Recently Passed Stimulus Act Results in a Third Stimulus Payment for Eligible Individuals
Edward A. Zurndorfer
The latest stimulus act signed into law recently in March 2021 by President Biden includes a new stimulus payment for 2021 and expanded tax-related benefits for families with children and other dependents. This week’s FEDZONE column and next week’s FEDZONE column will discuss the new stimulus payment and the tax-related family benefits for families, respectively.
The new benefits are particularly helpful for low-income individuals. But the benefits extend well into the middle-income individuals with many eligible low- and middle-income individuals eligible for more than $10,000 in tax-free income during 2021. Even high-income individuals can benefit in 2021 through expanded tax credits for child and dependent care costs.
But as will be discussed explained, the design of these tax benefits creates strong incentives for individuals to beware of, and keep close attention, to their 2021 adjusted gross incomes (AGI). This is because some of the year’s best tax benefits “phase out” above individual AGI thresholds. These AGI thresholds depend on an individual’s 2021 federal income tax filing status (single, head of household, married filing joint, married filing separate, or qualified widow/widower).
3rd Round Stimulus Payments (the First Stimulus Payment During 2021)
Perhaps for families, the most generous 2021 benefit coming out of the latest stimulus act is the third-round stimulus payments or rebate credit of up to $1,400 per household member. Household members include both parents, younger and older children and adult dependents. There are AGI limits just like there were for the first and second round stimulus payments during 2020 (based on 2019 and 2020 AGI). For the third-round stimulus payment, the amount of the individual’s third round stimulus payment will depend on the individual’s AGI from the individual’s most recently filed federal income tax return. If the individual had filed the 2020 federal income tax return as of March 1, 2021 then the individual’s 2020 AGI will be used. If the individual had not filed his or her 2020 federal income tax return as of March 1, 2021, the individual’s 2019 AGI will be used.
The IRS started sending third-round stimulus payments in mid-March 2021. For those individuals who are not eligible for a stimulus payment based in 2019 or 2020 AGI but may qualify based on their 2021 AGI, they can get some if not all of their $1,400 payments as a “recovery rebate tax credit’ when they file their 2021 federal income tax return in spring 2022. In particular, the IRS will make available as part of the 2021 individual tax filing forms a “recovery rebate credit” worksheet which will be used to determine an individual’s eligibility for the third-round stimulus payment based on 2021 AGI. A similar “recovery rebate credit” worksheet is part of the 2020 individual tax filing forms for helping an individual’s eligibility for the first two stimulus payments based on 2020 AGI.
For the 2021 stimulus payment and recovery rebate credits, the phase-out is rather steep. The phase-out range is $150,000 to $160,000 for married filing joint filers; $112,500 to $120,000 for head of household filers; and $75,000 to $80,000 for single filers. The following examples will help illustrate:
Example 1. Jim and Susan file as married filing joint. During 2019, their AGI was $152,600. When the March 2021 stimulus payment was issued in mid- March 2021, Jim and Susan had not filed their 2020 federal income tax return. Their stimulus payment was based on their 2019 AGI of $152,600, which is between $150,000 and $160,000. The way the “phaseout” works is that for every $50 a married couple’s AGI is over $150,000, the couple will lose $14 of the third-round stimulus payment. In Jim and Susan’s case, $152,600 less $150,000 = $2,600.
$2,600/$50 equals 52 (multiples)
52 times $14 equals $728
Of the $2,800 stimulus payment that Jim and Susan are entitled to, $728 will be deducted due to their excess AGI of $2,600, resulting in a net third-round stimulus payment of $2,800 less $728 or $2,072.
Example 2. Nancy is single and had AGI of $76,230 during 2019. Nancy has not filed her 2020 income tax return as of the middle of March 2021. The way the “phaseout” works for individuals who file as single is that for every $50 Nancy’s 2019 AGI is over $75,000, Nancy will lose $14 of her stimulus payment.
$76,230 less $75,000 = $1,230
$1,230/$50 equals 24.6 (multiples)
24.6 times $14 equals $344
Of the $1,400 stimulus payment that Nancy is entitled to, $344 will be deducted due to her excess AGI of $344.
Her net stimulus payment will be reduced to $1,400 less $344, or $1,056.
Note the following: (1) Jim and Susan, and Nancy can reduce, if nor eliminate, the reduction in their recent stimulus payments if their 2021 AGIs are reduced below $150,000 and $75,000, respectively; (2) since AGI is not reduced by itemized deductions such as mortgage interest or charitable contributions, or by tax credits it is important for those individuals who do not qualify for the some or all of the third-round stimulus payment recently issued (based on 2019 or 2020 AG) that they may qualify for the remainder or all of the third round payment based on their reduced 2021 AGI.
It is therefore important for federal employees who may not qualify for the third-round stimulus payment (based on too large 2019 AGI or 2020 AGI) to understand there are financial moves they can perform during 2021 that can reduce 2021 AGI. For federal employees, contributions to the traditional Thrift Savings Plan (TSP) will reduce an employee’s taxable salary which will in turn reduces the employee’s AGI. Those employees who are married and whose spouses work in private industry with access to traditional 401(k) or 403(b) qualified retirement plans will also be able to reduce their taxable salary by contributing to these retirement plan.
Also, before-taxed contributions to health savings accounts (HSAs) or health-care flexible spending accounts, and dependent care flexible spending accounts via payroll deduction reduce gross salary and in turn reduce AGI. Next week’s FEDZONE column will discuss the expanded health care and dependent care flexible spending account contribution limits starting in sometime in 2021, another result of the passage of the recent 2021 stimulus act.
A married couple under age 50 could reduce their AGI by more than $50,000 by making maximum TSP/401(k)/403(b) and flexible spending contributions for 2021. A married couple over age 50 could reduce their AGI close to $60,000 during 2021 through maximum participation in qualified retirement plans and flexible spending account. In so doing, in addition to savings for their future retirement and paying for out-of-pocket health care and dependent care expenses in a tax-preferential way, a married couple, single individual or head of household tax filer may be able to qualify for the full amount of the third stimulus payment when they file their 2021 federal income tax return in spring 2022.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.