4 Ways the Stimulus Package May Affect Retirees
Yes, the possibility that you’ll get a stimulus check is something to care about, but there are other aspects of this act involving taxes and RMDs that could directly affect retirees like you. It is important to know what’s in this bill that will affect you, to make sure you’re getting as much as possible out of your tax dollars.
1. You’ll (Probably) Get Another Check
Because the entire purpose of these stimulus packages was to provide relief to those suffering economic setbacks due to the virus, you might think that retirees, who aren’t in the workforce, would not be eligible. Wrong. “If you got a full payment last time, you will get the full payment this time,” provided your income has not substantially changed, said Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy.
The payments are based solely on adjusted gross income (AGI), not employment status or age. The checks will be a maximum of $1,400 per individual, or $2,800 per married couple, plus $1,400 per dependent. Like past direct payments, this third round will be based on income. The income limits for those to receive the maximum amount will remain the same. Individuals who earn up to $75,000 in adjusted gross income, heads of household with up to $112,500, and married couples who file jointly with up to $150,000 will get the full $1,400 per person.
The Biden stimulus, known as the American Rescue Plan, includes: a one-off payment of US$1,400 for most Americans; extended unemployment support; increased food stamp benefits; increased tax credits; grants to businesses; and increased education funding. This is a major injection into the US economy that is not matched by a comparable withdrawal from increased taxation (although Biden is raising some taxes and considering more, especially on the wealthy).
2. You Might Get a Tax Break for Charitable Giving in 2021
I admire the intention here, as charities are helping many of the people hurt most by the pandemic. The CARES Act increased the percentage of gross income you could write off, for cash contributions, from 60% of gross income up to 100% of gross income. It also added up to a $300 above-the-line charitable deduction for those who take the standard deduction. The new appropriations act extended the former through 2021 and, in certain instances, expanded the latter. Those who file jointly, and take the standard deduction, in 2021 can take up to a $300 deduction per taxpayer, meaning $600 per couple. In 2020, the deduction was $300 per tax return, not per person, so married couples were limited to a $300 deduction.
It’s important to note that the percentage-of-AGI limits typically come into play only with significant, one-time gifts. Those gifts often come in the form of appreciated stock or capital assets, donated directly to a charity, trust or donor advised fund. This adjustment specifically excludes those types of donations. It would surprise me if a savvy planner would advise driving your AGI down to zero with a cash gift.
3. The 7.5% AGI Floor on Medical Expense Deductions Has Been Extended
The appropriations bill includes a subsection titled the “Taxpayer Certainty and Disaster Tax Relief Act of 2020.” Apparently, continuing to call this annual activity “extenders” was just too simple. These are the bills that often, as they indicate, extend certain provisions of the Internal Revenue Code by another year or two, or retroactively for the previous year.
The extension of the 7.5% AGI hurdle for medical expense deductions is a win for retirees, who see ever-increasing health care expenses. This has bounced between 7.5% and 10% for many years. Unlike many “extenders,” this was permanently (or at least until Congress changes its mind) pegged at 7.5%.
Here’s an example: John was sick in 2020. He had gross income of $100,000 and medical expenses of $10,000. With a 7.5% hurdle, he can write off his medical expenses in excess of $7,500 on his Schedule A. He gets to write off $2,500. If the hurdle had been 10%, he could have only written off expenses in excess of $10,000, or, zero.
4. Required Minimum Distributions Are Back
I was relieved when the CARES Act suspended 2020 RMDs. I was excited when I heard murmurs that this new bill would extend that through 2021. My emotional roller coaster headed south again when I found out that such a provision was left out of the final bill.
With RMDs back in play, we face a somewhat tricky situation due to a provision in the SECURE Act. That law, which took effect on Jan. 1, 2020, pushed the starting RMD age from 70½ to 72, for those born on or after July 1, 1949. Therefore, those who had just started taking these distributions had a temporary reprieve. Those who were about to start got an extension. The IRS imposes an especially hefty penalty of 50% for missed distributions, so it’s important that you confirm when you must begin taking these and how much you have to take.
I hope this bill will provide significant help for all those hurt during a horrific year. I hope it means that I will be able to safely visit my favorite bars and restaurants, including those owned by my college roommate, before they go out of business.