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Scaled-Back Stimulus Payments Would Create Tricky Tax Situation

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What You Need to Know

  • Under a deal struck with the Senate, the payments will be phased out more quickly than they would be under the bill that passed the House.
  • This tight phase-out creates a disincentive for certain taxpayers to earn more, according to Jeffrey Levine.
  • The Senate voted Thursday afternoon to begin debate on the bill.

The $1.9 trillion economic stimulus package, which passed the House on Saturday, is expected to be enacted within a week with scaled-back eligibility for $1,400 checks. The Senate voted Thursday afternoon to begin debate on the bill.

The change in the stimulus payments creates a “messed up” situation for certain families near the income limit, according to Jeffrey Levine, chief planning officer of Buckingham Wealth Partners.

Unemployment benefits of $400 per week, however, “will be retained in the final bill, along with all sorts of pork, including an injection of federal money to keep poorly run private pensions afloat,” notes Greg Valliere, chief U.S. strategist for AGF Investments, said Thursday in his morning Capitol Notes email briefing.

Stimulus Check Eligibility

Late Wednesday, the Senate agreed to scale back eligibility for $1,400 direct payments.

About 8 million fewer Americans would receive payments, according to the Tax Policy Center.

The payments would be fully phased out for individuals earning $80,000 per year, couples earning $160,000 per year and heads of household earning $120,000 per year. That is reduced from income limits of $100,000, $200,000 and $150,000 in the version of the plan that passed the House.

The phase-outs begin at the same income level as in the House bill: $75,000 for individuals, $150,000 for couples and $112,500 for heads of household.

Still, the payments would be larger than in previous rounds of stimulus, in which Americans received $1,200 and $600 checks.

‘Almost Cliff-Like’

The relative abruptness of the phase-out is “almost cliff-like,” according to Jeffrey Levine, chief planning officer of Buckingham Wealth Partners.

“A difference of just $10k of AGI could mean the difference of $7,000(!) in stimulus checks for a family of 5!” he tweeted Wednesday.

For certain families near the income limit, the situation gets tricky.

For example, according to Levine, a couple with four dependents — say, children and grandparents living with them — earning $150,000 would receive $8,400 in stimulus payments. That same household earning $160,000 would receive no payments. And because the extra $10,000 in earnings would amount to $7,800 after federal taxes, their after-tax income would be lower than it would be if they earned only $150,000.

“Just for the record,” Levine continues, “it’s not ‘really messed up’ b/c people don’t deserve help. It’s messed up b/c it’s a pretty direct disincentive to making additional income. You don’t really see this with a larger phaseout range.”

Payments ‘Should Be Better Targeted’

Jason Fichtner, associate director of the Master of International Economics and Finance Program at the Johns Hopkins School of Advanced International Studies, said the stimulus check changes are “only a step in the right direction.”

The payments “should be better targeted to those who really need them — those who have lost their jobs or had lost income due to the economic downturn resulting from the pandemic,” he said.

Recent research by the National Bureau of Economic Research “suggests that low-income households, which are more financially constrained, spent a larger portion of their previous Covid relief payment,” Fichtner added. “Most of the money was saved or used to pay down existing debt.”

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