Millions of Americans have now received a stimulus check from the federal government as part of the CARES Act relief plan. Individuals who have adjusted gross income under $75k ($150K for joint filers) are eligible to receive a payment of $1,200 per person plus $500 for each eligible dependent based on your 2019 or 2018 tax return information.
But before you go off and spend this new found cash, there’s a small catch you should be aware of. Technically, this is a prepayment of a refund which will be added to the 2020 tax forms. Your eligibility for this credit will be based off of your 2020 income, so if you are not eligible based off your 2020 income, it will need to be repaid with your 2020 taxes.
Who is at risk? Anyone whose earnings in 2019 or 2018 would be under the $75k (or $150k) threshold but whose 2020 income has increased above the limits. There is a phaseout range, so if you find yourself in this situation, you may only need to repay a portion of the stimulus payment.
If you need any guidance based on your personal situation, please contact me!
So, back to important matters – “Where should I spend my stimulus payment?”
1) Cover basic expenses:
Of course, the purpose of the relief package is to help Americans cover the basic necessities and expenses that may have become more difficult to afford due to reduced income or loss of work. If cash flow is an issue, use this to weather the storm and cover your basic needs – groceries, bills, medical costs, rent, mortgage, etc. Many companies, especially mortgage and utilities, are offering deferred payment options if you cannot pay your bills on time, so this may be an avenue to explore as well.
2) Pay down debt:
If you have been forced to rack up some additional credit card debt or have other outstanding debt on high interest credit cards, the may be a smart place to use the stimulus funds. Interest on credit cards can easily be north of 20% so paying them off or at least reducing them as much as possible can save a small fortune. If your stimulus check won’t eliminate all your high interest debt, consider transferring the balance to a credit card offering 0% interest. There are cards out there that will offer 0% for an introductory period which will allow you more time to pay off the debt while possibly avoiding some high interest rates for a period of time (just make sure to read the fine print on these).
We all know that we should have emergency funds set aside for a time exactly like this. If you have been fortunate enough to have kept your employment and you don’t have an immediate need to the funds, consider putting them aside to fund your emergency fund, because these are still uncertain times.
The stock market bottom in March was followed by a sharp rebound and a month of April with double digit returns across the major indexes. Clearly there are significant unknowns in the market right now, but contributing to a retirement plan with excess funds would be a great way to maximize the stimulus check and gain some tax benefits.
5) Discretionary spending:
No, I’m not saying go buy that Peloton bike, but if you are in a confident financial position, consider allocating a portion of the stimulus to some discretionary spending, after all many of us have been stuck at home for a long time now. Make sure to save the rest to boost that emergency fund!