Democrats Propose Round Three Of COVID-Related Stimulus Checks: What You Need To Know

President Biden is determined to provide a third round of COVID stimulus to the American people, and with Democrats in control of both the House of Representatives and the Senate, there are few fiscal or procedural impediments to doing just that.

While Republicans balked at the $1.9 trillion price tag of the latest round of relief, given the current composition of the two chambers of Congress, their opposition is of no consequence. With the House and Senate having passed budgets for the year, Democrats can employ the streamlined reconciliation process to pass a stimulus bill with a simply majority in the Senate as opposed to needing the customary 60 votes. As a result, Republican buy-in, while originally sought-after by President Biden, is no longer necessary.

Yesterday, House Democrats took the opening steps towards passing the American Rescue Plan, releasing draft text of the largest piece of their desired package. The bill comes on the heels of the CARES Act — passed in March — and the Consolidated Appropriations Act, 2021, which became law shortly after Christmas. The text released yesterday will now head to the House Ways and Means Committee for a vote, with eyes on a full House vote by the end of February.

Included in the proposal are a number of significant provisions, including an extension of supplemental unemployment benefits, an expanded child tax credit (more on this in a subsequent article), and an extension of the recently enhanced employee retention credit.

The headliner, however, is a third round of payments made directly to individuals. These stimulus checks have been a point of contention even among Democrats, who have squabbled over the income level at which an individual should no longer be eligible to receive a payment. Add in some back-and-forth over which dependents will receive a payment, and even those diligently following the legislative process are likely to be a bit confused over what is being offered.

With the customary caveat that the text released yesterday is far from becoming law, we thought it would be helpful to understand where things stand now with the proposed individual payments, and we’ll do so in our preferred Q&A format.

Q: How much am I getting?

A: Cutting right to the chase, eh? The proposed third round of stimulus payments consists of checks of up to $1,400 for each “eligible individual” ($2,800 in the case of a married couple filing a joint return). Add that to the $1,200 that went out in Round 1 last spring and the $600 paid in Round 2 just after the start of 2021, and the U.S. government has now put as much as $3,400 into your pocket throughout the pandemic.

Q: Fair enough. But I’ve got kids, and they ain’t cheap. Do I get anything to help pay for them?

A: You do, in fact. Up to $1,400 per dependent. And here’s the better news: unlike the first two rounds – when you only received a payment for a child under the age of 17 – in this round, you’ll get up to $1,400 for anyone who qualifies as a dependent. This would include a full-time college student, an elderly parent, or potentially, your freeloading boyfriend. If you’d like to understand more about who qualifies as a dependent, I’d recommend you give this a read.

Q: I noticed that you put the term “eligible individual” in quotes up above. That leads me to believe that not everyone is getting a payment. Who’s out?

A: That’s very observant of you. Yes, some people get shut out of the stimulus program. We’ll discuss the income limits in a moment, but before we get to that, understand that three categories of taxpayers will get nothing:

1.     A nonresident alien individual,

2.     An estate or trust, and, most notably,

3.     Any individual who is a dependent of anyone else. This apparently does not preclude someone who was previously a dependent from getting a payment if no one claims the individual as a dependent in 2021, but we’ll explore that more when we get into the mechanics of the stimulus payment/credit interplay.

Q: “Stimulus/credit interplay?” That sounds like tax nerd talk. Can we shelve that for a bit? I’d rather you tell me more about the income limits on receiving the payment.

A: You got it. It’s all based on your “adjusted gross income” for the year on which the stimulus payment calculation is based. Adjusted gross income is the sum of ALL of your sources of income for the year less a few select deductions. On your 2019 Form 1040, your AGI can be found on Line 8b; on the 2020 form, it’s on Line 11. As for what line it will be on the 2021 return; time will tell.

Moving on, if your AGI for the year on which the payment s based is less than $75,000 (if you’re single; $150,000 if you’re married and $112,500 if you’re a “head of household”) then you’ll get the full payment you’re entitled to. So if you’re married with three young children and your AGI is below $150,000, you’ll receive a payment of $7,000.

If, however, your AGI begins to creep over those limits, you’ll start to slowly lose a piece of each payment you are owed. It works like so: the amount owed to you will be reduced by a percentage, the numerator of which is *your AGI for the year in excess of the applicable threshold* and the denominator of which is *$25,000 if single, $50,000 if married, and $37,500 if a head of household*.

To illustrate, if you’re single and have AGI of $87,500 for the year on which the payment is based, your $1,400 payment will be reduced by 50%:

$12,500 ($87,500 of AGI – $75,000 threshold)/$25,000=50%.

Thus, the $1,400 will be cut in half, to $700.

Or, if you’re married with three kids with AGI of $190,000, the $7,000 you are owed will be reduced by 80% to $1,400 as follows:

$40,000 ($190,000-$150,000)/$50,000 = 80%.  

Obviously, based on this formula, you’re going to reach a point where your stimulus payment is reduced to zero, and you’ll get nothing. I’ll spare you the math and give you the shortcut: you get shut out of the payment once your AGI exceeds $100,000 if single, $200,000 if married filing jointly, and $150,000 for a head of household.

If you’d like a more granular analysis, here is a quick chart of the payment you can expect based on your filing status, AGI level for the year on which the credit is based (see discussion below), and number of dependents.

Q: Got it. So if I’m an eligible individual with income below the AGI limit, I’m free and clear, right?

A: You should be, yes. But don’t forget the formalities: to be entitled to the payment, you’ve got to have included on your tax return for whatever year on which the credit is based– and also include on your 2021 return – a valid identification number for yourself, your spouse, and any dependents. This would generally be the Social Security number. Oh, and you need to be alive as of January 1, 2021 to receive an advance payment, which shouldn’t be an issue giving the timing of this exchange.

Q: Hold on, I just thought of something…you’re saying we get payments based on filing status, and number of dependents, and income level….but for WHEN? Is it determined based on our 2021 tax returns, because if so, we’re going to be waiting awhile, and I’d like that cash ASAP.

A: Wonderful question. Notice that in a few places above, I referenced “whatever year on which the credit is based.” It works like this, we will all ultimately claim a “credit” equal to the stimulus payments we are owed based on our 2021 tax information, on our 2021 tax returns. But to speed up that process, the checks you receive if the bill becomes law will be based on either your 2019 or 2020 tax return.

Q: But I haven’t filed my 2020 tax return yet!

A: That’s not really a question, but I understand your point. That’s why the fallback option is for the government to make payments based on your 2019 data.

Q: But I had a kid in 2020, which would entitle me to another $1,400. And my income went down because of the pandemic, so I wouldn’t be subject to the income limitations. Do I lose out?

A: Nope. You’ve got three ways to be made whole. First, if you can move quickly and get your 2020 tax return filed BEFORE the government starts making its determination of the amount you’re owed, it will go ahead and base the payments on your 2020 data. If that doesn’t work, we move on to option #2: if you can get your 2020 tax return filed before – assuming the tax deadline doesn’t get extended like it did last year – July 15^th, 2021, then the IRS will send you an additional payment equal to what you WOULD have been owed based on 2020 data, less what you ACTUALLY received based on 2019 data. Finally, if all else fails, you – like everyone else – will compute the credit you are ACTUALLY owed on your 2021 return, and if it is greater than the amount you received throughout 2021, you’ll get the extra amount when you file that 2021 return.

Q: Slow down…I want to understand that last part. So you’re saying that even though we get the payments in 2021, those are really estimates, and when we file our 2021 tax return, we’ll figure out what is ACTUALLY owed to us and get paid the difference. Is that right?

A: More or less, yup. Let’s say your payment is based on your 2019 information when you didn’t have a kid, and so you and your spouse get only $2,800 paid in advance. Then let’s assume you don’t get your 2020 return filed in time to get “trued up” during 2021 as discussed above. When you file your 2021 return next spring, the IRS will add in the kid, and you’ll get a credit – or a reduction in the tax owed – of $4,200. You’ll reduce that credit by the $2,800 you already received, and get the net credit of $1,400.

Q: Thanks, but I see two problems with that. First, what if my income goes back up in 2021 so I’m not eligible for the credit at ALL in 2021? And second, are you saying that a credit on a 2021 tax return reduces the tax I owe, so that rather than get a check deposited in my bank account, I’ll just pay LESS to the IRS with my 2021 tax return?

A: Let me take the second one first. Yes, that’s exactly what I’m saying. When you file your 2021 return and compute your actual credit, any amount you are owed but haven’t yet received will reduce your 2021 tax liability. So while you may not get the gratification of receiving a deposit in your bank account, you will be paying less to the IRS on your 2021 tax return, and you’ll just have to make peace with the fact that those two things are effectively the same thing.

On to your first question – yes, picking the right year to base the credit on is an intricate dance. You are REALLY going to want to figure out which year will maximize your payment, and make it so the IRS pays you the amount based on that year. To illustrate, assume in 2019 you and your spouse had two dependents and low income – entitling you to a full $5,600 payment – but in 2020 one of your dependents moved out on their own and your AGI was $175,000, cutting your payment to $2,100. Assume further that in 2021, you’ll still have one dependent and the same income, so the payment would still be $2,100.

If you’re not careful, and you file your 2020 return TOO early, the IRS will base the payments on the 2020 return and make you a payment for only $2,100, which last time I checked, was significantly less than the $5,600 you’d get based on your 2019 return. And if your income in 2021 is going to be too high to generate a credit, well, that misstep will cost you $3,500. So knowing what you know about your dependents and income – for 2019, 2020 and 2021 — you may want to sit on that 2020 return for a few months until you get your cash.

Q: But wait…once I file my 2021 return and show an ACTUAL credit of only $2,100, won’t the IRS just say, “Dude, we paid you too much, you owe us $3,500?”

A: No, for two reasons. First, I’ve never known the IRS to address anyone as “dude.” Second, this is a ONE-WAY credit system. If you get paid more based on 2019 than you deserve based on 2020, or based even on what you are owed on your 2021 tax return where you actually CLAIM the credit, there is no mechanism to pay that windfall back. You walk away with your extra cash, no questions asked.

Q:  I need to make sure I understand that…you’re saying if I get paid $5,600 based on my 2019 tax info, but come 2021, I’ve got no more dependents and make so much money that my actual credit on the 2021 tax return is ZERO, I don’t have to pay back the $5,600 I received?

A: That’s 100% correct. That’s why doing what you need to do to get the IRS to base the payments on the ideal year is so important: once you get the money, there’s no way for the IRS to make you give it back!

Q: Last question on the mechanics: say my payment due based on 2019 and 2020 is only $1,400, but in 2021 I marry someone with two kids, and suddenly we’re due a $5,600 credit on the 2020 return? I’ll get that extra amount, right?

A: Absolutely. You’ll have a credit on your 2021 return of $4,200 ($5,600 – $1,400). That will either reduce your tax bill, or, if you don’t have a tax bill, create an additional refund.

Q: OK…so let’s say —-purely hypothetically, of course – that I’ve got a bit of tax problem; I owe the IRS some back taxes. They are going to take that out of any payment they owe me, right?

A: They are not. Congress has said that the payments will not be offset against past due federal or state tax debts, or past-due child support.

Q: Hey, what about my old man? He doesn’t even file a return anymore, but he’s not anyone’s dependent. Does he get $1,400?

A: He does, and the government will be reaching out to non-filers to explain how they can qualify for the advance payment.

Q: At the risk of burying the lede here, I don’t have to pay taxes on these stimulus payments, do I? That would seem, uh…counterproductive.

A: Nope. Just as was the case with the payments you received in 2020, these payments are not subject to tax.

Q: Last question: WHEN AM I GETTING PAID?

A: Depends. First, we’ll need the bill to pass. And even though the Democrats hold majorities in both the House of Representatives and the Senate, this is not necessarily a slam dunk. In the Senate, the Dems have only 50 seats – and the tie-breaking vote in the form of Vice President Kamala Harris – and since 51 votes are needed for passage as part of the reconciliation process, a single defection would kill the deal. Assuming the bill passes, however, if you filed a 2019 or 2020 tax return, the legislative text requires the IRS to make these payments as rapidly as possible. And as we’ve seen with the first two rounds, while the IRS generally doesn’t answer phones, open mail, or process returns with any sense of urgency, it does crank out some stimulus payments.

Even if the bill becomes law, there is a chance the rules governing stimulus payments could change before reaching final form. Be sure to check back for updates.