Scaled-Back Stimulus Payments Would Create Tricky Tax Situation

‘Almost Cliff-Like’

The relative abruptness of the phase-out is “almost cliff-like,” according to Jeffrey Levine, chief planning officer of Buckingham Wealth Partners.

“A difference of just $10k of AGI could mean the difference of $7,000(!) in stimulus checks for a family of 5!” he tweeted Wednesday.

For certain families near the income limit, the situation gets tricky.

For example, according to Levine, a couple with four dependents — say, children and grandparents living with them — earning $150,000 would receive $8,400 in stimulus payments. That same household earning $160,000 would receive no payments. And because the extra $10,000 in earnings would amount to $7,800 after federal taxes, their after-tax income would be lower than it would be if they earned only $150,000.

“Just for the record,” Levine continues, “it’s not ‘really messed up’ b/c people don’t deserve help. It’s messed up b/c it’s a pretty direct disincentive to making additional income. You don’t really see this with a larger phaseout range.”

Payments ‘Should Be Better Targeted’

Jason Fichtner, associate director of the Master of International Economics and Finance Program at the Johns Hopkins School of Advanced International Studies, said the stimulus check changes are “only a step in the right direction.”

The payments “should be better targeted to those who really need them — those who have lost their jobs or had lost income due to the economic downturn resulting from the pandemic,” he said.

Recent research by the National Bureau of Economic Research “suggests that low-income households, which are more financially constrained, spent a larger portion of their previous Covid relief payment,” Fichtner added. “Most of the money was saved or used to pay down existing debt.”