (based on 2019 / 2020 returns, and begin at $150,000 (joint), $112,500 (head of household), or $75,000 (single and others). Recognize those numbers? Yes, same as the rebate thresholds!

A portion of this credit may be paid in advance, beginning in July 2021; unlike the recovery rebate, the amount paid is subject to “claw back” if you end up not qualifying later based on 2021 income.

Child & Dependent Care Tax Credit

This is fully refundable (can reduce your tax below zero). It is a maximum of $4,000 per child or $8,000 for two or more children for 2021 only. Both the maximum eligible expenses and the maximum applicable percentage have increased.

UNEMPLOYMENT & HEALTHCARE

You may have heard that benefits set to expire this past week have been extended to September 6th, 2021. The extra federal benefit amount (on top of state benefits) is $300 per week.

An additional change impacts the taxation of 2020 unemployment benefits (which are typically taxable income). If your AGI (any filing status) is under $150,000, up to $10,200 per person of unemployment compensation will be tax-free. If this impacts you and you’ve already filed your 2020 return, you will want to file an amended return.

Finally, if you were laid off, you should be aware there are now additional health care benefits (potentially no-cost COBRA benefits) available through September 2021.

FINAL THOUGHTS

As we noted initially, there is a lot in this bill! We have only scratched the surface, and you may need more details, but we wanted to highlight some major areas to be aware of and possibly explore further. Be sure to give us a call, or send an email with any questions you have.