Last week, the government passed the American Rescue Plan, which provided the third round of stimulus payments. This also includes enhanced child tax credits and unemployment benefits. These potential payments and tax credits all have qualifications based on income levels and provide some planning opportunities.
The bill provided stimulus payments, or “Recovery Rebates,” of $1400 per taxpayer and dependent based on certain levels of adjusted gross earnings.
The benefit phases out between $75,000 and $80,000 of adjusted gross income for single tax filers, $112,500 – $120,000 for the head of household filers, and $150,000 and $160,000 for married joint filers.
Do you qualify for the American Rescue Plan?
The income limits are based on either 2019, 2020, or 2021 earnings. There are three checks for eligibility:
1. If the most recent adjusted gross income on file is below the limit (2019 or 2020 if you already filed), then you automatically qualify.
2. If you did not qualify based on 2019 earnings, but you will based on your 2020 earnings, you have until 9/1/2020 to file and qualify.
3. If you did not qualify based on 2019 or 2020 but will you based on your 2021 income, then the rebate will be applied to your 2021 tax return.
Enhanced Child Tax Credits
The American Rescue Plan also provided enhanced Child Tax Credits for 2021. They are:
- An increase from $2000 to $3,600 each for children under 7
- $3,000 each for children aged 7 – 17
These credits also phase-out based on adjusted gross income at:
- $75,000 for single filers
- $112,500 for the head of household
- $150,000 for married filers
The benefit is reduced by $50 for each $1000 over the income limit. The benefit will be phased-in over the summer in monthly payments for those eligible beginning in July.
Note: These benefits CAN be clawed back if you exceed the income limits, depending on a safe harbor calculation.
The new law extended the enhanced unemployment benefits already in place through September of 2021. For 2020, the law made the first $10,200 of unemployment benefit per taxpayer tax–free subject to an adjusted gross income limit of $150,000 for all filing statuses.
IMPORTANT NOTE: For people who would qualify but have already filed 2020 tax returns, they should re-file to receive the additional tax benefit.
The following are things you may be able to do in order to maximize your benefits with the current American Rescue Plan.
- If you qualify for the Recovery Rebate based on 2019 income but would not be based on 2020, wait until after you have received the rebate based on 2019 to file your 2020 tax return.
- If you did not qualify based on 2019 and your 2020 income is close to the threshold, check with your tax advisor or financial planner to see if you are eligible to contribute to a deductible IRA or a SEP IRA plan (if self-employed) to reduce your income and possible qualify.
- If you did not qualify for the rebates in 2019 or 2020, but project to be close for 2021, and particularly if you have minor children to qualify for the child tax credits, act now to reduce your income. Consider:
- Increased 401k contributions
- Switching contributions from Roth (non – deductible) to traditional (deductible) if appropriate
- Talk to your employer about deferring bonuses into 2022
- In extreme cases, such as for parents with several dependents, taking un-paid leave may make sense as the tax incentives may offset the lost income.
We hope this has helped clarify some confusion and give you ideas on how to maximize these benefits for your particular situation. Still confused? Give us a call and we’d be happy to walk you through it. 517-321-4832
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