If there is any certainty entering 2021 with a new Presidential administration in the U.S., it’s that American’s will likely be receiving another stimulus check in the near future. Rather than discuss the specifics, or the politics, we’re going to talk about how the stimulus checks have been structured in the past, and how you can best align yourself for the maximum benefit in the future.
The Basics
Long story short, the government issues “stimulus” checks as a means to stimulate the economy. These checks provide short-term support to those who need to pay bills, and for the rest, it provides some spending money which will stimulate the economy as people start buying TVs, new cars, etc. Stimulus checks can be structured in many ways, and that’s why conducting research is a very important step in gaining your maximum benefit.
How The Stimulus Checks are Structured
So the first two rounds of stimulus payments in 2020 were both classified as advanced tax credits on your 2020 income tax return. This means that the checks were issued using your 2019 tax return as a reference, however, the final settlement will be based on your 2020 tax return filing. There are also income phaseouts which start at $75k for single-filers and $150k for married joint-filers. Keep an eye on these, because for every $100 over the limits, your stimulus is decreased by $5 until it hits zero. This doesn’t seem like much, but it can happen quickly.
So what does all of this mean, exactly? Well, several things, some good, some bad. Since personal finance is my passion, you can probably guess that I scoured the internet for information upon learning the first stimulus bill was passed. Once I read that this was an advanced credit for 2020, I knew we had some work to do. We only received $1698 of the $3400 entitlement due to income phaseout, but since this was an advanced credit for 2020, I knew that if we could lower our household income below the threshold, or close to it, we could recoup all or most of the stimulus amount when filing taxes in the Spring of 2021. My wife and I immediately decided to open a 403(b) account at her work and defer the maximum amount for the remaining 6 months of the year (around $8.5k). This, combined with less passive income in 2020, should have us well below the income phaseout. Oh yeah, they passed another stimulus check in December that we will also recoup due to our earlier planning. All in all, we should have an additional $3200 or so on our tax return in the form of credits. Not too bad for some simple income deferment.
The Flipside
The example above probably got you excited if you’re in the same position as me. Well, not everyone should be excited. The above scenario works in reverse as well. Let’s say your income was really low in 2019, which caused you to get a stimulus check since that was the reference point for the immediate payouts. But then, you got promoted or started a side hustle in 2020 and absolutely killed it! That’s great, right? Well, not when it comes to the stimulus checks. If your income is into the phaseout range, you will possibly owe stimulus money back when you file your 2020 tax return due to your change in eligibility. Bummer, I know. But remember, you hustled in 2020 and increased your income. Don’t let a little tax consequence ruin your great financial year. Take this as a lesson and better prepare yourself to navigate these situations in the future.
Feeling Guilty?
I have heard some people express that they feel guilty about receiving a stimulus check because they don’t really need it. I can relate to this as I’ve felt the same way. In fact, if you become a regular follower of Wealthy Idiots, you’ll soon have an emergency fund, retirement accounts, possibly some real estate holdings, low credit card balances, etc. etc., that could put you in this same position. So what can you do if you’re experiencing stimulus guilt?
- Donate to charity. Maybe you love dogs and want to help out your favorite shelter or think the local food bank could use some extra cash, either way, donating to charity is a great way to help others while also helping out your neighbors.
- Give better tips. You have some extra cash, so it’s reasonable to go out to eat a little more. Why not throw the waitstaff a 50% tip instead of the normal 18-20%? Restaurants have been greatly impacted by COVID-19 and they certainly wouldn’t mind the help! – Lifestyle changes. Have you been putting off a gym membership? Want to start cooking healthier meals? Maybe you want a massage? Why not make positive lifestyle changes with the money. This can have long-lasting health impacts and also give you a sense of accomplishment.
- Support your local businesses. Small businesses have been absolutely devastated by COVID-19 restrictions. They can use your help! Go support our small businesses so they’ll still be here in the coming years to support us. Remember, small businesses constantly give back to the community and it is time we give back to them.
- Literally anything else. This is just like it sounds. Go spend money on literally anything if you don’t really need it. In order to stimulate the economy, the money needs to circulate. Spend it if you’ve got it! But really, you can also save this money, I’m just going over the other options.
Plan Ahead in 2021
The glaring problem right now is that no one knows how they will structure the 3rd stimulus check. We can speculate, but there is really no solid guess. Considering tax season starts February 12th, it would be prudent to assume the next one wouldn’t be an advanced credit on 2020 taxes, but who really knows. This is a time where everyone should check up on the status and ensure you know the rules. Don’t get left behind while your friends and family are planning caribbean vacations or putting fancy additions on their homes!
