personal finance  |  april 6, 2021

How the 2021 COVID-19 Relief Package Could Benefit Taxpayers

Gaining a better understanding of the American Rescue Plan can help you get the largest possible stimulus payment.

 

Key Insights

  • Stimulus check amounts are based on the adjusted gross income (AGI) from your most recently filed tax return.

  • The payments phase out using a narrower income range than previous stimulus payments.

  • If your AGI is close to the phase-out range, you may want to consider taking a few key steps.

Roger Young, CFP®

Senior Financial Planner

The Internal Revenue Service (IRS) has extended the deadline for filing 2020 federal tax returns until May 17, 2021 (please note that state filing deadlines may vary). This extension reflects unusual circumstances due to the COVID-19 pandemic, including the March 11 adoption of legislation to provide relief and economic stimulus. The American Rescue Plan Act of 2021 includes several provisions, most notably a third round of relief payments (often called stimulus checks), to be paid out in 2021.

“The impact of the current relief package on individuals is largely tied to this new round of payments,” explains Roger Young, CFP®, a senior financial planner with T. Rowe Price. “By contrast, last year’s legislation—the Coronavirus Aid, Relief, and Economic Security (CARES) Act—included a broader array of relief measures, which gave investors a lot more to consider.”

The 2021 American Rescue Plan Act provides a stimulus payment of $1,400 per eligible individual—including household dependents. This year’s payments could be significantly larger than those in 2020, especially for families with dependents. However, the payments (technically tax rebates) phase out at adjusted gross income (AGI) between $75,000 and $80,000 for single filers, between $150,000 and $160,000 for married couples filing jointly, and between $112,500 and $120,000 for a head of household. Those are much narrower income ranges than the ones under the CARES Act in 2020.

Understanding How the COVID-19 Relief Payments Work

It is important to understand how the IRS will evaluate who receives a rebate. It will look at the adjusted gross income for your most recent tax return—either your 2019 tax year if you haven’t yet filed a 2020 return or your 2020 return if you filed it already. If you are eligible based on your most recent AGI on file, you will automatically get a rebate. In that case, there is nothing more for you to do—you will not have to pay back any rebate even if you have higher income in subsequent years.

If you haven’t filed your 2020 return and your 2019 AGI was high enough to limit your rebate, you may still be eligible for a larger payment based on your 2020 AGI. To qualify, you must file your return no later than 90 days after the 2020 calendar year filing deadline—even if you file for an extension. Since the 2020 filing deadline was changed to May 17, the deadline for rebate purposes is August 16.

If you have already filed your 2020 return and your AGI was high enough to reduce or eliminate your rebate, you could still receive one based on your 2021 tax return if your income decreases in the current tax year. However, you wouldn’t receive any rebate until you file your 2021 return in 2022.

“For most people, it’s pretty straightforward whether you will receive a payment or not,” says Young. “The gray area lies with the phase-out of the rebate payments. If you are near those phase-out ranges, that’s when you need to pay particular attention.”

Action Items to Consider

If you believe your income puts you in the vicinity of the phase-out range, consider estimating where your 2020 and 2021 AGI will fall. You may want to take steps that could help you maximize your payment. They include:

  • Strategically timing the filing of your return. Some people may want to postpone filing their 2020 return until after receiving the rebate if they are eligible based on their 2019 AGI. However, if your rebate would be larger based on your 2020 AGI than on your 2019 AGI, make sure to file your 2020 return by August 16 to receive the larger rebate.

  • Taking steps to lower your AGI for 2020. If both your 2019 and 2020 AGI are too high to qualify you for a full rebate, you may still have options to reduce your 2020 AGI to increase your rebate if you haven’t filed yet. For instance, maximizing your contributions to a deductible Traditional IRA, SEP IRA, or health savings account could lower your AGI. Deadlines for 2020 contributions to these accounts have been extended to May 17 along with the tax filing deadline. However, if you participate in a workplace retirement plan, be aware that the deductibility of any IRA contributions may be limited.

  • Additionally, up to $10,200 of unemployment compensation in 2020 is now exempt from federal income taxes, subject to income limits. While this isn’t something you can change at this point, make sure your 2020 return reflects this provision if it applies to you.

  • Planning ahead. Estimate your 2021 income level and see if you are likely to qualify for higher rebates or credits for this tax year. Many tax credits, including the child tax credit and the child and dependent care credit, have been increased for 2021. If your AGI may be near key thresholds, such as $75,000 for single filers and $150,000 for married couples filing jointly, consider maximizing your deductible retirement contributions. “In this situation, pretax contributions may be preferable to Roth contributions,” says Young. “Of course, you’ll want to consider your full financial situation, including any other tax effects, when weighing any potential actions.”

Ultimately, steps to increase your rebate payment are worth investigating, but not as important as fundamentals such as saving and investing prudently. As with any tax decisions, they should be taken in consultation with a tax adviser.

Important Information

This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

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