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11 March 2021 / COVID-19 IRS Updates

How will the third stimulus bill affect my taxes?

11 March 2021 > COVID-19 IRS Updates

How will the third stimulus bill affect my taxes?

The enormous $1.9 trillion stimulus bill — titled the American Rescue Plan — has now been signed into law, enacting the most extensive anti-poverty effort in a generation.

Millions of Americans will receive direct payments of up to $1,400. 

The bill also extends a $300 federal boost to unemployment benefits through September 6th. States, schools, and small businesses will receive substantive support, and vaccine distribution will get the funding it needs to accelerate. Additionally, the bill ups the child tax credit, provides rental, utility, and mortgage assistance, and funds transit agencies. 

Most taxpayers won’t be as concerned about the funding the bill provides to various sectors as they will be about what it means for them—and how they can claim their full payment. Many have questions about what amount they are likely to receive and concerns about how to get the right amount if they haven’t filed their 2020 taxes yet.

Common questions about the new bill

Will I get a stimulus check? How much?

The latest stimulus bill has tightened parameters for who gets how much stimulus money. The $1,400 checks will go to Americans with an adjusted gross income (AGI) of $75,000 or less and couples with an AGI of $150,000 or less. The size of the check will decrease as income goes up. Individuals making $80,000 or more and couples making $160,000 or more won’t get a check at all.

Additionally, parents and caretakers who meet the income eligibility requirements to get a check of any size will receive $1,400 for each dependent, either child or adult.

Use the IRS’s Get My Payment tool or Kiplinger’s Stimulus Check Calculator to figure out how much you should be getting.

 

What if my income changed in 2020?

The IRS will send the stimulus payments automatically to taxpayers who have bank account information on file, basing the amounts provided on the most recent tax return filed.

This means that if you haven’t filed your 2020 tax return yet, the IRS will automatically provide you a payment based on the income you reported on your 2019 return. So if your income changed in 2020, you may end up getting the wrong amount from the government — either more or less than you should.

 

What if my income went down in 2020?

If your income fell in 2020, you may be eligible for a bigger check than you would have been a year earlier, considering that the amounts being given out decrease as income rises. If you haven’t filed your taxes yet, the amount you get will be based on your 2019 income — and, therefore, will be smaller than you’re eligible to receive.

If you received less than you should due to a change in income, you can reclaim the difference as a refund or reduction on your 2020 tax return.

 

What if my income went up in 2020?

If your income rose in 2020, you might end up getting a check smaller than $1,400, or even none at all. Since the amount you receive will be based on your 2019 income, your check may include extra funds.

If you received an overpayment because of the difference between your 2019 and 2020 income, the IRS probably won’t ask for it back. You may get away with a little extra!

 

What if I had a child in 2020?

If you had a baby in 2020 and qualify for this round of stimulus checks, the baby is an eligible dependent. However, you’ll only receive a payment if you’ve let the IRS know you have a new addition.

If you haven’t already filed your 2020 tax return and indicated your new dependent to the IRS, you won’t receive a payment for your new bundle of joy. The same principle applies if you acquired a new adult-dependent in 2020 and plan to report that to the IRS on your 2020 return.

As in the scenario of receiving too little because your income fell, you’ll need to claim the amount you should have gotten for your newfound dependents on your 2020 tax return. 

 

What if I collected unemployment in 2020?

Taxpayers who collected unemployment in 2020 will receive a tax break — the bill stipulates that they will be exempted from taxes on the first $10,200 of that money, assuming their adjusted gross income is under the $150,000 threshold. 

If you received unemployment in 2020 and you’ve already filed your 2020 tax return, you may need to file an amended return to be refunded.

 

How else will the bill affect my taxes?

 

Earned Income Tax Credit

An expansion of the Earned Income Tax Credit, which is specifically for people without children, will include more people and pay them more money. 

The credit for 2021 can be as much as $1,502, increased from a maximum of $543. The bill raises the income cutoff to claim the maximum credit from $4,220 to $9,820 and temporarily allows taxpayers to use their 2019 income instead of their 2021 income if it grants a larger credit. The minimum age to claim the credit has also been lowered to 19, while the maximum age has been eliminated. Finally, the eligibility phaseout for the credit will now begin at $11,610 instead of $5,280 for individuals. 

These benefits will show up when taxpayers file their 2021 returns in early 2022. You can use the IRS Earned Income Tax Credit (EITC) Assistant tool to see if you qualify.

Child Tax Credit

The bill also expands the 2021 child tax credit to provide more benefit to more people. Those eligible for the full amount of the credit will get $3,000 (up from $2,000) per child younger than 17 and $3,600 per child under 6. Eligible families have AGIs below $75,000 for single filers, $112,500 for heads of household, and $150,000 for married couples. 

If your income is too high to qualify for the expansion, you can still take the regular credit of $2,000 per child as long as your adjusted gross income is below $200,000 (single filers) or $400,000 (joint filers).

From July to December 2021, a portion of a family’s total credit will be advanced and sent in monthly installments. The remainder of the credit will be paid out when taxpayers file their 2021 tax returns in spring 2022. 

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Katherine Gustafson

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