ARPA: Next Round of Stimulus Payments – What Can You Expect?
by Jill Clark, CPA
President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law on March 11, 2021. This latest round of legislation provides additional assistance to the American people as we continue to navigate our way through the COVID pandemic. Among the many provisions included in this new legislation is the third round of what has become known as “Stimulus Payments” or “Economic Impact Payments”. Many of the provisions contained in the new law, related to these payments, mirror that of what was in the first two rounds of legislation providing similar payments to the American people; however, some changes have been made that may impact the stimulus payment people are eligible to receive. So, what can you expect?
• Individuals that are eligible will receive up to $1,400 per person (including dependents). So, a family of 4 (husband, wife and two dependent children) could potentially receive a $5,600 stimulus payment.
• The initial stimulus payment amount will be determined based on the taxpayers filing status, adjusted gross income (AGI) and dependents reported on their 2019 or 2020 federal income tax return, whichever has been most recently filed and processed by the IRS. Therefore, if a taxpayer has not filed their 2020 return when the payment amounts are determined, the stimulus payment will be based on the information reported on their 2019 return. If their 2020 return has been filed (and processed), that is the return that the IRS will use to determine their stimulus payment amount.
• If an eligible individual’s AGI is over a certain amount, the amount of stimulus payment they are otherwise eligible to receive will start being reduced and once their AGI reaches a certain point, they will no longer be eligible to receive any payment. It does not matter how many dependents a taxpayer has or how much of a potential stimulus payment an individual may be eligible for, once they reach the upper limits of the AGI threshold their payment will be completely eliminated. The point at which payments begin to decrease are the same in this round as they were in the first two rounds. What is different in this round is how quickly the payments are reduced once a taxpayer starts to exceed these AGI thresholds.
– For single filers, the phase-out threshold begins at $75,000 and once AGI reaches $80,000 the taxpayer is no longer eligible for a stimulus payment.
– For joint filers (and surviving spouse filers), the phase-out threshold begins at $150,000 and once AGI reaches $160,000 the taxpayer is no longer eligible for a stimulus payment.
– For head of household filers, the phase-out threshold begins at $112,500 and once AGI reaches $120,000 the taxpayer is no longer eligible for a stimulus payment.
Let’s look at a few examples to see how this works:
Example #1: Family of 4 (husband, wife and two dependent children) have AGI of $150,000. In this example, the family is potentially eligible for a $5,600 stimulus payment ($1,400 per person) and because their AGI does not exceed $150,000 they can expect to receive the entire $5,600 stimulus payment.
Example #2: Same family of 4 but let’s assume their AGI is $200,000. In this example, while the family was potentially eligible for a $5,600 stimulus payment, because their AGI exceeds $160,000 they are not eligible to receive any stimulus payment.
Example #3: Let’s assume the same family of 4 has AGI of $155,000. They are again potentially eligible for a $5,600 stimulus payment. However, their AGI exceeds the $150,000 threshold where the eligible payment starts to decrease but it does not exceed the $160,000 threshold where they would no longer be eligible for any payment. So, what can they expect?
In this situation, the reduction in the potential stimulus payment is determined by multiplying the full eligible payment amount by a percentage. This percentage is determined by dividing the amount that the taxpayer’s AGI exceeds the beginning phase-out threshold by the total amount over which the payment phases out. So, in this example, the reduction equals $2,800 calculated as follows:
– $5,600 (amount of the full eligible payment) multiplied by 50% (the percentage calculated below)
Percentage calculation: $5,000 (the amount by which the taxpayers AGI exceeds the beginning phase-out threshold: $155,000 (AGI) minus $150,000 (beginning phase-out threshold for joint filers)) divided by $10,000 (the total amount over which the payment phases out: $160,000 (ending phase-out threshold) minus $150,000 (beginning phase-out threshold))= 50%
Therefore, the family of 4 in this example should expect to receive a $2,800 stimulus payment ($5,600 potential payment less $2,800 required reduction).
• This legislation includes a provision that requires the IRS to make an “additional payment” to taxpayers if a taxpayer has not yet filed their 2020 return when the payments are first being determined by the IRS and based on the information reported on their 2020 return they are eligible to receive amounts in excess of what they already received based on their 2019 tax return. This does require the taxpayer to file their 2020 tax return within 90 days of the original 2020 tax return filing deadline or, if earlier, September 1, 2021.
Let’s look at another example to see how this works: Assume a married couple, who has one child that was born in 2020, has not yet filed their 2020 tax return at the time the IRS determines the eligible stimulus payments. However, they have filed their 2019 tax return and their AGI on that return is below the $150,000 phase-out threshold. The couple would be eligible for and should receive a $2,800 stimulus payment based on their filing status/AGI/dependents reported on their 2019 return. However, because based on their 2020 filing status/AGI/dependents they would be eligible for $4,200 (because of the added dependent and assuming AGI is still less than $150,000), the IRS will be required to issue them an “additional payment” equal to the excess they were eligible for based on their 2020 return over what they already received based on their 2019 return (if they file their 2020 return before the required deadline).
So, in this case this couple would receive an initial stimulus payment of $2,800 (based on their 2019 return) and an “additional payment” of $1,400 after they file their 2020 return.
The legislation does not state when the “additional payment” is required to be paid by the IRS so these payments will likely be delayed until the IRS is able to ensure their systems are set-up to appropriately determine the “additional payment” amounts owed to eligible individuals.
• Similar to the rules provided as part of the first two rounds of stimulus payments, taxpayers will be required to recalculate the payment amount they are eligible for when filing their 2021 federal income tax return. If, based on their 2021 filing status/AGI/dependents they are eligible for amounts in excess of what they receive in advance based on their 2019 and/or 2020 return(s), they will be allowed to take those excess amount as a credit against their 2021 income taxes. However, if a taxpayer recalculates their payment amount on their 2021 tax return and they already received more than that amount based on their 2019 and/or 2020 return(s), they will not be required to repay those excess amounts.
• The IRS will have a system in place for those that are not required to file a return for 2019 or 2020 allowing those individuals the ability to provide the IRS with the information necessary for the IRS to determine their eligibility and payment amounts.
It is unclear at this point how quickly the IRS will be able to start sending out these payments. However, those taxpayers that have filed their 2019 and/or 2020 returns that meet the eligibility requirements and who have previously provided the IRS with their direct deposit information, could expect their payments to be made via direct deposit within the next couple of weeks.
If you have any questions regarding this next round of stimulus payments, please do not hesitate to reach out to your trusted BRC tax advisor.
Click Here to read our other article that summarizes the many tax provisions that are included in the American Rescue Plan Act of 2021.