Strategies for Possible New Stimulus Payment

It is looking very likely that a new tax law will be enacted that includes a third round of stimulus/economic impact payments.  While the final details of such payments will not be known until/unless the new tax law is enacted, practitioners can begin to plan to help clients maximize the benefits of such payments. 

So far, the bill that was passed by the House of Representatives on February 27, 2021 proposes a third round of stimulus/economic impact payments of $1,400 per person, and it proposes the same phaseout threshold as was used for the first two rounds (i.e., phaseout begins at $75,000 for single and $150,000 for married joint returns). 

While the bill proposes the use of the same threshold where the phaseout would begin, it also proposes a faster phaseout that results in full phaseout of eligibility than applied for the first two rounds of stimulus/economic impact payments.  Reminder: Since this bill represents a proposal, any tax law that might be enacted could differ from this proposal.

The proposed third round of stimulus/economic impact payments would represent an advanced payment of a credit for the 2021 tax year, as a result, it would not change the calculation of the recovery rebate credit on 2020 returns.

Under the proposal, eligibility for the third round of stimulus/economic impact payments would be based on the income of taxpayers as reported on their 2020 income tax returns, if they have already filed such returns.  For taxpayers who have not yet filed their 2020 returns, it would be based on the income reported on their 2019 returns.  It is expected that the proposed third round of stimulus/economic impact payments would be distributed by the IRS before April 15, 2021.

This proposal creates an important strategic choice as to when certain clients should file their 2020 income tax returns.

For clients that had higher income in 2019 than in 2020, if their 2019 income made them ineligible for the first two rounds of stimulus/economic impact payments, and their 2020 income is lower and below the expected phaseout threshold, there is an incentive to finalize and file their 2020 returns as soon as possible, so that the IRS would have the 2020 (lower) income information available when determining whether such clients are eligible for the new round of stimulus/economic impact payments.

The opposite consideration applies for client with lower income in 2019 than in 2020.  For clients that had 2019 income that made them eligible for prior rounds of stimulus/economic impact payments, if their 2020 income is higher and above the expected phaseout threshold, there is an incentive to delay filing the 2020 returns, so that the IRS would only have the 2019 (lower) income information available when determining whether such clients are eligible for the new round of stimulus/economic impact payments.