The third round of direct stimulus payments will start being disbursed to eligible taxpayers this weekend, the Biden administration said Thursday. This will be welcome financial relief for millions of households still struggling a year into the coronavirus pandemic.
While the $1,400 payments will be based on the most recent tax return the Internal Revenue Service (IRS) has on file for each taxpayer, if you lose income in 2021 and become eligible for the third stimulus check for the first time — or for a larger portion of it — you will be able to claim it on your 2021 tax returns, which you will file in 2022, says Garrett Watson, a senior policy analyst at the Tax Foundation.
Eligible recipients who have a baby in 2021 will be able to collect an up-to-$1,400 dependent payment as well.
"This is similar to the process going on now for residual credits being claimed for the two previous payments," says Watson. Eligible taxpayers who did not receive the first or second stimulus payments, or received an incorrect amount, but lost enough income in 2020 to qualify, can currently claim a Recovery Rebate Credit on their 2020 Form 1040.
That means if you earned $80,000 in 2019, but only $60,000 in 2020, you would be able to claim the credit.
Anyone with an adjusted gross income (AGI) under $75,000 and married couples earning under $150,000 will receive the full $1,400 or $2,800 payment, respectively. After those limits, there are very steep income phase outs: Individuals earning $80,000 or above, and couples earning $160,000 or above, will get no third payment at all.
That small difference in AGI eligibility could incentivize those right above the income limit to lower their taxable income for 2021 so that they, too, can get a check. This can be done by contributing to a traditional 401(k) or IRA, among other strategies, which lowers a taxpayer's AGI.
If an individual earning $80,000 contributes $5,000 to a traditional IRA or 401(k), they would lower their taxable income enough to reach the $75,000 AGI eligibility limit for the full stimulus payment, Watson says. They would then qualify for a $1,400 payment when they file their taxes in 2022.
Couples near the income limits with dependents have even more money at stake. A couple with three children that earned $161,000 in 2020 would receive $0 right now. But if the couple lost enough hours at work or contributed enough to a 401(k) to reduce their AGI to $149,000 in 2021, they would get $7,000 in retroactive stimulus pay next tax season, as well as a larger child tax credit.
It's possible that the IRS could try to top off payments for those who lose income later this year, so they don't have to wait until next tax season to collect the benefit. But Watson says that is unlikely, and the IRS has not provided details on this process yet.
"The IRS has been hesitant to do that in previous rounds as it can cause more issues than it solves," like incorrect payment amounts, says Watson. That said, "the president's executive order asking Treasury to find ways to get payments to people who haven't gotten them may push them to reconsider this."
Don't miss:
- When third stimulus payments will start being deposited
- What you need to know about the third round of stimulus payments
- New $3,000 child tax credit could raise issues for divorced parents
- What to know about the American Rescue Act's unemployment insurance provisions
Check out: Use this calculator to see exactly how much your third coronavirus stimulus check could be worth
