American Rescue Plan Stimulus Checks: What Those on the Cusp of Eligibility Need to Know

March 15, 2021 9:29 am

Betsey A. Purinton, CFP®

Managing Partner & CIO

The American Rescue Plan Act of 2021 is massive and complicated – impacting individuals, businesses, educators, state and local governments, while addressing the pandemic itself. The one aspect that would appear to be straight forward is the provision for stimulus checks, which are currently being sent out to most Americans. But that is not entirely the case. For those on the cusp of eligibility, some proactive planning in 2021 could be advantageous.

What are the stimulus checks? They are advance tax credits, officially known as Recovery Rebate Credits. We have seen these checks before, through the CARES Act and the Consolidated Appropriations Act of 2020. But the 2021 version has a few twists and turns of its own that you should be aware of in determining how much you should be receiving.

Eligibility
Under the American Rescue Plan, eligible individuals are entitled to $1,400 in rebates per person, including dependents. Under the previous relief programs, “dependents” meant children that you could claim under the Child Tax Credit rules, which formerly defined children as under the age of 17. With the American Rescue Plan, eligibility has been expanded to include anyone you have named on your tax return as a dependent. Children over the age of seventeen, elderly parents or other individuals you claim can now be calculated into your stimulus check.

Narrower Phaseouts
In previous legislation, recovery rebates were reduced by $5 for every $100 of income over a certain threshold. Under the American Rescue Plan the phase out ranges are much narrower and more restrictive, resulting in a faster loss of benefits once a certain income threshold has been reached. This means that there will be some individuals who previously received stimulus checks, that may not receive them this time.

The American Rescue Plan Act of 2021 phaseout ranges are as follows:

Single Filers and Married Filing Separately: $75,000 – $80,000
Head of Household: $112,500 – $120,000
Married Filing Jointly: $150,000- $160,000.

If your Adjusted Gross Income (AGI) is below the first number, you are paid the full $1,400. If your AGI is above the second number, you are paid nothing. In the phase out range the formula is: your AGI less the lower limit, divided by the amount of the range itself. That equals the percentage reduction of your stimulus check.

Examples
If you are single with an AGI of $78,000, you would lose $78,000-$75,000/$5,000 or $60% of $1,400 and end up with $560 (40% of $1,400).  

If you are married, with three dependents, your potential rebate is $7,000 (5 * $1,400). However, if your AGI falls between $150,000 and $160,000, the entire $7,000 is reduced accordingly. Thus, if your income is $157,000, using the above formula, your household would experience a 70% reduction on their payment, or $2,100.

Adjustments to eligibility
Built in potential adjustments provide the most room for planning. As stated above, the recovery rebate is for the year 2021. However, your final income for this year has yet to be determined. In order to calculate the proper amount you will receive, the IRS is using up to three checkpoints.

The first checkpoint is your latest tax form on file with the IRS. If you haven’t yet filed your 2020 return, the IRS will use your 2019 return to calculate your payment. (Recall that checks are rolling out now; the Treasury Department is not waiting for you to file your 2020 return). 2019 is likely to have been a better year financially for a number of individuals, especially for those who lost their jobs in 2020. If you don’t receive a check from the Treasury in coming weeks, you may not have qualified based on your 2019 AGI alone.

If you receive no rebate or less than the full rebate, the IRS will look at your 2020 return when it is filed and determine where your income falls in terms of the top threshold of the phaseout range. At this second checkpoint if adjustments are needed, the IRS will send you any balance due. Please note that the IRS will only review your 2020 return if it is filed before the “Additional Payment Determination Date” (APDD). The APDD is 90 days after the 2020 calendar year filing deadline (currently April 15th) or September 1, 2021 (if the IRS postpones the filing deadline).

If you believe that you will qualify for additional stimulus money based on your 2020 return, it behooves you this year to file your taxes as early as possible.

But even if you and your dependents are not eligible for the full $1,400 rebate using either 2019 or 2020 AGI, you have one more chance to qualify.  Checkpoint #3 is your 2021 AGI. If that is below the upper threshold and lower than your 2019 or 2020 income, the IRS will send you the additional balance.

It is important to note that once you are given a stimulus check under the American Recue Plan, it is yours to keep. If you receive the full amount up front based on 2019 income, the IRS will not attempt to claw back the rebate based on higher income in either 2020 or 2021. The checkpoints work only to help your eligibility, not hurt it.

Planning Tips
Based on the above process for receiving stimulus checks, we recommend the following planning steps in 2021.

  1. Check your dependents. For 2021’s recovery rebate calculation, count all dependents. Claiming older high school students and college students could increase your anticipated payment.
  2. If 2020 is the only year or the best year that you will qualify for the stimulus check, file your return before the Additional Payment Determination Date. This means not deferring until the October 15th extension deadline, as you may have in the past. Filing after the APDD (90 days following the 2020 deadline or September 1st, whichever is earlier), may cause you to miss out on some stimulus money.
  3. If you are not able to take full advantage of stimulus money eligibility based on either your 2019 or 2020 tax returns, and you believe you can in 2021, prepare a plan for keeping your AGI below the phaseout range. If you are working, this could mean deferring a discretionary bonus until 2022. If you are retired, it may mean making some discretionary withdrawals from cash reserves or non-qualified accounts as opposed to fully taxable retirement plans. Caveat: any retirement planning should be part of your overall income strategy as it relates to 2021 and future years.

For many Americans, the receipt of the Recovery Rebate Credit will be straight forward. Your AGI will either fall below the phase out threshold, thereby making you eligible for the full advanced rebate, or above the phaseout range, rendering you ineligible for any stimulus money.  But for those individuals on the cusp, income and tax planning in 2021 could enable you to receive the largest stimulus checks allowed.

Betsey A. Purinton, CFP® is Managing Partner and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at bpurinton@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.