Stimulus: Second Round for Americans
Stimulus Update: Tuesday, December 29, 2020
On Tuesday, December 29th, the House passed a bill to increase the stimulus checks from $600 to $2,000. Now, that bill goes to the Senate. Meanwhile, Treasury Secretary Steven Mnuchin has stated that the $600 stimulus checks will begin to go out as soon as Tuesday night of the 29th.
Stimulus Update: Sunday, December 27, 2020
President Trump signed the stimulus bill into law in the evening on Sunday, December 27th.
Stimulus Update: Wednesday, December 23, 2020
Congress has passed a massive spending bill with largely bipartisan support, and the bill now makes its way to President Trump’s desk. The President alluded to vetoing the bill unless Congress raises the stimulus to individuals to $2000 from $600. However, it remains to be seen what will become of the bill in the coming days.
While we cannot be sure about the bill’s fate at this time, we have done extensive research into the bill and wanted to make you aware of some of the more applicable pieces as it relates to personal financial planning. As news develops around this legislation, we will keep this post updated.
Similar Process, Different Amounts
Included in the legislation is another round of stimulus distributing to the public in the form of a check. This stimulus (officially referred to as “Economic Impact Payments”) works largely the same way the last round did from the CARES Act. However, this time around, the stimulus is $600 per person (the CARES Act stimulus was $1,200 per person).
For example, a single tax filer with no children will receive $600, while a married couple filing jointly with three children will receive $3,000. Like the last stimulus payments, these checks are basically an advance on a tax credit that will apply to your 2020 tax return.
There is a phaseout for this stimulus, which begins at $75,000 of adjusted gross income for a single tax filer ($150,000 for married-filing-joint). For every $100 of income above that threshold, the stimulus check will reduce by $5. The stimulus you receive will be based on your 2019 tax return and will apply to your 2020 tax return.
However, even if your 2019 tax return disqualified you from receiving a stimulus check because your income was too high, that doesn’t necessarily mean you won’t be eligible for the tax credit.
For example, if you did a large Roth conversion in 2019 that put your income over the phaseout limits for the Economic Impact Payments, but your 2020 income will be under the limits, you will still receive the economic impact payment in the form of a tax credit on your 2020 tax return. Thus being “made whole.” To further clarify, the amount you receive from the treasury in the form of this stimulus is not taxable income.
In addition to the stimulus checks, unemployment benefits were once again expanded. The bill includes 11 weeks of an additional increase of $300 to state unemployment benefits. This additional unemployment income, as well as the original state unemployment benefit, is taxable income.
Business Stimulus and PPP Updates
For business owners, the Paycheck Protection Program has been brought back, along with some changes. Congress has clarified that that business expenses paid for with PPP funds are deductible as business expenses.
In addition, they’ve simplified the ability to get PPP loan forgiveness if the loan amount was $150,000 or less by completing a one-page application. The maximum PPP loan calculation for your business is still 2.5x the average monthly payroll expense up to a maximum of $2,000,000. There are some exceptions to this for businesses in the Accommodation and Food Services sector.
Other Notable Items in the Stimulus Bill
While most people will focus on either the Economic Impact Payments or the Paycheck Protection Program provisions in this bill, there are a few other areas to highlight.
1. Charitable Contributions
There is an extension of the Qualified Charitable Contribution through 2021. This is an above-the-line tax deduction for cash contributions given directly to a charity of up to $300 for 2020, and for 2021, up to $300 for single tax filers and up to $600 for married-filing-joint. This deduction is only taken for tax filers claiming the standard deduction.
2. Health Care
The healthcare expense deduction hurdle was permanently adjusted to 7.5% of AGI. This number used to be 10%, so the reduction should help those taxpayers who may be on the verge of itemizing deductions.
Another healthcare-related item is the ability to rollover Flexible Spending Account funds from 2020 into 2021 and 2022. It’s up to your employer to make this allowable, but Congress has given them the option now.
Employers are now allowed to give their employees up to $5,250 tax-free. Employees can use those funds to make student debt payments.
The income limits for the Lifetime Learning Credit was increased to the same levels used for the American Opportunity Credit ($80,000 for single, $160,000 for married-filing-joint).
Again, as more information about the 2021 spending bill becomes available, we will continue to update this post. If you’re not a client and have any questions about how this bill may impact your financial plans or taxes, schedule a complimentary consultation below. If you are a client, click here and reach out to us with your questions or contact your advisor.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.