Not So Fast! Timing is the Key for Your Third Stimulus Check

This past weekend, the Senate passed a $1.9 trillion economic relief package. The Democrat-controlled House of Representatives is expected to pass the bill later this week, and President Biden is expected to sign it into law before unemployment aid programs expire on March 14th

As part of this package, millions of Americans should start to see stimulus checks of up to $1,400 per person, including all dependents regardless of age, land in their bank accounts in just a few weeks. The full $1,400 will go to singles earning up to an adjusted gross income (AGI) of $75,000, and $2,800 will go to those married filing jointly up to an AGI of $150,000. Unlike previous stimulus bills, the phase out starts at $75,000 and $150,000 respectively and is completely phased out for those earning more than $80,000 single or $160,000 joint. 

Given these phaseouts, taxpayers should be aware that timing the filing of their 2020 tax return can affect their stimulus check. The third stimulus payments are expected to be based on either your 2019 tax return or your 2020 tax return, whichever was most recently filed when the IRS starts processing stimulus payments. This means that if you are close to the adjusted gross income (AGI) thresholds specified in the bill, you need to be very careful about whenyou file your tax returns. For example:

  • Case #1: & Mrs. Winfield are married with three dependent children. This means that they couldqualify for a $7,000 stimulus check (5 people x $1,400).
    • They filed joint tax returns in 2019 with an AGI of $149,000 (line 8b of 2019 Form 1040).
    • On March 1, 2021, they submitted their 2020 joint tax returns. Line 11 of 2020 Form 1040 states that their AGI for 2020 was $161,000.
    • Because their most recently filed taxes are from 2020 and show an AGI of greater than $160,000, they do not qualify for a stimulus check.
    • Had they simply waited to file their 2020 taxes until after the IRS released stimulus payments, they would have received $7,000, because the payments would have been based on their 2019 tax filing.
      • Note that if you receive a higher stimulus check than you should have because the IRS based the payment on your 2019 tax returns instead of your 2020 tax returns, you do not have to return the money, according to the current legislation.
    • What are their options?
      • They may be able to make prior year contributions to their traditional IRAs to reduce their AGI below the $160,000 threshold. If they are able to reduce their AGI to less than $150,000, they would qualify for the full $7,000 payment. If they are able to reduce their AGI to between $150,000 and $160,000, they would receive a reduced stimulus payment. Note that they would be required to amend their tax return for 2020.
      • If they made Roth IRA contributions in 2020, they could recharacterize the contributions as traditional IRA contributions in order to reduce their AGI in the same manner as outlined above. Note that they would be required to amend their tax returns for 2020.
  • Case #2: Williams is single and had an AGI of $90,000 in 2019. In 2020, he lost his job due to the pandemic and had an AGI of $40,000. 
    • He should file his 2020 return online as soon as possible in order to immediately qualify for the stimulus payment because he would be under the $75,000 AGI threshold.
    • If he waits to file his return until after the stimulus payments go out, he will not receive a stimulus check, given that the AGI the IRS has on file is for $90,000. He will have to wait until he files his 2021 taxes to receive the payment.

While these examples are illustrations of the current legislation, all tax situations are unique to the individual, couple, or business. This commentary is not intended to provide specific tax advice, but to encourage clients to be aware of current tax considerations. Be sure to consult your tax professional about your individual situation.

Beacon Wealth Consultants’ Biblically Responsible Investing solutions can be used for retirement savings, including IRAs. Beacon’s LightPoint™ Portfolio Solutions also offer the Kingdom(k)® retirement platform for corporate 401(k) accounts and the Kingdom(b)® retirement platform specifically designed for the retirement plan needs of churches and pastors. To learn more about any of Beacon Wealth Consultants’ investing or financial planning services, please call (540) 345-3891 or contact us here.

 

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