The $1,400 checks are coming. The stimulus bill passed through the Senate on Saturday and it will soon get through the House and get a presidential signature by March 14th. According to this bill, how much money will you get? When will you get it? What else is included in the bill? And my big question…“What impact will the 2021 stimulus have on my taxes?”
From what I can tell, the last question is HUGE. You’re going to want to read this post from start to finish.
The 2021 Stimulus: How Much Will You Get?
How much will you get with the 2021 stimulus?
- If you earn less than $75,000 a year, you’ll get $1,400
- If you earn $80,000 or more, you’ll get nothing
- In between the two? You’ll get the appropriate ratio of funds – less than $1,400 but greater than $0
- If you claim dependents on your taxes, you’ll get $1,400 for each dependent as well
- If you earn less than $150,000 combined per year, you’ll get $1,400 per person
- If you earn $160,000 or more, you’ll get nothing
- And again, if you make in between the two, you’ll get the appropriate ratio of funds – less than $1,400 per person, but greater than $0
- And, you’ll get $1,400 for each dependent you claim as well
As an example, my wife and I earn less than $150,000 a year. We have two young children. Therefore, we get $1,400 x 4 = $5,600. That’s a lot of money!
When Will You Get The Stimulus Money?
The next big question: “When can we expect to get this payment?”
According to the big chief himself (President Biden) the payments will start hitting our accounts by the end of March. If you get paid by check, it may take a couple weeks longer.
What Else Is Included in the Bill?
As you may have heard, the bill includes more than just the $1,400 payments.
In addition to the checks, there’s also:
- a $300/week boost to unemployment income
- no taxes owed on unemployment taken in 2020 up to $10,200
- a child tax credit bump – up from $2,000 per child in 2020 to $3,600 per child (age 5 and under) in 2021, $3,000 for children ages 6-17
- additional funds to fight the pandemic and help states, local governments, and schools
- an Affordable Care Act boost – an increase in the subsidies for those on Obamacare, which means they’ll pay lower premiums each month
Also, note that there is no minimum wage boost to $15. This was stripped from the bill.
Not sure if you caught it, but there are two HUGE points in there that will impact your taxes – both this year AND next year.
Stimulus Impact on the 2020 Tax Season
If you were unemployed during part of 2020 and received unemployment benefits, you likely already paid taxes on those earnings. According to this new bill, you no longer owe taxes on unemployment income in 2020, up to $10,200.
I was partially unemployed in 2020 and received $4,500 in unemployment benefits. My wife and I landed in the 12% tax bracket in 2020, so we paid approximately $540 in taxes on this money. With the passing of the 2021 stimulus, we’ll soon be getting this money back!
Were you unemployed and already filed your 2020 taxes? Then you’ll likely be getting some money back too!
Are you thinking that $540 isn’t that big of a deal…?
What if you received $10,200 in unemployment tax and you were in the 22% tax bracket? You could have $2,244 coming your way!
Stimulus Impact on the 2021 Tax Season
Here an even BIGGER deal. The big impact of the 2021 stimulus on your taxes.
You might think I’m going to say that you owe taxes on your $1,400 check. But nope, that’s not true. It’s simply an early tax credit. Instead of getting the credit applied to your taxes at the end of the year, you’re getting it now in the form of a check. There are no taxes owed on tax credits.
And…speaking of tax credits, here comes the actual BIG deal!
The update to the child tax credits.
- In 2017, the child tax credit was $1,000 per child
- In 2018, it bumped up to $2,000 per child
- Now in 2021, the child tax credit is $3,000 per child that’s between the ages of 6-17, and $3,600 per child that’s under 6 years old
These are some big jumps! And believe it or not, this is going to have a BIG impact on your 2021 tax returns!
Related: 21 Ways to Get Your Paycheck Back!
Why Is The Child Tax Credit Such a Big Deal?
Let’s say you earned $100,000 in 2020 and over the course of the year, you paid in $8,000 worth of federal taxes. Sure enough, when you filed your taxes, you owed $8,000…but then you were able to deduct $2,000 from your tax bill for each kid! With your two young kiddos, you were able to deduct $4,000!
So, instead of paying exactly the right amount of tax throughout the year, you received a $4,000 refund! YESSS! (actually, sort of “yesss”…Really, you should have estimated better and had fewer dollars deducted from each paycheck).
- $8,000 paid in federal taxes
- $8,000 owed, but $4,000 in child tax credits
- Result = a $4,000 tax refund
Now, let’s calculate your 2021 returns with the same earnings
Your earnings are still $100,000 and you still paid $8,000 in federal taxes, but the child credits have increased significantly.
- $8,000 paid in federal taxes
- $8,000 owed, but $7,200 in child tax credits ($3,600 x 2 kiddos)
- Result = $7,200 tax refund
Meaning, in the above example, if you change nothing on your tax forms, you will be overpaying your taxes by $7,200 over the course of the year.
Instead, wouldn’t you rather bring home an extra $600 a month and use that money throughout the year? I would!
Have More Kids? Your Impact Could Be Even Greater!
Have more kids? Then the 2021 stimulus likely has an even greater impact on your taxes.
Let’s say you have five kids…
- Two of them between ages 6-17, and
- Three of them under age 6
You’ll get a $3,000 tax credit for each of the older kids, and a $3,600 tax credit for each of the younger kids. That’s $16,800 in tax credits, which is $6,800 more than in the prior year! That’s huge!
All this to say, it’s time to plan out your tax withholding for the 2021 season so you don’t overpay the government by thousands of dollars!!
How to Reduce Your Federal Tax Withholding
If you want a fatter paycheck each pay period and a smaller return when you file, then you’ll want to reduce your federal tax withholding.
How do you do this?
It’s pretty simple really. Just hop onto your employer’s payroll or benefits site and find the W-4 form and increase your dependent number (if they don’t have a page for this, here’s a PDF version that you can print and turn in to your payroll department).
What Should Your Dependent Number Be?
To decrease the amount of taxes that are withheld from your paycheck, you simply increase the number of dependents on your W-4…but what number should you increase it to??
This answer isn’t all that easy and it’s one that you’re going to have to play around with a little bit.
You know roughly the amount that your withholding should decrease by, so what you could do is take your best guess at what you should increase your dependent number to, and then assess how much was taken out of your next paycheck.
- Is your withholding still too much? Then bump up that dependent number by 1 or 2
- Are you now withholding too little? Then reduce your dependent number.
The Impact of the 2021 Stimulus On Your Taxes
Not only will you be receiving a check from the government, but your tax bill next year could be FAR LESS than it was this year, all thanks to your beloved children!
Be sure to calculate how much less you’ll owe based on the new child tax credit and reduce your tax withholding accordingly. I’m going to adjust mine ASAP! I suggest you do too!
How does the 2021 stimulus impact your taxes? Will you be adjusting your federal withholding?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.