Stimulus Checks & Child Tax Credits: What You Need to Know
3.12.2021 | President Biden signed the American Rescue Plan into law March 11 and among other things, the plan authorizes a third round of stimulus checks and a temporary expansion of the child tax credit. Following is an overview of each, as well as how they may impact relocating employees.
The latest stimulus payments are worth up to $1,400 per exemption but do phase out for higher incomes. To determine income eligibility, the IRS will use the most recently filed return at the time of payment. In other words, if you have already filed your 2020 Federal tax return, then your 2020 gross income will determine the amount of your payment. If you haven’t filed by the time the payment is calculated, then your 2019 Federal tax return (and 2019 gross income) will be used.
For every exemption claimed on your most recently filed return, a taxpayer may be eligible to receive $1,400. Here’s how it works:
- A single taxpayer will be eligible to receive a $1,400 payment for gross income up to $75,000.
- Taxpayers who are married filing jointly, with $150,000 or less of gross income, will be eligible to receive $2,800.
- A taxpayer filing as head of household will be eligible to receive a $1,400 payment for gross income up to $112,500.
- In addition, a $1,400 payment per dependent will be given for those who are eligible. For the previous two stimulus payments, only dependents under the age of 17 were eligible for the extra payment.
For incomes exceeding the thresholds mentioned above, a portion if not all of the payment may be lost:
- A single taxpayer will not be eligible for any payment once gross income reaches $80,000.
- Taxpayers who are married filing jointly will not be eligible for any payment once gross income reaches $160,000.
- A taxpayer filing as head of household will not be eligible for any payment once gross income reaches $120,000.
If your payment is based on 2019 income, the IRS may make a second payment later this year if any additional payment is owed based on 2020 income once your 2020 tax return has been filed. Similar to the 2020 stimulus payments that were considered advance payments of the Recovery Rebate tax credit on the 2020 tax return, this third payment is considered an advance payment of the credit on the 2021 return.
To see how much your stimulus payment will be, you can access the online calculator from Kiplinger.
Stimulus Checks & Transferees
Relocation can have a negative effect on the amount of stimulus payment that a transferee receives. Taxable relocation could push an individual’s gross income over the threshold, when in a normal year they might have received the full stimulus payment. To determine if this may be the case, it is best to wait until after the transferee files their 2020 tax return (for the first two payments) and after filing their 2021 tax return (for this third payment). The original payments were based on the gross income shown on the most recently filed return, but then reconciled when the following year’s return was filed. After which, it can then be determined if relocation caused the final stimulus amount to be reduced or eliminated by studying the tax returns.
Temporary Expansion of Child Tax Credit
With the passing of the American Rescue Plan, the child tax credit is temporarily expanded for tax year 2021. For 2021, the enhanced child tax credit will increase from $2,000 to $3,000 and the age cutoff will increase from under 17 years old to under 18 years old as of December 31, 2021. Meanwhile for child dependents under 6 years old as of December 31, 2021, the credit will be $3,600.
Later this year, the IRS plans to make partial advance payments for a portion of the increased credit, that would then be reconciled when filing the 2021 tax return in 2022. This credit will begin to phase out at similar income thresholds as the third stimulus payments – at gross income thresholds of $75,000 if single, $150,000 if married filing jointly, and $112,500 if head of household. The phaseout rate will be the same as the existing child/dependent credit, at a rate of $50 for every portion of $1,000 over the threshold.
With these lower income thresholds as compared to the regular child tax credit thresholds ($400,000 if married filing jointly and $200,000 for others), if an individual does not qualify for the enhanced child tax credit, then they may still be eligible for the existing $2,000 credit depending on their gross income level.
Some are pushing to extend the enhanced credit beyond 2021, but the American Rescue Plan only provides for the temporary one-year credit.
Child Tax Credit & Transferees
Similar to stimulus payments, relocation may have a negative effect on the amount of the child tax credit claimed. Taxable relocation could push an individual’s gross income over the threshold, when in a normal year they might have received the full credit amount. To determine if this may be the case, it is best to wait until after the transferee files their tax return for the year in question. The credit phaseout is based off of total income reported on the tax return, which is often unknown until after the tax return has been prepared.
For questions or assistance, reach out to our relocation tax experts.