3 Ways To Max Your Stimulus

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

March 16, 2021

Are you looking for ways to maximize your Stimulus check?

Last week President Biden signed the American Rescue Plan paving the way for the IRS to start distributing stimulus checks to most Americans. In fact, you may have already received a deposit into your checking account as recently as this past weekend.

The American Rescue Plan contains several provisions aimed at providing aid to many Americans, especially those with children. If you don’t need the money because you didn’t face a financial hardship due to the Covid Recession last year, you might be wondering how you can make the most out of these funds. Outlined below are three things you can do to maximize the value of your stimulus.

What’s Contained in The American Rescue Plan?

There are many provisions contained within the Plan, but I’m only going to focus on the ones that directly relate to those Americans receiving stimulus aid. There are three categories of stimulus that most Americans will receive, two of which apply to those with children still on their payroll.

2021 Recovery Rebates, a.k.a. Stimulus Checks

The most talked about element of the Plan is the $1,400 stimulus check given to most Americans. There are two key elements to who will actually receive money. First, unlike the previous two stimulus bills where the person receiving the stimulus had to be a taxpayer, this stimulus will cover eligible individuals. Second, not every American is eligible.

Unlike the previous stimulus bills passed last year, the American Recovery Plan expands checks to cover eligible individuals. This includes taxpayers plus their dependents. For example, a married couple with two children will receive $1,400 x 4 = $5,600!

Not every American taxpayer qualifies. Stimulus checks begin phasing out for single filers whose adjusted gross income is $70,000, and $150,000 for married couples filing jointly.

Stimulus Check Phaseouts

  • Single filers and Married filing Separately: $70,000 – $80,000
  • Married filing Jointly: $150,000 – $160,000
  • Head of Household: $112,500 – $120,000

If you find yourself within these limits, your stimulus will be proportionately reduced depending upon how far you are in the range.

Funds are being distributed based on the most recent adjusted gross income the IRS has on file for you. This could be either your 2019 or 2020 tax return if you’ve filed it already.

What happens if you haven’t filed 2020’s return yet and your 2019 income disqualifies you? If your income in 2020 was lower than 2019, do not delay and don’t file for an extension. You will need to get your return submitted before the IRS deadline of July 15th (90 days after the normal calendar year tax filing deadline) in order to receive a stimulus check.

The IRS is pushing back the normal tax filing deadline to May 17th for 2020 tax returns. As a result, the deadline for filing your return and qualifying for the 2021 Recovery Rebate is August 21st

Child Tax Credits Gets Increased

In addition to stimulus checks, families with young children will see the Child Tax Credit increase to $3,000 per child from $2,000, and $3,600 for children under the age of 6. In addition to the increased benefit, it will be extended to children through age 17. This will be an extremely valuable tax benefit for families who qualify.

But wait, there’s more. The Child Tax credit will be fully refundable! In the past, the child tax credit was only allowed to offset a tax liability until the liability was completely gone. If any portion of the credit was unused because the taxpayer’s liability had been eliminated, the unused portion was gone. Now the unused portion will be fully refunded, even if you have no tax liability. You will get to keep the difference.

Husband and wife have two children ages 8 and 4. The maximum child tax credit is $3,000 for the oldest and $3,600 for the youngest. That’s a $6,600 child tax credit for 2021. Assuming their AGI is below the $150,000 limit, they will also receive $5,600 in stimulus money resulting in total tax credits of $12,200!

Just like with the stimulus checks, not every taxpayer will qualify for the increased Child Tax credit. The increase above the normal $2,000 credit will be phased out for single filers at $75,000 and $150,000 for joint filers.

Child Credit Phaseouts

  • Joint Filers $150,000
  • Head of Household $112,500
  • All others $75,000

The IRS is going to advance the credit to qualifying families beginning in July. Beginning in July, the IRS is going to pay 50% of the credit in monthly installments. Like the stimulus checks, qualification will be based on your prior tax return. If your eligibility for child credits has changed since your last tax return, it will be trued up when you file your 2021 return.

In addition to the increased Child Tax Credit, the Rescue Plan also extends temporary enhancements to the Child and Dependent Care Tax Credit for 2021. The credit is calculated by multiplying eligible expenses by their Applicable Percentage. Under the Plan, eligible expenses have more than doubled, to $8,000 when there is one qualifying child and 16,000 of expenses when there is more than one child.

How To Maximize Your Tax Credits

The economic argument for passing the American Rescue Plan is to continue stimulating the economy so those 9 million Americans still unemployed get back to work as soon as possible. Economists hope you will use this money to buy goods and services, which will then trickle throughout the economy and theoretically lead to declining unemployment. But what if you don’t need or want to spend the money? How can you put that money to work for you?

1. Contribute to a Roth IRA

One way to maximize your stimulus money is to contribute it to a Roth IRA, leading to tax-free growth for your future. Roth IRAs are a great way to accumulate wealth because of their tax-free status. Contributions made today and invested could earn some nice returns and be available for your retirement. Along the way, you won’t have to pay taxes on the gains or on the eventual withdrawals (provided certain conditions are met).

The IRS says you can contribute up to $6,000 to a Roth IRA ($7,000 if you’re age 50 or older) this year. However, there are income limits that could impact your ability make a Roth IRA contribution and you have to have wages to begin with. The ability of single filers starts to phase out when their income exceeds $125,000. Married couples filing jointly start to phase out at $198,000.

2. Increase your 401k contributions

Another way you can maximize your stimulus is to increase contributions to your employer provided retirement plan. This option could have similar outcomes as contributing to a Roth IRA, but you can makes things simpler.

Most workers in America are covered by some form of employer provided retirement plan like a 401k, 403(b) or 457 plan. Rather than opening a new account, you could increase your contributions to your retirement account in an equal amount of the stimulus.

Let’s use the husband and wife example from before. They are expected to receive $12,200 in tax credits. Assuming they are not already maxing out their 401ks, they could increase the contributions between them by $12,200. At the time of this writing, there are nine months left in 2021. They could divide the credit by nine and increase their monthly contributions by $1,355. While their take-home pay will decrease, the decline would be offset by the stimulus and child tax credits.

Most employer retirement plans include options to contribute to pre-tax and Roth accounts within the plan. Making contributions to the Roth account within the 401k will have the same tax treatment as a standard Roth IRA, but you’ll be able to exceed the $6,000 limit. Contributing to the pre-tax account will result in lowering your current year tax liability, but you will have to pay taxes on the withdrawals in retirement. Paying taxes in retirement might be worth it if you are in the 22% marginal tax bracket today.

Whether you chose to make contributions to the pre-tax account or the Roth account within your 401k is up to you. The point is to increase your contributions (provided you are not already maxing them out!) by the amount of stimulus you receive so you can maximize it for later.

3. Deposit into an HSA account

Do you have access to a Health Savings Account? An HSA account is a tax-deferred savings account that is used to cover deductibles and out-of-pocket qualified healthcare expenses. If the funds held in the HSA are not consumed each year, they can grow tax-deferred for future use – similar to a retirement account.

Individuals with health coverage under a qualifying high-deductible health plan can contribute up to $3,600 in 2021 and deduct that contribution on their tax return.

Again, you have to be covered under a qualified health plan to take advantage of this.

Bringing It All Together

Most Americans will be receiving some amount of stimulus as a result of the American Recovery Plan. If you are in a position that does not require you to spend the money, increasing contributions to your retirement or HSA accounts means you will get a bonus on that money. Here’s how:

You receive a $1,400 stimulus check and increase your 2021 401k contribution by an equal amount. The stimulus check is received tax-free, and you use that to cover a portion of your spending over the remainder of the year. In the meantime, you have increased your 401k contribution by $1,400 and you are depositing it into the pre-tax account. Later, when you file your 2021 tax return, your taxable income will be reduced by the contribution. You will pay taxes on less income than normal. Not only do you get the stimulus, but you also get the bonus of paying less taxes.

Of course, you can also spend the money. That is what the government is hoping you will do.

Do you have questions about how to maximize your stimulus given your situation? Are you looking for ways to improve your retirement success? If so, please let me know. I’d be happy to see if I can help.