Here’s how to use deferred tax savings to get the $ 1,400 Stimulus Check
Stimulus Checks printed at the Philadelphia Financial Center in Philadelphia.
Jeff Fusco | Getty Images
As new $ 1,400 worth of stimulus checks arrive, some people may wonder why they received less than they expected – or no money at all.
This third round of federal direct payments was approved earlier this month by Congress and President Joe Biden as part of the US $ 1.9 trillion bailout.
As with the first two checks, payments are based on the same income thresholds. Individuals with Adjusted Gross Income up to $ 75,000 – or Heads of Households up to $ 112,500 or married couples filing up to $ 150,000 together – are eligible for full payments.
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This time, however, payments will expire faster for people above these thresholds. If your Adjusted Gross Income exceeds $ 80,000 and you’re single – or $ 120,000 as a head of household or $ 160,000 for couples – you won’t get any money.
However, there are certain steps you can still take that will affect your Adjusted Gross Income – and therefore your eligibility – for a payment of $ 1,400.
It all depends on your retirement savings.
Note that this will only work if you have financial flexibility.
Many Americans expect $ 1,400 checks to stay afloat as individuals and families deal with challenges like unemployment, eviction risks, or food insecurity.
On the flip side, others see the $ 1,400 payments as an added bonus after a year of reduced spending and uninterrupted income.
For those in the latter situation who are close to eligibility because of their income, some retirement strategies could potentially help make a difference.
Invest in an IRA
The new $ 1,400 stimulus payments are based on either 2019 or 2020 federal tax returns.
The IRS will use 2020 returns as long as they are filed and processed. The agency has announced that it may look into topping up the taxpayers’ stimulus check, the 2020 return on which shows a decline in annual income from 2019 onwards.
The deadline for filing tax returns for 2020 has been extended from the usual date of April 15 to May 17 this year.
The IRS has not yet confirmed whether the deadline for IRA submissions will also be May 17th. However, Ed Slott, CPA and founder of Ed Slott & Co., said he believes the deadline for the IRA will be extended because of the language in the tax code and how the IRS has handled similar changes in the past.
Contributions to a traditional IRA can generally be deducted. Roth IRA contributions are not deductible.
If you’re single and your income is around the $ 80,000 limit, you can consider funding the maximum amount in a traditional IRA – $ 6,000 or $ 7,000 if you are 50 or older.
Your ability to deduct these contributions will depend on your income and whether or not you also have a retirement plan at work.
There is very little you can do to change last year’s income without a time machine.
CPA and founder of Ed Slott & Co.
According to Slott, this could change your eligibility for the $ 1,400 stimulus check.
A couple who files an application together and adjusted their gross income by the $ 160,000 cap for the stimulus checks could set aside $ 6,000 each in a traditional IRA, or a total of $ 12,000, Slott said. That could bring them under $ 150,000 for full stimulus checks. If they also have two children, their total payment could be $ 5,600.
“You can use an IRA deduction to change last year’s income,” Slott said, adding that other options are limited. “There is very little you can do to change last year’s income without a time machine.”
Increase the 401 (k) posts
Oliver Rossi | Stone | Getty Images
Alternatively, this year you can save on accounts that reduce your taxable income.
That way, when you file your taxes next year, you might be able to apply for this year’s stimulus check.
Just like this tax season, it will give a credit to anyone who missed the $ 1,400 stimulus checks next year, according to Garrett Watson, senior policy analyst at the Tax Foundation.
Take, for example, a single filer who made $ 80,000 and didn’t contribute to a retirement account in the last year. Every dollar they put into a 401 (k) this year reduces their gross adjusted income. If they wager $ 5,000, they’ll be eligible for the full $ 1,400 stimulus payment, Watson said.
Other people on this threshold as well may want to use the 401 (k) to set aside as much as $ 19,500 this year when they max out their contributions. (People aged 50 and over can redeem additional catch-up fees of USD 6,500.)
Of course, not everyone can afford to put that much money aside, Watson said.
“You have to have the leeway to save that much and not touch it,” he added.
There are also certain restrictions. When you have a 401 (k), your ability to withdraw money that goes into a traditional IRA is more limited.
Another option is a tax deferred health savings account, provided you have a high-deductible health insurance plan at work. This would also help lower your adjusted gross income when you file your taxes in the next year, according to Watson.