On December 27, 2020 President Donald Trump signed the Consolidated Appropriations Act, 2021. Aside from the overall funding implications and averting a shutdown of the federal government, there are two provisions that will specifically apply to millions of Americans: a second stimulus payment and payback of the payroll tax deferral.
Payroll Tax Deferral Payback
A few weeks ago, I wrote how the payroll tax deferral was ending and that the payback period was beginning. Originally, all the payroll taxes that had been deferred were set up to be paid back in four months, but the recent Consolidated Appropriations Act changed the payback completion date from April 2021 to December 2021. You can find this change on page 2003 of the bill. This allows the payback period to be spread across twelve months vice four months, which will greatly ease the reductions in paychecks that will start this month for those affected. Below is a table with estimated payroll tax payments with estimates for how much your paychecks may be reduced due to resuming payment of payroll taxes combined with repaying deferred payroll taxes.
Second Stimulus Payments
Also included in the Consolidated Appropriations Act (starting on page 1966) are “Additional 2020 Recovery Rebates for Individuals.” The stimulus payments are $600 for individuals, $1,200 for married couples that file jointly, and $600 per child. The income limits for this round of stimulus checks, based on tax filing status, are:
Single: $75,000
Head of Household: $112,500
Married (filing jointly): $150,000
For every $100 dollars above the limits below, the stimulus payment will be reduced by $5 until it is $0. Those without children and whose income is above the limits below will NOT receive any stimulus payment:
Single: $87,000
Head of Household: $124,500
Married (filing jointly): $174,000
The $600 payments for each child will also be reduced at the same rate.
What to do with your stimulus check?
There are many possibilities for your stimulus check. My recommendations will be very similar to the recommendations I had for the first stimulus check. Here are my recommendations:
- If your income has been disrupted by the current pandemic, you should be using that money as you need for essentials: food, utilities, rent/mortgage, gas, medication, and any other needs. Although things are progressing towards a return to normal, we still have a long time for a full return to normal across the entire country and economy, so you shouldn’t be spending the stimulus check on wants like clothes, new electronics (unless you need it for school or work), or any other random unnecessary items you may find online.
- If you have been able to keep your income, good for you and your family. You can definitely look to put some money back into the economy, but let me cover a few questions before you go on a spending spree.
- Do you have an emergency fund? Even though the trajectory is towards a return to normal, there is always risk of something happening that requires extra unplanned expenses. Anything from losing a job to unexpected medical bills to house or car repairs can (and do) cause financial hardship for Americans every year, with or without a global pandemic. Your emergency fund should have a minimum of 3 months of expenses, but having more saved up (maybe 6-12 months) will provide you with a much larger cushion in the event of a major emergency.
- Have you maxed out your IRA contributions for 2020? The limit was $6,000 for people under 50, and $7,000 for people 50 and older. If not, you should look to contribute towards your retirement. Remember, you can make IRA (Traditional or Roth) contributions that count for 2020 until ‘tax day’ this year, which is April 15, 2021.
- Do you have any personal debts at a higher interest rate, especially credit card debt? If so, you should probably put most (if not all) of your stimulus check towards lowering and paying off that debt. In a sense, you already put the stimulus money into the economy before this all happened (and some extra with the interest costs), and now is a good time to stop paying as much in interest on your debt.
- Do you have an emergency fund? Even though the trajectory is towards a return to normal, there is always risk of something happening that requires extra unplanned expenses. Anything from losing a job to unexpected medical bills to house or car repairs can (and do) cause financial hardship for Americans every year, with or without a global pandemic. Your emergency fund should have a minimum of 3 months of expenses, but having more saved up (maybe 6-12 months) will provide you with a much larger cushion in the event of a major emergency.
I hope this helps clear up any confusion and provides some helpful suggestions.
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