January 15, 2021

Family Finances

The stimulus bill explained

Congress recently passed a highly anticipated economic stimulus bill just in time for the holidays. The entire bill contains over 5,000 pages of new legislation appropriating over $900 billion in government spending. The following is an outline of the provisions most pertinent to our clients here at Rockbridge.

The headline provision in the bill is the additional direct payment stimulus checks to individuals who qualify based on their income. The base credit amount is $600 per individual and includes additional payments to taxpayers who claim child tax credits for children under the age of 17. Similar to the CARES Act, taxpayers whose adjusted gross income (AGI) is above a certain amount will see their payment reduced or eliminated altogether.

Example: David is a single taxpayer with 2 children under the age of 17, and AGI of $65,000 in 2019. Therefore, David will receive $1,800 – $600 for David and $600 for each child under 17.

Similar to the CARES Act, these payments begin phasing out for single filers with AGI above $75,000 and married fliers with AGI above $150,000. The phaseout provision reduces the taxpayer’s payment by $5 for every $100 of AGI above the limit.

Example: David and Jenna file a joint return and claim Child Tax Credits for 3 children under the age of 17. Before taking into account their AGI, the couple would expect to receive direct payments of $3,000 – $600 for David, $600 for Jenna, and $1,800 total for the children. However, David and Jenna have an AGI of $175,000. Therefore, the couple will see their payment reduced by $1,250, leaving them with a direct payment of $1,750.

The stimulus bill also addressed the Paycheck Protection Program (PPP), another major program enacted under the CARES Act. Arguably the most significant item addressed for small businesses who already have an outstanding PPP loan, is the deductibility of business expenses paid for with funds from the PPP loan. This is significant because while the CARES Act specifically stated that PPP loans would not be included as income, the IRS subsequently took the position that expenses paid for with PPP loan funds were therefore not deductible – effectively making the loans taxable. Fortunately, small business owners now have clarity that they can seek loan forgiveness without increasing their tax bill.

Other important PPP related items contained in the bill include: both reopening the window for small businesses to apply for an initial loan; and providing those business who received a PPP loan, but continue to need financial support, an opportunity for a second loan, albeit with more strict qualification requirements. The bill also expands the types of business expenses that qualify for loan forgiveness.

People may be wondering if the new stimulus bill extends certain popular provisions enacted by the CARES Act, including waiving required minimum distributions (RMDs) and Federal student loan relief. Unfortunately, the answer is no. At this point individuals should plan on taking their RMD for 2021, and those with Federal student loans should plan to resume making those payments beginning in February.

Those who do not need distributions from their retirement accounts to meet their living expenses may want to wait until later in the year (if they do not already), in the event that additional legislation is passed further waiving RMDs. Contact your Rockbridge advisor if you would like to discuss a plan for your 2021 RMDs.

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