Moar stimulus! (draft bill)

[seattlecyclone]

The proposed next round of tax-related stimulus changes is up here. Some highlights:

New individual stimulus checks.
* $1,400 for single people, $2,800 for married filing jointly.
* Add $1,400 per dependent of any age.
* Phases out in the $75-100k AGI range for single people, $112.5k-150k for head of household, $150k-200k for joint filers.
* Must supply a social security number on your return to qualify...unless you're in the military and married to someone without one. That's weird.
* Written as a credit against 2021 taxes with advance payments based on 2019 income (or 2020 income, if you file before the payments go out). A subsequent round of advance payments would go out, after the 2020 tax filing deadline, to taxpayers whose income declined in 2020 compared to 2019, and would have received a bigger payment based on 2020 income.

Child tax credit. All changes would apply to 2021 only, though many Democrats have stated an intention to push to make these changes apply to future years as well.
* 17-year-olds would count.
* The credit would be $3,600 for kids under 6 at the end of the year, $3,000 otherwise.
* The increased credit amount would phase out at 5˘ on the dollar for income over $75k (single), $112.5k (head of household), $150k (joint).
* Monthly advance payments of this credit would be sent out based on most recent filed tax return (and would be updated mid-year after people file their next tax return). There would be a website to allow people to opt out of the advance payments (if they'd rather use it to offset other tax liability) or report a change in the number of qualifying children, change in marital status, change in income, etc. Any difference between the advance payment and actual credit would generally be trued up at tax time.

Earned income credit.
Changes for 2021 only include:
* Lowering the minimum age for the credit (24 for students, 18 for former foster kids and homeless youth, 19 for others),
* Eliminating the maximum age for the credit,
* Increasing the credit for filers without children, and
* Allowing taxpayers to elect to use their 2019 earned income to calculate the EIC if their earned income declined from 2019 to 2021.
Indefinite changes include:
* The amount of allowed investment income would increase to $10,000 (currently $3,650), and would adjust upward for inflation every year.
* The EIC would now apply in US territories.

Child/dependent care credit. Changes for 2021 only.
* Maximum cost of care considered for the credit would increase to $8,000/$16,000 (currently $3,000/$6,000).
* Credit would start at 50% of the cost of care and decrease for taxpayers with AGI over $125k (currently 35%/$15k).
* The credit is currently available at 20% for people with any income; it would now phase out below 20% at incomes over $400k, disappearing entirely at $480k.
* The credit would be refundable.

ACA premium tax credits.
* For 2021 and 2022 only, tax credits would increase for people who currently qualify for them. This includes $0 (net) silver plans for people below 150% of the poverty line.
* For 2021 and 2022 only, the cliff at 400% of the poverty line would be eliminated. Tax credits would bring the net cost of the second-cheapest silver plan to 8.5% of MAGI for folks over 400%.
* For 2021 only, people who receive unemployment compensation would be treated as having income at 133% of the poverty level for the purposes of this tax credit.

Other changes
* Limits on dependent care FSAs would increase for 2021 only.
* Credits to businesses for COVID-related sick leave and family leave would be extended and expanded to include time off for vaccination (including recovery from side effects).
* The employee retention credit would be available for all of 2021 (currently only available for the first half of the year), at the new rate of 70% of the first $10k of wages per employee per quarter.
* Restaurant revitalization grants would be exempt from tax.

[dandarc]

As VP of Finance at our church and looking at that employee retention credit, I'm low-key wishing the governor would issue another stay at home order. Not that we need the money - assuming we actually get paid for our 2020 retention credit I think we'll actually be better off financially than had there been no disruption to our activities.

[DadJokes]

Before long, my kid is going to be worth more in tax credits than he costs...

[seattlecyclone]

As VP of Finance at our church and looking at that employee retention credit, I'm low-key wishing the governor would issue another stay at home order. Not that we need the money - assuming we actually get paid for our 2020 retention credit I think we'll actually be better off financially than had there been no disruption to our activities.

A stay at home order is not required. For 2021 a 20% revenue drop compared to the same quarter of 2019 is sufficient. I'm treasurer for a nonprofit preschool and we're expecting to qualify based on that. If we somehow have more than 80% of 2019 revenue we'll be fine without the credit. Given that most of our budget goes toward wages and the IRS is offering to cover 70% of those, our financial picture is also looking quite nice.

[dandarc]

Yeah - that is a pretty sweet deal. And a lot less difficult than the PPP loan thing, albeit about 30% less money at least for my church (which we also didn't get - applied for PPP and crickets for the last 9 months). Is this strictly quarter by quarter? And is that same deal for 2020 Q3 & Q4?

I think encouraging pledge pre-payers to wait until April 1st might go beyond the pale, but our income is sort of lumpy so we might take a look at our books and see if we just lucked into qualifying other than that Q1 / Q2 2020 timeframe when we were under a stay at home order.

[seattlecyclone]

Yeah - that is a pretty sweet deal. And a lot less difficult than the PPP loan thing, albeit about 30% less money at least for my church (which we also didn't get - applied for PPP and crickets for the last 9 months). Is this strictly quarter by quarter? And is that same deal for 2020 Q3 & Q4?

Yep, quarter by quarter. This year you also have the option to look at the previous quarter's revenue compared to 2019. If you were at 75% last quarter and 85% this quarter you'll qualify both quarters. This is currently law for Q1 and Q2, and the new bill proposes applying it to Q3 and Q4 as well.

I think encouraging pledge pre-payers to wait until April 1st might go beyond the pale...

Maybe consider having your minister share the pulpit one Sunday with representatives from other charities in your community. Have them say. "Thanks for your continued support in these challenging times. Due to IRS rules our church will actually have more money if you send a quarter of your pledge this year to support some of this other worthy work in our area." Seems like everyone would be better off if that happened. Worth a try, right?

...but our income is sort of lumpy so we might take a look at our books and see if we just lucked into qualifying other than that Q1 / Q2 2020 timeframe when we were under a stay at home order.

Note that this 80% rule (and the one-quarter lookback option) is new for 2021. For 2020 the rule was you had to have a quarter with a >50% revenue drop to begin qualifying based on revenue, and then you would qualify for subsequent quarters in 2020 as long as your revenue stayed below the 80% level. Beginning this year the initial quarter with a 50% drop is no longer required.

[Paul der Krake]

The ACA considering everyone with UI at 133% FPL is pretty wild.

[reeshau]

Hooray for the (temporary) end to the ACA cliff!  I have LTCG ready to go, once it passes.

[dandarc]

Hooray for the (temporary) end to the ACA cliff!  I have LTCG ready to go, once it passes.

You ain't kidding - hope that passes and becomes permanent.

[phildonnia]

[Dependent Care] Credit would start at 50% of the cost of care and decrease for taxpayers with AGI over $125k (currently 35%/$15k).

So is there any reason to have a Dependent care FSA anymore?

[Lucky Recardito]

The proposed next round of tax-related stimulus changes is up here. Some highlights:

New individual stimulus checks.
* $1,400 for single people, $2,800 for married filing jointly.
* Add $1,400 per dependent of any age.
* Phases out in the $75-100k AGI range for single people, $112.5k-150k for head of household, $150k-200k for joint filers.
* Must supply a social security number on your return to qualify...unless you're in the military and married to someone without one. That's weird.
* Written as a credit against 2021 taxes with advance payments based on 2019 income. A subsequent round of advance payments would go out, after the 2020 tax filing deadline, to taxpayers whose income declined in 2020 compared to 2019, and would have received a bigger payment based on 2020 income.

Child tax credit. All changes would apply to 2021 only, though many Democrats have stated an intention to push to make these changes apply to future years as well.
* 17-year-olds would count.
* The credit would be $3,600 for kids under 6 at the end of the year, $3,000 otherwise.
* The increased credit amount would phase out at 5˘ on the dollar for income over $75k (single), $112.5k (head of household), $150k (joint).
* Monthly advance payments of this credit would be sent out based on most recent filed tax return (and would be updated mid-year after people file their next tax return). There would be a website to allow people to opt out of the advance payments (if they'd rather use it to offset other tax liability) or report a change in the number of qualifying children, change in marital status, change in income, etc. Any difference between the advance payment and actual credit would generally be trued up at tax time.

May be too early to know, but here are the things I am tracking based on our situation (2019 AGI was about $155K; 2020 AGI was about $185K; 2021 AGI is likely to also be around $185K; currently have one young child born 2019, with a 2nd due spring 2021). Would be thrilled if someone had these answers to hand:

• For the individual stimulus checks ... for us, having the stimulus check calculated against 2019 income vs. 2020 or 2021 is a major boon. We did get most of rounds 1 and 2 (with a little off the top as we had entered the phase-out zone but not by too much), and I've read that we would NOT then owe back any "overage" when filing our 2020 taxes (meaning, we wouldn't owe back credit that was essentially advanced to us but that wouldn't have been paid based on 2020 income). Wondering if (a) I actually have this right (or am due in for a rude surprise), and if so, (b) whether the same would be true for this round 3? (I'm in no rush to file our 2020 taxes for this specific reason.)
• For the child tax credit... similar Q. Wondering if I should be paying attention to possibly needing to opt out of the advance payments if they happened to start ASAP (eg, before I file our 2020 taxes)? Related... I don't know how to translate "the increased credit amount would phase out at 5c on the dollar" -- can someone help me understand what this curve looks like?
• Also re. the child tax credit... is this on top of the current $2K credit, or in place of it?

[seattlecyclone]

[Dependent Care] Credit would start at 50% of the cost of care and decrease for taxpayers with AGI over $125k (currently 35%/$15k).

So is there any reason to have a Dependent care FSA anymore?

I think it would depend on your income. The DCFSA is not subject to payroll taxes. If you're married with $175k AGI, you'll likely be in the 22% bracket. Add the 7.65% payroll tax and you save 29.65% with a DCFSA. The tax credit percentage would decrease by one percentage point per $2,000 that your AGI exceeds the threshold amount ($15k today, $125k proposed). For $175k income the tax credit would then be 25%. 29.65% is more than 25%. If your AGI is $100k you're likely in the 12% bracket and the tax credit would be 50%, so the tax credit would be a clear winner. The break-even point looks to be somewhere around $165k AGI (MFJ).

[seattlecyclone]

May be too early to know, but here are the things I am tracking based on our situation (2019 AGI was about $155K; 2020 AGI was about $185K; 2021 AGI is likely to also be around $185K; currently have one young child born 2019, with a 2nd due spring 2021). Would be thrilled if someone had these answers to hand:

• For the individual stimulus checks ... for us, having the stimulus check calculated against 2019 income vs. 2020 or 2021 is a major boon. We did get most of rounds 1 and 2 (with a little off the top as we had entered the phase-out zone but not by too much), and I've read that we would NOT then owe back any "overage" when filing our 2020 taxes (meaning, we wouldn't owe back credit that was essentially advanced to us but that wouldn't have been paid based on 2020 income). Wondering if (a) I actually have this right (or am due in for a rude surprise), and if so, (b) whether the same would be true for this round 3? (I'm in no rush to file our 2020 taxes for this specific reason.)

a) Yes. b) Looks like it.

• For the child tax credit... similar Q. Wondering if I should be paying attention to possibly needing to opt out of the advance payments if they happened to start ASAP (eg, before I file our 2020 taxes)? Related... I don't know how to translate "the increased credit amount would phase out at 5c on the dollar" -- can someone help me understand what this curve looks like?

For every dollar that your AGI exceeds $150k, the tax credit would be 5˘ less. $185k is $35,000, which would translate to $1,750 less than your maximum credit of $7,200 for two kids under 6. The language around this phase-out is very confusing but I believe that this $150k phase-out only applies to the increase in the child tax credit over current law. For the $2,000 per kid that you would have already been getting, the previous phase-out rules would remain in place.

• Also re. the child tax credit... is this on top of the current $2K credit, or in place of it?

It's in place, though because of the phase-out rules it's also valid to think of it as an additional $1,000 (or $1,600) with a different set of income criteria.[/list]

[dandarc]

@seattlecyclone

We're similar to your non-profit where almost all of our costs are staff-related (very roughly 80% staff, 15% maintain building, 5% miscellany). Wasn't talking about folks sending money elsewhere, but just changing the timing of donations. We're running our pledge drive right now for 2021-22. Folks tell the church what they are going to do to support the 2021-22 fiscal year, and practically speaking, a pledge can be paid from the day it is made until 6 months after the fiscal year end for which it was made. We actually do a real good job collecting by the time we cut it off - our two treasurers are absolutely amazing right now. But I mean even suggesting folks might wait a few months to pay won't go over well - we try to really leave it up to the donor. So long as it is paid eventually we're pretty chill.

So shifting a large-enough chunk of donations into one quarter (or even into 2022 - I'm actually doing that with our pledge anyway as we've gotten to where alternating-year is favorable tax wise for charitable. Even number years will get big donations and property taxes, odd number years much lower) would increase our odds of qualifying by reducing the other quarters. Or I could try and sell our congregation on temporarily tapping certain parts of our "savings" to smooth cash flow for a year, but people are always highly resistant to that. I was almost yelling "we're talking about a 3% withdrawal for one year from the endowment! Trinity Study!"

Thanks for the heads up this is for 2021 only. Kinda wish that <20% of 2020 same quarter income was also part of the deal - we had an extremely generous unrestricted gift from an estate arrive at the end of last year, so if Q4 2021 is revenue > 80% of Q4 2020 I'd be shocked. Or we'll have started a capital campaign to add on to our building in earnest. So this totally could happen by luck again, or maybe we could nudge our odds a bit higher.

[seattlecyclone]

The pledge process sounds pretty similar to what my church does. Leaving it up to the donor is great, and also laying out facts such as "the government will pay 70% of our payroll if some of you wait until 2022 to pay your pledge" or "withdrawing 3% of our endowment in a rough year is safe and exactly what the endowment is there for" is great. What people decide to do with those facts is up to them.

[Lucky Recardito]

TY, @seattlecyclone !

[jpdx]

* The amount of allowed investment income would increase to $10,000 (currently $3,650), and would adjust upward for inflation every year.

This is a big deal for some in the FIRE community. Do any of the following count as investment income: Roth conversions, RMDs or withdrawals from inherited IRAs, annuity death benefits?

* For 2021 only, people who receive unemployment compensation would be treated as having income at 133% of the poverty level for the purposes of this tax credit.

So even if your AGI is over 133% of FPL, and you have unemployment income, your ACA premium tax credit is calculated as if your AGI was at 133%?

[Paul der Krake]

* The amount of allowed investment income would increase to $10,000 (currently $3,650), and would adjust upward for inflation every year.

This is a big deal for some in the FIRE community. Do any of the following count as investment income: Roth conversions, RMDs or withdrawals from inherited IRAs, annuity death benefits?

The list of what counts is here:
https://www.irs.gov/publications/p596#en_US_2020_publink1000297452

This potentially a big deal indeed for early retirees. I suspect many mustachians are riiight around that ballpark, with 500-700k in taxable accounts.

[secondcor521]

* The amount of allowed investment income would increase to $10,000 (currently $3,650), and would adjust upward for inflation every year.

This is a big deal for some in the FIRE community. Do any of the following count as investment income: Roth conversions, RMDs or withdrawals from inherited IRAs, annuity death benefits?

The list of what counts is here:
https://www.irs.gov/publications/p596#en_US_2020_publink1000297452

This potentially a big deal indeed for early retirees. I suspect many mustachians are riiight around that ballpark, with 500-700k in taxable accounts.

But the EIC is based on the lower of the two amounts in the EIC table based on earned income and AGI.  Roth conversions, RMDs, and investment income all add to AGI but are not included in earned income.  For the purposes of EIC it looks like even SE income doesn't count, since the EIC instructions basically point to line 1 wages, and SE income ends up on line 8.

So even if I can get my AGI in the proper range, and my investment income in the proper range, I still can't qualify because my earned income is zero.

I guess someone who is "barista FIRE" could maybe claim it.

[Paul der Krake]

* The amount of allowed investment income would increase to $10,000 (currently $3,650), and would adjust upward for inflation every year.

This is a big deal for some in the FIRE community. Do any of the following count as investment income: Roth conversions, RMDs or withdrawals from inherited IRAs, annuity death benefits?

The list of what counts is here:
https://www.irs.gov/publications/p596#en_US_2020_publink1000297452

This potentially a big deal indeed for early retirees. I suspect many mustachians are riiight around that ballpark, with 500-700k in taxable accounts.

But the EIC is based on the lower of the two amounts in the EIC table based on earned income and AGI.  Roth conversions, RMDs, and investment income all add to AGI but are not included in earned income.  For the purposes of EIC it looks like even SE income doesn't count, since the EIC instructions basically point to line 1 wages, and SE income ends up on line 8.

So even if I can get my AGI in the proper range, and my investment income in the proper range, I still can't qualify because my earned income is zero.

I guess someone who is "barista FIRE" could maybe claim it.

Right, I should have specified: it's a big deal for early retirees with modest amounts of earned income reffing soccer games on the weekend or whatever.


Somebody who truly does zero work all year will not see anything.

[seattlecyclone]

* The amount of allowed investment income would increase to $10,000 (currently $3,650), and would adjust upward for inflation every year.

This is a big deal for some in the FIRE community. Do any of the following count as investment income: Roth conversions, RMDs or withdrawals from inherited IRAs, annuity death benefits?

The list of what counts is here:
https://www.irs.gov/publications/p596#en_US_2020_publink1000297452

This potentially a big deal indeed for early retirees. I suspect many mustachians are riiight around that ballpark, with 500-700k in taxable accounts.

But the EIC is based on the lower of the two amounts in the EIC table based on earned income and AGI.  Roth conversions, RMDs, and investment income all add to AGI but are not included in earned income.  For the purposes of EIC it looks like even SE income doesn't count, since the EIC instructions basically point to line 1 wages, and SE income ends up on line 8.

Self-employment absolutely counts.



The above image is an illustration of EIC amounts in 2019. In my case (MFJ with two kids), for 2021, the maximum credit ($5,980) would be available if all three of the following were true:

• Investment income below $10k.
• Earned income between $14,950 and $25,470.
• AGI between $14,950 and $25,470.

If the earned income and/or AGI are outside this range but both less than $53,865, there would still be some credit, just not as much. The investment income limit is a hard cliff though. For people who aren't able to hit the sweet spot with both income numbers I could see some opportunity to optimize by trying to hit the same spot on both sides of the above curve. For example if you have $10k earned income (MFJ, 2 kids), that's roughly a $4k credit. On the other side of the curve, a $4k credit corresponds to about $35k income. So you'll take your $10k earned income, $10k of investment income, and you have $15k of room to do Roth conversions or something without reducing your EIC.

Personally, I've already realized enough capital gains income this year that the investment income target would be hard to hit. Perhaps if there's a stock market correction that allows me to harvest some losses and shift some of my holdings into VUG with its low dividend yield I'll be in good shape. My lowest-basis shares are from last spring's COVID dip, so we'd have to go down at least 30% from today's prices to have any shot at it for this year. Going forward...the prospect of an extra $6,000/year for the next decade seems definitely worth doing a bit of planning for. It would mean more withdrawals from Roth principal while the kids are under my roof and less from taxable, but not all that much might need to be withdrawn to be honest. $6k from EIC, $6k from child tax credit, $9k from taxable dividends, plus $15k of earned income...that's more than half of our spending right there.

[ender]

Holy crap that child tax credit jump is insane.

Guess there are problems with our income going way up in 2020/2021...

[secondcor521]

@seattlecyclone, yeah, as I was posting that it didn't seem right.  But I just looked at the Form 1040 instructions and couldn't find where SE income was included in earned income.  The link you provided is very clear though, and from the IRS, so I believe it.  I must have missed it in the instructions somehow.

@ender, it really seems to me more like a UBI camel-nose-under-the-tent thing more than a modified child tax credit.

[ender]

@seattlecyclone, yeah, as I was posting that it didn't seem right.  But I just looked at the Form 1040 instructions and couldn't find where SE income was included in earned income.  The link you provided is very clear though, and from the IRS, so I believe it.  I must have missed it in the instructions somehow.

@ender, it really seems to me more like a UBI camel-nose-under-the-tent thing more than a modified child tax credit.

Yeah.

We won't benefit this year since our income is too high (rip). I figured my income going up significantly in 2020 as compared to 2019 and before would eventually catch up to me...

actually wait, we might since we're having kiddo number 2 and at $50/$1k income over $150k that means what... you get $3200 in possible credit or a HH income up to $216k AGI before it phases out completely if I did the math right?

[teen persuasion]

* The amount of allowed investment income would increase to $10,000 (currently $3,650), and would adjust upward for inflation every year.

This is a big deal for some in the FIRE community. Do any of the following count as investment income: Roth conversions, RMDs or withdrawals from inherited IRAs, annuity death benefits?

The list of what counts is here:
https://www.irs.gov/publications/p596#en_US_2020_publink1000297452

This potentially a big deal indeed for early retirees. I suspect many mustachians are riiight around that ballpark, with 500-700k in taxable accounts.

But the EIC is based on the lower of the two amounts in the EIC table based on earned income and AGI.  Roth conversions, RMDs, and investment income all add to AGI but are not included in earned income.  For the purposes of EIC it looks like even SE income doesn't count, since the EIC instructions basically point to line 1 wages, and SE income ends up on line 8.

Self-employment absolutely counts.



The above image is an illustration of EIC amounts in 2019. In my case (MFJ with two kids), for 2021, the maximum credit ($5,980) would be available if all three of the following were true:

• Investment income below $10k.
• Earned income between $14,950 and $25,470.
• AGI between $14,950 and $25,470.

If the earned income and/or AGI are outside this range but both less than $53,865, there would still be some credit, just not as much. The investment income limit is a hard cliff though. For people who aren't able to hit the sweet spot with both income numbers I could see some opportunity to optimize by trying to hit the same spot on both sides of the above curve. For example if you have $10k earned income (MFJ, 2 kids), that's roughly a $4k credit. On the other side of the curve, a $4k credit corresponds to about $35k income. So you'll take your $10k earned income, $10k of investment income, and you have $15k of room to do Roth conversions or something without reducing your EIC.

Personally, I've already realized enough capital gains income this year that the investment income target would be hard to hit. Perhaps if there's a stock market correction that allows me to harvest some losses and shift some of my holdings into VUG with its low dividend yield I'll be in good shape. My lowest-basis shares are from last spring's COVID dip, so we'd have to go down at least 30% from today's prices to have any shot at it for this year. Going forward...the prospect of an extra $6,000/year for the next decade seems definitely worth doing a bit of planning for. It would mean more withdrawals from Roth principal while the kids are under my roof and less from taxable, but not all that much might need to be withdrawn to be honest. $6k from EIC, $6k from child tax credit, $9k from taxable dividends, plus $15k of earned income...that's more than half of our spending right there.

That "hit the same spot on both sides of the curve" is basically my plan for next year.  DH is planning to quit working mid year this year; I'll continue in my part time job for a bit longer.  As long as we have 1 or 2 dependents around, it's worth a bit of earned income to take advantage of EITC + state 30% match on federal EITC.  I wanted to just max my SIMPLE IRA, but that drops my w2 wages too low, so I will target the beginning of the plateau on the left.  Then Roth conversions to target AGI for the end of the plateau on the right.  Nice convergence that max EITC AGI is roughly $25k, standard deduction MFJ is roughly $25k, and FAFSA auto EFC zero is AGI < $27k (for DS5, class of 2023, FAFSA Oct 2022 uses tax return on 2021).

But the new FAFSA Simplification changes auto SAI zero to full PELL eligibility, below 175% of fed poverty level, which would be $38k AGI  for family of 3 IIRC.  So now I'm torn - max EITC and other credits, or Roth convert more at the expense of refundable credits?  Watching and waiting, calculating...

[seattlecyclone]

Holy crap that child tax credit jump is insane.

Guess there are problems with our income going way up in 2020/2021...

[rab-bit]

Even though our kids are adults, there are still plenty of goodies for us in this bill, but I have a couple of questions regarding the ACA parts that maybe someone could try to answer.

• If a couple is MFJ with no dependents, and one spouse is retired and the other is receiving unemployment compensation in 2021, are they treated jointly as having income limited to 133% of the FPL for two people, so that both could get a $0 net silver plan?
• In our state (PA), "households with annual incomes of up to 138% of the FPL may qualify for Medicaid" (according to the state exchange website), so could we then be forced onto Medicaid if one of us receives unemployment income?

[EvenSteven]

I have a question about the dependent care tax credit. 2021 has already started so I have already made contributions to a dependent care FSA. If this passes as is, the tax credit would likely be better for me than the FSA.

How does it work claiming the tax credit if you have already made some contributions to a FSA?

[seattlecyclone]

I have a question about the dependent care tax credit. 2021 has already started so I have already made contributions to a dependent care FSA. If this passes as is, the tax credit would likely be better for me than the FSA.

How does it work claiming the tax credit if you have already made some contributions to a FSA?

Normally you can only claim the credit for care over and above your FSA election. For example when I participated in these you could contribute $5,000 to an FSA but you could count $6,000 toward the tax credit, so the first $5,000 of care was paid by the FSA and then we got to claim a tax credit on the next $1,000.

I didn't notice anything in the bill to allow people to adjust their contributions downward midyear in response to these changes, but it might be there. If it isn't you'll probably be stuck with the FSA for whatever you elected and then you could claim the tax credit on the excess. Or you could change jobs and decline the FSA at the new place.

[Frankies Girl]

Hooray for the (temporary) end to the ACA cliff!  I have LTCG ready to go, once it passes.

You ain't kidding - hope that passes and becomes permanent.

Wait - what? WHAT.


I'm FIREd, fed tax rate means I never own on dividends/cap gains due to also controlling my generated income so I can hit an ACA sweet spot (currently holding around 175% of fed poverty level) and also have a honking big taxable account I'd love to harvest sweet LTCG from. Also also just was told this past year the whole cap gains and what actually counted towards income bucket thing. (I'm a slow learner apparently. I am okay with this.)

Can someone please explain this one like I'm 5? I'm kind of thinking this could be a Big Deal for me.

[dandarc]

If you're hitting the 175% FPL line, probably not a huge change for you. They addressed the really big PTC cliff. There are other cliffs, and I think you may be referring to one of those. Or maybe I'm just myopic to how this affects me personally and someone else will chime in.

The ACA specifies a cliff at 400% of the FPL for a household of your size - if you're at 400% of FPL, then your premiums (2nd most expensive silver plan available in your area - doesn't matter what plan you actually choose for PTC calculations) are limited to 8.5% (I'm just using the rate in the proposed stimulus just for illustrative purposes). But at 400% + $1 you get nothing. Because it is a cliff and the way these premiums are calculated, this can be substantial.

The proposed change is simply to cap the premium tax credits at 8.5% of AGI above the 400% line. So the PTC phases out at $0.085 per dollar of AGI over that 400% FPL line whereas used to be a sudden stop.

Example (family coverage household of 2 - gonna just call 400% of FPL $68,000 even for illustration). 2nd Lowest silver plan for us in our area costs $933 per month, so $11,196 per year premium.

If we got our AGI to $68,000, our premium tax credit would be = $11,196 - 0.085 * 68000 = $5,416.

But what if, try as I might the lowest we can only get our AGI down to $70,000

Old way: PTC is $0. That $2,000 of additional AGI cost us $5,416 in tax - 270% marginal rate (plus regular income tax rates and FICA)

Proposed way: PTC = $11,196 - 0.085 * 70000 = $5246. That extra $2,000 in income only cost us $170 in taxes (aside from the usual income tax and maybe FICA depending how we got to that number)

[Frankies Girl]

If you're hitting the 175% FPL line, probably not a huge change for you. They addressed the really big PTC cliff. There are other cliffs, and I think you may be referring to one of those. Or maybe I'm just myopic to how this affects me personally and someone else will chime in.

The ACA specifies a cliff at 400% of the FPL for a household of your size - if you're at 400% of FPL, then your premiums (2nd most expensive silver plan available in your area - doesn't matter what plan you actually choose for PTC calculations) are limited to 8.5% (I'm just using the rate in the proposed stimulus just for illustrative purposes). But at 400% + $1 you get nothing. Because it is a cliff and the way these premiums are calculated, this can be substantial.

The proposed change is simply to cap the premium tax credits at 8.5% of AGI above the 400% line. So the PTC phases out at $0.085 per dollar of AGI over that 400% FPL line whereas used to be a sudden stop.

Example (family coverage household of 2 - gonna just call 400% of FPL $68,000 even for illustration). 2nd Lowest silver plan for us in our area costs $933 per month, so $11,196 per year premium.

If we got our AGI to $68,000, our premium tax credit would be = $11,196 - 0.085 * 68000 = $5,416.

But what if, try as I might the lowest we can only get our AGI down to $70,000

Old way: PTC is $0. That $2,000 of additional AGI cost us $5,416 in tax - 270% marginal rate (plus regular income tax rates and FICA)

Proposed way: PTC = $11,196 - 0.085 * 70000 = $5246. That extra $2,000 in income only cost us $170 in taxes (aside from the usual income tax and maybe FICA depending how we got to that number)

@dandarc thanks so much for explaining! (and also belated thanks to @seattlecyclone for posting this thread as well!)

Ah, got it. Darn. So I'm already doing fine and dandy and unlikely to reap anything extra. I just saw the whole capped/LTCG thing and thought I might be able to pull a bit more than I usually can and got all excited, but it would cost me in ACA subsidies if I'm reading that properly.

[seattlecyclone]

The bill would increase premium subsidies for everyone who currently gets one. Right now the subsidy is set so that someone at 175% of the poverty line would pay 5.31% of their income for the second-cheapest silver plan. Under the proposed bill you'd pay 1% of your income for the same plan. That's a difference of almost $1,000 per year for a single person. It's not as big of a difference as a family of four at 401% of the FPL would experience, but it's also not nothing. You could look at this as an opportunity to realize some more capital gains and get the same premium tax credit. The cost-sharing threshold at 200% of FPL would still apply, so decide carefully.

[Lucky Recardito]

Child/dependent care credit. Changes for 2021 only.
* Maximum cost of care considered for the credit would increase to $8,000/$16,000 (currently $3,000/$6,000).
* Credit would start at 50% of the cost of care and decrease for taxpayers with AGI over $125k (currently 35%/$15k).
* The credit is currently available at 20% for people with any income; it would now phase out below 20% at incomes over $400k, disappearing entirely at $480k.
* The credit would be refundable.

Wait... just realizing there might be something here for us as well, though I breezed past it on my first read.

Current state: 1 child in FT daycare, spending ~$22k annually (hahahahahahaha)
2021 plan: 1 child in FT daycare all year (~$22k); 2nd child in FT daycare Oct-Dec (~7k); total childcare spending ~$29k

2021 AGI expected to be ~$185K.

We currently max out our DCFSA ($5K) and get no benefit from the Dependent Care credit -- my understanding has always been that once we had 2 children in daycare, that extra $1k (difference between the $5K we funnel through the DCFSA and the $6K cap) might net us a little something in terms of the Dependent Care Credit. Though frankly, I haven't paid much attention because I'm focused on what's right in front of my face.

But with this change... can anyone help me understand the impact?
* $5K continues to go thru DCFSA (maximum tax benefit)
* $11K of the "max cost of care considered for dependent care credit" would then be available to us ($16K - $5K)
* We have plenty of childcare spending to "claim" all of that, by a mile
* Actual credit to us would be somewhere between $5.5K (50% of $11K) and $2.2K (20% of $11K) -- probably closer to the higher end of that range because at our AGI we'd be into the phase-out zone, but closer to the bottom than the top.

Eh? This feels too good to be true -- I'm guessing I'm misunderstanding something?

[Mr. Green]

The removal of the ACA subsidy cliff could be a very nice opportunity for FIREd people to harvest capital gains/max out Roth IRA conversions. Unless you're planning to stay outside the US for a year it might be the only opportunity in quite some time to push your AGI above 400% FPL without serious financial consequences. Definitely going to look into this a bit further for ourselves.

[seattlecyclone]

The removal of the ACA subsidy cliff could be a very nice opportunity for FIREd people to harvest capital gains/max out Roth IRA conversions. Unless you're planning to stay outside the US for a year it might be the only opportunity in quite some time to push your AGI above 400% FPL without serious financial consequences. Definitely going to look into this a bit further for ourselves.

Yes and no. If absent the ACA you'd have income somewhere around 450% of the FPL, yes you'll be able to do that more cheaply under this bill than before. If you're looking to go way above that, to the point where the sticker price of the second-cheapest silver plan in your area is less than 8.5% of your desired income, it's the same either way. Whether the premium subsidy phases out gradually to zero somewhere below your desired income, or whether it abruptly shuts off, it makes no difference.

Even under the current law, deciding to harvest a bunch of gains and pay full price for health care one year so you can get better subsidies going forward is a valid tactic.

[Mr. Green]

The removal of the ACA subsidy cliff could be a very nice opportunity for FIREd people to harvest capital gains/max out Roth IRA conversions. Unless you're planning to stay outside the US for a year it might be the only opportunity in quite some time to push your AGI above 400% FPL without serious financial consequences. Definitely going to look into this a bit further for ourselves.

Yes and no. If absent the ACA you'd have income somewhere around 450% of the FPL, yes you'll be able to do that more cheaply under this bill than before. If you're looking to go way above that, to the point where the sticker price of the second-cheapest silver plan in your area is less than 8.5% of your desired income, it's the same either way. Whether the premium subsidy phases out gradually to zero somewhere below your desired income, or whether it abruptly shuts off, it makes no difference.

Even under the current law, deciding to harvest a bunch of gains and pay full price for health care one year so you can get better subsidies going forward is a valid tactic.

Valid point. I guess the big thing will be where that threshold is based on the full cost of the second lowest cost silver plan in your area. For us, that premium in 2021 is $1,140 per month. So our AGI would need to be ~161k before the full cost of insurance goes above 8.5% of it. Personally, I wouldn't ever do more than max out the bottom two tax brackets so ~106k for a couple with no kids. That's still a pretty dramatic increase from the 2 person subsidy cliff of $68,960. Someone who lives in an area with much more reasonable insurance premiums won't see nearly the same "savings."

[Mr. Green]

ACA premium tax credits.
* For 2021 and 2022 only, tax credits would increase for people who currently qualify for them. This includes $0 (net) silver plans for people below 150% of the poverty line.
* For 2021 and 2022 only, the cliff at 400% of the poverty line would be eliminated. Tax credits would bring the net cost of the second-cheapest silver plan to 8.5% of MAGI for folks over 400%.
* For 2021 only, people who receive unemployment compensation would be treated as having income at 133% of the poverty level for the purposes of this tax credit.

I'm wondering how this unemployment bit will work. I'm drawing unemployment because the pandemic killed my live events consulting business. I'd be shocked if live events return before Winter 2021 so I'll likely fully utilize whatever extensions they legislate into existence. Our state did not expand Medicaid so 133% FPL still has you on private insurance. I'm also one-half of a couple. Will they adjust my half of our premiums down to whatever 133% FPL is and leave my wife's based on our actual AGI? I suppose that additional calculation wouldn't be that much to add to the PTC reconciliation process, but it's different for someone in an expanded Medicaid state where 133% qualifies you. Plus, how will they handle someone on unemployment for only part of the year? Unemployment runs weekly here but insurance is monthly. Will be interesting to see how this works out in practice.

[Lucky Recardito]

Child/dependent care credit. Changes for 2021 only.
* Maximum cost of care considered for the credit would increase to $8,000/$16,000 (currently $3,000/$6,000).
* Credit would start at 50% of the cost of care and decrease for taxpayers with AGI over $125k (currently 35%/$15k).
* The credit is currently available at 20% for people with any income; it would now phase out below 20% at incomes over $400k, disappearing entirely at $480k.
* The credit would be refundable.

Wait... just realizing there might be something here for us as well, though I breezed past it on my first read.

Current state: 1 child in FT daycare, spending ~$22k annually (hahahahahahaha)
2021 plan: 1 child in FT daycare all year (~$22k); 2nd child in FT daycare Oct-Dec (~7k); total childcare spending ~$29k

2021 AGI expected to be ~$185K.

We currently max out our DCFSA ($5K) and get no benefit from the Dependent Care credit -- my understanding has always been that once we had 2 children in daycare, that extra $1k (difference between the $5K we funnel through the DCFSA and the $6K cap) might net us a little something in terms of the Dependent Care Credit. Though frankly, I haven't paid much attention because I'm focused on what's right in front of my face.

But with this change... can anyone help me understand the impact?
* $5K continues to go thru DCFSA (maximum tax benefit)
* $11K of the "max cost of care considered for dependent care credit" would then be available to us ($16K - $5K)
* We have plenty of childcare spending to "claim" all of that, by a mile
* Actual credit to us would be somewhere between $5.5K (50% of $11K) and $2.2K (20% of $11K) -- probably closer to the higher end of that range because at our AGI we'd be into the phase-out zone, but closer to the bottom than the top.

Eh? This feels too good to be true -- I'm guessing I'm misunderstanding something?

... though now I'm also seeing that the proposal includes increasing the DCFSA limit to $10,500.

So net impact is... (I think?)...
* Additional $5,500 can go through our DCFSA, for tax savings of $1631 ($5,500 x 29.65% which is 22% marginal tax rate + 7.65% FICA)
* "Remainder" that could be available for the dependent care credit would be $5,500 ($16k-$10.5k)
* Potential additional dependent care tax credit would be somewhere between $2,750 (50%) and $1,100 (20%)

.... eh?

[Michael in ABQ]

Before long, my kid is going to be worth more in tax credits than he costs...

I've got 6 so they're practically paying for themselves in helicopter money at this point. By the time third 3rd stimulus package gets doled out we'll be at $20k. Throw in child tax credits for our 2019 and 2020 taxes (and increases for 2021) and it probably doubles that.

[Paul der Krake]

ACA premium tax credits.
* For 2021 and 2022 only, tax credits would increase for people who currently qualify for them. This includes $0 (net) silver plans for people below 150% of the poverty line.
* For 2021 and 2022 only, the cliff at 400% of the poverty line would be eliminated. Tax credits would bring the net cost of the second-cheapest silver plan to 8.5% of MAGI for folks over 400%.
* For 2021 only, people who receive unemployment compensation would be treated as having income at 133% of the poverty level for the purposes of this tax credit.

I'm wondering how this unemployment bit will work. I'm drawing unemployment because the pandemic killed my live events consulting business. I'd be shocked if live events return before Winter 2021 so I'll likely fully utilize whatever extensions they legislate into existence. Our state did not expand Medicaid so 133% FPL still has you on private insurance. I'm also one-half of a couple. Will they adjust my half of our premiums down to whatever 133% FPL is and leave my wife's based on our actual AGI? I suppose that additional calculation wouldn't be that much to add to the PTC reconciliation process, but it's different for someone in an expanded Medicaid state where 133% qualifies you. Plus, how will they handle someone on unemployment for only part of the year? Unemployment runs weekly here but insurance is monthly. Will be interesting to see how this works out in practice.

There are still rules around who qualifies for ACA coverage, regardless of subsidy calculation. Can't have a job or a spouse with affordable coverage, etc.

So my guess is that they will simply look at whether you drew UI even just one week in 2021, and apply the 138% for the whole period you happened to otherwise qualify for the ACA. Simple, crude, works well enough for most, who cares if they "accidentally" subsidize a couple thousand people at the margins.

[seattlecyclone]

ACA premium tax credits.
* For 2021 and 2022 only, tax credits would increase for people who currently qualify for them. This includes $0 (net) silver plans for people below 150% of the poverty line.
* For 2021 and 2022 only, the cliff at 400% of the poverty line would be eliminated. Tax credits would bring the net cost of the second-cheapest silver plan to 8.5% of MAGI for folks over 400%.
* For 2021 only, people who receive unemployment compensation would be treated as having income at 133% of the poverty level for the purposes of this tax credit.

I'm wondering how this unemployment bit will work. I'm drawing unemployment because the pandemic killed my live events consulting business. I'd be shocked if live events return before Winter 2021 so I'll likely fully utilize whatever extensions they legislate into existence. Our state did not expand Medicaid so 133% FPL still has you on private insurance. I'm also one-half of a couple. Will they adjust my half of our premiums down to whatever 133% FPL is and leave my wife's based on our actual AGI? I suppose that additional calculation wouldn't be that much to add to the PTC reconciliation process, but it's different for someone in an expanded Medicaid state where 133% qualifies you. Plus, how will they handle someone on unemployment for only part of the year? Unemployment runs weekly here but insurance is monthly. Will be interesting to see how this works out in practice.

Direct text from the bill:

For purposes of this section, in the case of a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021, for the taxable year in which such week begins—
(A) such taxpayer shall be treated as an applicable taxpayer, and
(B) there shall not be taken into account any household income of the taxpayer in excess of 133 percent of the poverty line for a family of the size involved.

The wording is a bit strange because they have to write it to cover the very rare case of someone using a tax year that doesn't line up with the calendar year, but basically it says that if you get unemployment for even one week in 2021 they'd use the 133% number (or your actual income, if less) for the premium subsidies for the whole year. I don't think it affects Medicaid eligibility at all because it only applies to this section of the tax code that defines the premium subsidies. The rest of the section uses one income amount for your whole family and I don't see anything in here that would change that, so I'd assume that for taxpayers with spouses or dependents the benefit of the 133% income limitation would extend to them as well. Not 100% sure on this bit though.

... though now I'm also seeing that the proposal includes increasing the DCFSA limit to $10,500.

I don't think your employer would be obligated to offer the higher limit. Even if they do, you wouldn't be obligated to increase your contributions. If the tax credit is more lucrative for you, it would be to your advantage to use that instead.

So net impact is... (I think?)...
* Additional $5,500 can go through our DCFSA, for tax savings of $1631 ($5,500 x 29.65% which is 22% marginal tax rate + 7.65% FICA)
* "Remainder" that could be available for the dependent care credit would be $5,500 ($16k-$10.5k)
* Potential additional dependent care tax credit would be somewhere between $2,750 (50%) and $1,100 (20%)

I think you're basically understanding it right. The way the credit amount phaseout works is it starts at 50% for people with AGI below $125k. Then it goes down by one percentage point in increments of $2,000 income. So income $125,000-126,999 would get a 49% credit, $127,000-128,999 would get 48%, and so on until it hits 20%. This 20% point is right at the $185k income you expect. It stays at 20% for a while until $400k AGI and it starts declining again from there. Compare the 20% credit to your current tax bracket (plus payroll tax) to see which would be more lucrative for you.

[dandarc]

Circling back to make sure I have this right:

Current law is that if we can demonstrate an 80% drop vs. same quarter 2019 we can get that quarter and the following covered by the employee retention credit. And that, under current law, does not require the area be under any kind of government order. But that only goes through June 30th 2021, so calendar Q1 and Q2 only.

If this proposal passes, then we'd be able to have the same terms through December 31st 2021, so all 4 quarters of the year.

Is that correct?

[seattlecyclone]

Circling back to make sure I have this right:

Current law is that if we can demonstrate an 80% drop vs. same quarter 2019 we can get that quarter and the following covered by the employee retention credit. And that, under current law, does not require the area be under any kind of government order. But that only goes through June 30th 2021, so calendar Q1 and Q2 only.

If this proposal passes, then we'd be able to have the same terms through December 31st 2021, so all 4 quarters of the year.

Is that correct?

This generally matches my understanding of the proposal. Clarifications on the bolded bits:
* It's a 20% drop required (to 80% of 2019 levels), not an 80% drop.
* The rules let you claim a credit against wages paid in Q1 and Q2 of 2021, and this proposal would expand it through Q4 of 2021. The credit would not be available in Q1 of 2022 even if your Q4 2021 revenue meets the qualifying standard.

[dandarc]

Thanks. Time for me to not-so-subtly suggest folks not prepay pledges until April 1st.

Shooting for Q1 and Q3 to come in low compared to 2019. Q1 is quite urgent - ship is about to sail on gross receipts during this quarter.

[dandarc]

Apparently tax planning is "unethical".

[seattlecyclone]

Apparently tax planning is "unethical".

Judge Learned Hand would disagree:

Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

[yachi]

Based on the proposed cutoffs it doesn't look like I'm at risk of losing out on the third stimulus, but my AGI is higher in 2020 than in 2019.  Should I wait?
2019: 45K Married Filling Jointly
2020: 74K Married Filling Jointly

[Lucky Recardito]

... though now I'm also seeing that the proposal includes increasing the DCFSA limit to $10,500.

I don't think your employer would be obligated to offer the higher limit. Even if they do, you wouldn't be obligated to increase your contributions. If the tax credit is more lucrative for you, it would be to your advantage to use that instead.

So net impact is... (I think?)...
* Additional $5,500 can go through our DCFSA, for tax savings of $1631 ($5,500 x 29.65% which is 22% marginal tax rate + 7.65% FICA)
* "Remainder" that could be available for the dependent care credit would be $5,500 ($16k-$10.5k)
* Potential additional dependent care tax credit would be somewhere between $2,750 (50%) and $1,100 (20%)

I think you're basically understanding it right. The way the credit amount phaseout works is it starts at 50% for people with AGI below $125k. Then it goes down by one percentage point in increments of $2,000 income. So income $125,000-126,999 would get a 49% credit, $127,000-128,999 would get 48%, and so on until it hits 20%. This 20% point is right at the $185k income you expect. It stays at 20% for a while until $400k AGI and it starts declining again from there. Compare the 20% credit to your current tax bracket (plus payroll tax) to see which would be more lucrative for you.

TY, this is very helpful! (Specific thanks for explaining the phase-outs to me... that's the part that I don't have a lot of practice at understanding...)

[mntnmn117]

Before long, my kid is going to be worth more in tax credits than he costs...

It's almost like I played this perfectly. I've been concerned about a 2020 windfall from changing employers messing up stimulus check round 3.

Incomes:
2019 - 125k
2020 - 185k (Job change/ Co stock/ PTO payout)
2021 - 145k

But is looks like I'm going to get the full $1,400 for 4 kids in March, plus the full $3,600 each in 2021. I'd actually been contemplating and extension this year to make sure I didn't jeopardize stimulus round 3.